High speed rail anyone?

California High Speed Rail Authority
Investor Relations
The California High-Speed Rail Authority’s finance team has identified a broad array of public-private partnership opportunities, including project debt financing, vendor financing, system operations and private ownership. California's high-speed train is envisioned as a public-private partnership that eventually will enjoy a $1-to-$2 billion operating surplus every year – creating major investment opportunities for private equity funds, pension funds, new infrastructure funds, corporate operational partners and others. If you are interested in financial participation opportunities, please fill out our contact form or write to: Attn: Investor Relations California High-Speed Rail Authority 925 L Street, Suite 1425 Sacramento, CA 95814
That $50 Billion "Infrastructure" Plan
Obama's Thatcherite Gift to the Banks
I can smell the newest giveaway looming a mile off. The Wall Street bailout, health-insurance giveaway and support of real estate prices rather than mortgage-debt write-downs were bad enough, not to mention the Oil War’s Afghan extension. But now comes a topper: the $50 billion transportation infrastructure plan that  Obama proposed in Milwaukee – cynically enough, on Labor Day. It looks like the Thatcherite Public-Private Partnership, Britain’s notorious giveaway to the City of London underwriters. The financial giveaway had the effect of increasing prices for basic infrastructure services by building in heavy financial fees – guaranteed for the banks, who lent the money that banks and property owners used to pay in taxes in more progressive times.
The Obama transport plan is like a Fannie Mae for bankers, based on the President’s guiding mantra: “Let’s help Wall Street put Americans back to work.” The theory is that giving public guarantees and bailouts will enable financial managers to use some of the money to fund some projects that employ people – with newly created, non-unionized companies, presumably.
Here’s the problem. Transportation projects will make real estate speculators, the construction industry and their bankers very rich unless the government recovers its public spending through windfall site-value gains on property along the right-of-way.
What’s the point of a party having a constituency, after all, if not to sell it out? Is not the Democratic Party’s role to deliver labor, the minorities and the large cities hog-tied to Wall Street?
Hollywood surely has made enough movies along these faux-populist lines. The banker of a Western town manages to grab property along the railroad tracks coming through, to make a killing. The local mobster pays off a state legislator to build a highway by his property, making his land much more valuable. Mortgages will be refinanced in much larger sums. At least, this seems to be President Obama’s hope as he positions himself to become America’s Tony Blair. The role of Britain’s New Labor, after all, was to ram through economic programs so far to the right than no Conservative government could get away with them. In the United States it falls to Obama’s New Democrats to shepherd through proposals that Democrats would vote down if the Bush-Cheney Republicans had tried to enact them.
What President Obama did not acknowledge is a basic principle that every transportation economist is taught: Transport investment normally can pay for itself, simply by a windfall-gains tax enabling cities or other jurisdictions to recapture the higher rent-of-location and site value along the right-of-way.
London’s extension of the Jubilee Tube Line to the city’s financial district in Canary Wharf recently demonstrated this principle. The line’s extension cost £3.5 billion but increased property values by an estimated £13 billion along the route. A political protest movement arose over London’s failure to finance its transport system by taxing the higher rent-of-location and site values it created. Failure to do so gave landlords a windfall – one that the city could have recaptured by a windfall tax to cover the cost of what it spent. For instance, it could have issued bonds secured by a windfall property-rent tax.
Paying for capital investment out of such tax levies could provide transportation at a subsidized price, minimizing the cost getting to and from work. That would have made its labor force more competitive by alleviating cost-of-living pressure on wages, freeing more income for spending on goods and services and thus helping the economy.
But Obama’s infrastructure plan is for Wall Street investors to get the windfall – as property owners or as mortgage lenders making much larger loans against the enhanced site value. Balzac said that behind every family fortune is a great theft, and I would add that behind every great fortune is a public-sector giveaway. The largest asset in most families, billionaires as well as small homeowners, is land. The key to its site value (“location, location and location”) is transportation and other public infrastructure. The land grants to railroad barons after America’s Civil War, for example created the largest American fortunes for the ensuing century.
Obama’s guiding principle since taking office is that of his Republican predecessors: It’s Wall Street that makes America rich. In this mythology it’s the wealthiest brackets that employ labor, not downsize and outsource it. So it’s the rich who deserve tax breaks.         
No wonder Americans are listening to populist rants against “big government.” The Wall Street bailout was the watershed in making our government look like those of Britain and France in medieval times, with their special interests, insider dealings and giveaways to court favorites. Governments were hated when they were controlled by landed aristocracies and foreign bankers funding each new war debt by an excise tax borne by the population at large, not by the wealthy.
America got rich from the Progressive Era onward by a different kind of big government than we have today. From the Cumberland Road and Erie Canal onward, it provided roads and other basic services at public expense for free or at subsidized prices. The guiding idea was that the “return” to public investment should be measured by the degree to which it lowers the economy’s costs of living and doing business, not in the amount of income it could extract.
The plan would not add to the government deficit,  Obama promised. Unfortunately, in place of government taking more revenue, it will be the finance, insurance and real estate (FIRE) sector that does the taking. The banking system will now do what government was supposed to do back in the Progressive Era: finance infrastructure. The difference today is that instead of funding transportation out of tax proceeds (levied progressively on the wealthy) or by the central bank monetizing public debt, the Obama plan calls for borrowing $50 billion at interest from banks.
The problem is that this will build in high interest charges, high private management charges, underwriting fees – and government guarantees. User fees will need to cover these financial and other privatization costs “freed” from the government budget. This will build about $2 billion a year into the cost of providing the transport services.
This threatens to be the kind of tollbooth program that the World Bank and IMF have been foisting on hapless Third World populations for the past half-century. The “infrastructure bank,” reports The New York Times, “would be run by the government but would pool tax dollars with private investment.” It would be a test balloon for financing “a broader range of projects, including water and clean-energy projects,” for which Democrats already are drawing up a blueprint:
“[Connecticut Democrat Rosa] DeLauro’s plan would create an infrastructure bank that would be part of the United States Treasury, where it would attract money from institutional investors, then channel the funds to projects selected by a panel. The program, which would make loans much like the World Bank, would finance projects with the potential to transform whole regions, or even the national economy, the way the interstate highway system and the first transcontinental railway once did.
“The outside investors would expect a competitive return on their money, so many of the completed projects would have to charge fees, taxes or tolls. In an interview, Ms. DeLauro said she would be “looking at a broader base,” meaning the bank would finance not just roads and rails, but also telecommunications, water, drainage, green energy and other large-scale works.
“But if the projects did not raise enough money, the Treasury might get stuck paying back the investors, a prospect that gave pause to so-called deficit hawks like [Ohio Republican Congressman Pat] Tiberi. In an e-mail last week, he said he agreed the nation’s road and communications networks needed to be improved but was concerned about creating another company like Fannie Mae that might need a bailout.” Sheryl Gay Stolberg and Mary Williams Walsh, “Obama Offers a Transit Plan to Create Jobs,” The New York Times September 7, 2010.
Britain’s Public-Private Partnership built enormous financing charges into the cost of providing transport. London could have built the tube extension without running up public debts to the banks, paying the construction costs by funding the higher rent-of-location. America could do the same. In fact, in times past the United States financed public infrastructure out of progressive taxation that fell mainly on the wealthy, and by monetizing the budget deficit. But under  Obama’s plan, the rental value is to be capitalized into interest payments or simply kept by well-placed landowners.
It looks like President Obama sat down with Larry Summers, Tim Geithner and his other Rubinomics holdovers from the Clinton/Goldman-Sachs Administration and asked what policies can be funded without taxing the wealthy, but by borrowing via a separate entity – with a government guarantee like the Fannie Mae and Freddie Mac gravy train for Wall Street.

The cover story is always that giveaways to the wealthy are needed to employ labor.  (“Wall Street creates jobs.”) The Democratic excuse these days is that the economy won’t work without providing financial investors with “incentives.” The Democratic Leadership Council helped President Clinton accept the world as it is, rife with the fraud, crime and the proverbial free lunch as part and parcel of how the economy works. This certainly is how to attract campaign contributors and the Wall Street lobbyists that are designing today’s right-wing shift by Washington.
After its $13 trillion giveaway to Wall Street, the government has little debt-creating ability left in its budget to create jobs by public spending. Or so we are told. The giveaway money has not been lent out as promised to “get America back to work.” It has been paid out as bonuses to the bailed-out campaign contributors on Wall Street – and make offenders such as Bank of America and Citibank for their purchases of Countrywide, Wacovia and Washington Mutual (Wamu) whole for junk mortgages, on the pretense that a “sound banking system” is needed to get the economy moving again – the euphemism for pushing it further into debt.
But if there was so much money for bailouts, why is there any need to finance the fairly modest $50 billion transport initiative by borrowing instead of funding it out of the general budget?
There is no such need, of course. The program is simply an excuse for re-introducing Reaganomics as if the aim this time around is to “create jobs.” The way that  Obama proposes to do this threatens to price American labor even further out of world markets, by raising the cost of getting to work, and of renting or going into debt to buy homes and offices near the new transportation hubs. And I suspect that as in Britain, the new public-private agency will be non-unionized. Britain’s Public-Private Partnership still looms as the dress rehearsal for what we are getting into.
Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com

President Obama Promotes $50 Billion in Transportation Investments, Again Emphasizes Rail: Plan, yet to be fully laid out, would devote billions to 4,000 miles of new railways, in addition to roads, air traffic, and transit. Congressional approval is unlikely to be easy...Yonah Freemark
President Obama, at least, is not yet willing to give up on his Administration’s hope to eventually connect 80% of the American population to intercity rail service. After committing $8 billion to such services a year and a half ago during negotiations for the stimulus, the President announced today that he would campaign to devote $50 billion to an improved transportation system, including more spending on high-speed rail, road maintenance, local transit, and better runways. Any such program would require Congressional approval before moving forward.
The Administration’s new proposal seems to be an attempt to accomplish the goals of a new transportation bill without actually passing reauthorization legislation. The previous bill expired in 2009; spending is now being determined year-to-year and being partially sponsored by general income tax revenues, rather than being determined over a six-year period being sponsored entirely by fuel tax revenues, as was until recently the modus operandi.
The federal government currently spends about $50 billion annually on all forms of transportation.
At this time, it is not clear how much enthusiasm the Congress holds for what is being portrayed as a second stimulus, nor how much can actually be built with the money, which would be invested over a period of six years though mostly at the front end. Neither the House nor the Senate, both under Democratic control but threatened in this fall’s elections by increasingly popular anti-spending Republicans, seem particularly thrilled about the idea of voting for a new government program. Few specifics of the proposal have been revealed, other than that the Administration is again promoting its idea for a national infrastructure bank, a program it has had in mind since assuming office in early 2009.
Nor has the President addressed the all-consuming question of how many jobs this program will produce. Despite the fact that there is evidence that investment in public transportation operations is one of the most effective ways to get people back to work, what little has been said about this new spending seems to indicate that it would only go to capital investments. Funding will not be debt-based, the President said, though the exact mechanism to raise the needed dollars has yet to be worked out.
Mr. Obama’s framework, he claimed today, would result in the renovation of 150,000 miles of existing roadways, the construction of 4,000 miles of new railways, and the rehabilitation of 150 miles of runways. Evidently, money is also to be earmarked for the public transit New Starts program, which funds major expansion programs, usually in the form of rail rapid transit. The exact distribution of funds has not been addressed, nor has a decision-making process about worthy projects been established.
The proposal, though certainly a refreshing move from an Administration that over the last few months had threatened a “freeze” on spending, may simply not go far enough to produce effective change, especially for the national high-speed rail program. Even if all the money were spent on fast trains, the majority of money would have to be devoted to just one corridor: the California High-Speed project, which is in need of $20 to $30 billion in federal funds to be completed, depending on the level of private investment pinpointed. As things stand, with the $50 billion to be spread out between all modes in the transportation system, far less will actually be spent on any one mode. This means that smaller, incremental projects are likely to be the biggest beneficiaries here.
Mr. Obama, mimicking what has become standard industry commentary, suggested again that a national infrastructure bank be created to fund transportation projects. It’s a problematic concept from a variety of perspectives, including the fact that unless it is used purely on projects that make money in the long term (generally not rail or transit), it isn’t actually a new funding source, it’s just a different way of distributing existing money.
This second stimulus could be structured to include what the Administration is calling a “long-term framework” for national transportation policy, arguably vital for a country that lacks true goals for the future of its mobility system. Mr. Obama stated his desire to put high-speed rail “on an equal footing” with the rest of the transportation system. The program would also consolidate 100 transportation programs, supposedly with the goal of streamlining operations in the Department of Transportation, a move that was suggested by House Transportation and Infrastructure Chairman James Oberstar (D-MN) more than a year ago.
Instead of relying on a transportation reauthorization bill to accomplish a change in policy, the Congress may have an opportunity to promote similar goals if it moves forward with the passage of this bill. For those promoting alternatives to an automobile-centric transportation network, that may be a good thing, since this program will not rely on an increase in the gas tax to fund new spending, arguably a necessary change if we are to accept the fact that the current user fee model for funding is not only obsolete but inappropriate for today’s needs.
Most importantly, though, despite its optimism Mr. Obama’s proposal is coming at the exactly wrong time from a political perspective. Democrats have been slow to embrace significant spending even on transportation, arguably a matter that is of bipartisan interest. Why will they do so now? And if they do, will they choose to advance the policies the President has suggested are most important to him, like high-speed rail and transit, or will they attempt to placate suburban and rural interests with more highway spending?
Update: As commenter Jim points out, the Administration may be suggesting this proposal as the transportation bill reauthorization itself, which would add a total of $175 billion over the next six years, not just $50 billion. Whether that is true remains to be seen — we have yet to see the actual plan.
Benefits and Pitfalls of a National Infrastructure Bank…Yonah Freemark
If you haven’t been following lately, it’s becoming increasingly difficult for members of Congress to get anything done. In terms of transportation, this fact is no laughing matter, because the nation’s ground transport systems is running on hot air — deficit spending — for lack of agreement about how to pull together financing for the next planned six-year transportation bill, now a year late.
What was once considered unthinkable — a reliance on the income tax-sourced General Fund to ensure continued cash flow to states for the purposes of highway and transit construction — has become something of the status quo. But the lack of a committed, long-term source of funds for the program has produced a situation in which an expansion of overall spending on transportation, something that many consider an urgent priority, is very difficult to undertake.
Rather than acting as a consensus-builder, the Obama Administration has systematically undermined potentially the most politically reasonable approach: raising the gas tax, an action that hasn’t been pursued since 1993. Just this week, Secretary of Transportation Ray LaHood ruled out a gas tax hike even though alternatives, like a vehicle-miles-traveled tax, would take years to implement. So a continued reliance on the General Fund seems likely — and it has some significant merits, mostly relating to the fact that it derives funds from the progressive income tax rather than regressive user fees.
Nonetheless, everyone involved in the process seems to want more funds for transportation — just not from the deficit-laden treasury. That’s why the Administration has been harping again and again on an idea it’s been fantasizing about since before Mr. Obama even won the Presidency: a national infrastructure bank.
According to its proponents, such a bank would provide a new funding source to the nation’s essential infrastructure projects, allowing cities, states, and even regions as a whole to build new rail lines or electricity grids. Theoretically, this independently-run institution would finance only meritorious projects and it would do so by leveraging the government’s guaranteed and virtually infinite bonding capabilities. In turn, voilà: the U.S. gets a renewed physical plant, and taxpayers are asked to foot less of the bill.
The usefulness of this concept is relatively easy to understand when put in context. Take the example of Los Angeles: under the leadership of Mayor Antonio Villaraigosa, the local Metro transportation agency wants to speed up spending on 12 major transit projects — from a planned thirty years to just ten. But sales tax revenue to pay for those projects will take decades to come in, meaning that the proposal is dead in the water. That is, unless the federal government steps in, lending Los Angeles the equivalent of two-thirds of total tax revenue, using as collateral twenty years of taxes that the region will eventually pay back to Washington. The end result: L.A. gets a big new transit network much more quickly than planned, all at the same price as initially assumed.
A national infrastructure bank could provide these loans, unlike the current executive departments that have no mandate to do so. So there’s a gap to fill.
But as nice as the infrastructure bank may sound, its own financing mechanisms have yet to be clearly defined, even though the way it would lend out is relatively easy to understand.
In his fiscal year 2011 budget, President Obama suggested appropriating $4 billion to establish the new infrastructure bank, with the assumption that the new agency would distribute grants to qualified projects and have its coffers refilled every year or so depending on need. Of course, what’s envisioned there is no bank at all, since it wouldn’t be generating revenue in return for its investments: it would be draining Washington’s coffers even more, with no clear explanation for why it is necessary. What’s the point of establishing another federal agency to dole out grants for infrastructure, when the Departments of Transportation, Housing and Urban Development, and Energy already do that all the time?
This non-bank idea, in other words, is a non-starter.
But what about an infrastructure bank that distributed loans at low interest rates and then expected to get its money back over time? What Connecticut Congresswoman Rosa DeLauro has been proposing for years is something modeled on the European Investment Bank (EIB). The EIB was founded in 1958 and provides low-interest loans at up to 50% of cost to qualified projects in a variety of sectors in Europe and North Africa. Recent projects funded by the EIB’s transport division include an extension of the Bilbao Metro in Spain, a tramway network in Lodz, Poland, and the high-speed rail line between Istanbul and Ankara in Turkey.
Despite its vast size and lending obligations — it is larger than the World Bank — the EIB is independent, does not rely on infusions of funds from any European governments, and has a stellar credit rating.
The principal of encouraging states and local governments to take out low-interest loans was championed by the stimulus act of early 2009, which included a provision for Build America Bonds. Governments have now issued $78 billion in these bonds, now representing 20% of the municipal debt market, mostly because the BAB program is such a good deal for public authorities that want to take out debt for new construction projects. Unlike the proposed infrastructure bank, however, the BAB program does not distribute funds based on merit, nor does it rely on a government bank — the federal government artificially produces low interest rates by subsidizing private loans.
But the EIB and BAB models, as interesting as they are, do not actually increase the amount of money being spent on transportation in the long-term — they simply transfer more of the current spending load into debt. Is that a good idea when governments are already so squeezed by limited budgets? How can we be sure that we’ll be in an adequate financial situation to pay back these debts in the future? Spending now through loans inherently means less spending in the future: If Los Angeles compresses thirty years of transit spending into ten, what happens during the other twenty? Nothing at all, unless another separate revenue source is established.
So none of the the infrastructure bank proposals put forth thus far will actually aid in reversing the current lack of adequate financing for transportation.
But there’s an alternative that would meld the idea of a bank and a grant-lending institution, leveraging the power of the federal government to invest and then using the profits to spend on necessary projects.
Imagine the federal government began offering a bank savings account package to young people and seniors with a very favorable rate of return, run through private banks in exchange for, say, their participation in the FDIC bank insurance system. Then say the government “collected” all of those funds together in a public bank and used the money to invest as it wished in the private sector. If well managed, this system could make enough money through its investments not only to give its depositors high interest rates, but also a large profit that would go not to shareholders but instead towards the construction of new social housing and infrastructure.
It turns out that this is not that far-off of an idea: it’s exactly how France’s Caisse des Dépôts works. The independent agency, originally formed in 1816, finances much of the country’s affordable housing and urban redevelopment schemes; more recently, it has contributed to the construction of new high-speed rail lines. For the most part, these expenditures are in grant form, meaning that the Caisse is increasing France’s overall spending on infrastructure without increasing the nation’s debt load. That makes it significantly more effective in moving forward with new spending than would be the infrastructure banks proposed for the U.S.
The Caisse can raise funds easily partially because it runs a huge percentage of the nation’s bank deposits, but also because it invests directly in (and helps run) a number of major French enterprises, a type of state involvement in the economy that is a hallmark of French policy but is unlikely to play a major role in traditionally hands-off American political decision-making. On the other hand, since the Caisse is autonomous — it makes its investment decisions without, say, the involvement of the National Assembly — it acts somewhat more like a non-profit than an arm of the national government. It does not rely on any kind of subsidy to maintain its operations.
Even without a savings account scheme, a similar bank in the U.S. could leverage existing government funds, such as those reserved for Social Security, to invest in the market and earn interest for the public sector. If properly managed, those dividends could be sent back to local and state governments in the form of grants for infrastructure. It’s hard to see the downsides of that idea.