This blog is part of an online learning platform which includes the Pathways to New Community Paradigms Wiki and a number of other Internet based resources to explore what is termed here 'new community paradigms' which are a transformational change brought about by members of a community.

It is intended to offer resources and explore ideas with the potential of purposefully directing the momentum needed for communities to create their own new community paradigms.

It seeks to help those interested in becoming active participants in the governance of their local communities rather than merely passive consumers of government service output. This blog seeks to assist individuals wanting to redefine their role in producing a more direct democratic form of governance by participating both in defining the political body and establishing the policies that will have an impact their community so that new paradigms for their community can be chosen rather than imposed.

Thursday, May 24, 2012

Questioning Value Capture, How We Get There.

Fundamentally, this is an online learning platform focused on economic and community development that I have been developing and sharing with whomever is interested. Now that I am retired, I don’t have to worry about pleasing politicians, supervisors or anyone else for that matter. It means that I can fully concentrate on those issues that interest me rather than the minutia of a daily grind in a city hall. It also means being able to explore organizations with new ideas on how we should build our communities. One that has been featured in this blog is Strong Towns. I am very supportive of the Strong Towns mission, however, that does not stop me from raising questions.

One of the great things and one of the ‘challenges’ of making an extended examination and evaluation of the Strong Town positions, especially as put forth by Strong Towns Executive Director Chuck Marohn, is that his arguments are carefully crafted with current articles being built up upon past ones going back a few years. I am trying to do the same with New Community Paradigms but have been at this less than a year. My thinking and positions are still being formed based on a large part placing them against interesting ideas generated by others. Strong Towns falls into that category. The intention is not to be hairsplitting, it is to get a deeper understanding. This is not to argue in disagreement with anybody but to examine an argument by examining the merits.

So, let's be clear, I can agree with Chuck that just spending money on highways does not create economic growth and jobs. Second, I can agree that a system that gets more revenue because of people being inefficient and wasteful with use of resources such as the gas tax is perverse. Mostly agree with his point regarding the ability of institutions to deficit spend at artificially low rates not being a good thing but would add, if it is without a reasonable return on investment after considering all costs over time. He could point out though that since this has not actually happened in enough cases, the practice should still be stopped.

Relevant to this post, I can agree with the argument Chuck makes in his article The Value of Value Capture that one of our biggest public sector mistakes is that:

Today we spend money on infrastructure in the hopes of creating growth. That's backwards. Infrastructure should not be a catalyst for growth but something that emerges in support of productive patterns of development. There has to be a relationship between the infrastructure built and the value created.

Again, no problem with agreeing, I am not joining the ‘Infrastructure Cult’ based on an unquestioning belief that our current system of highway spending always creates prosperity.

The Value of Value Capture article was written as a follow up to the Paved with good intentions article in which Chuck wrote about the inadequate return on investment of our highway projects pointing out that even if modern transportation improvements really did create a good deal of wealth, we captured too little of it to be able to continue the system as we have built it.

Chuck repeats his challenge from the Paved with good intentions article for anyone to demonstrate how highway funding, and American post WW II development in general, is not simply a large Ponzi scheme, where spending generates the near term illusion of wealth in exchange for massive, unfunded, long term obligations. No disagreement with the Ponzi scheme argument either, this perspective was supported in the Pathways to New Community Paradigms posts Strong Towns: The making of Place as Economic and Social Engine and Strong Towns a closer look.

I did not take up his challenge to defend the "it's the system, dude" argument though I did repeat the challenge in the Strong Town Communities LinkedIn Group hoping someone else would - no one did. I can’t be sure whether I was the supposed source of the second hand rebuttal that essentially argued that Chuck’s analysis was too simplistic (Carly Simon playing in the background). If I believed that, Strong Towns would not be such an integral part of my ongoing efforts regarding new community paradigms. I do, however, believe that we need to identify and consider all the (unidentified) second order and third order growth effects. This does not mean that we then default into the “Sure, we may lose money on each project that you measure, but the overall effect of the system generates more than enough wealth to keep it all going” approach. The actual net benefits of any alternative system would still need to be proven. Even if it could be proven that such an effort could not be supported or sustained, the examination would be worthwhile as it could help us to understand what could work.

As an example from his Paved with good intentions article, Chuck points to a diverging diamond project in Colorado, which had a supposedly high return on investment. A $7.2 million investment it is claimed generated $157 million in wealth and prosperity.

Chuck points out though that out of the $157 million in GDP growth that only $260,000 would ever be returned to the federal coffers for future highway projects. As $260,000 is only a 3.6% return on the $7.2 million invested, this means of wealth generation, not to mention the ongoing maintenance costs, cannot be financially sustained. This is one point that I want to examine more closely. A far better system, according to Chuck in The Value of Value Capture article was the railroad system of the Nineteenth Century. This is another point where I start questioning the details.

I am not a history buff so others will be far more knowledgeable about details regarding the issues I am raising. Still, I can’t help but think that the comparison of the development of the railroads to the development of the highway system is not apples to apples. This doesn’t weaken Chuck’s argument against the current system of funding our national infrastructure but it does help delineate some differences in thinking first raised in Strong Towns and job creation - navigating between Scylla and Charybdis.

The subsidy that the national government provided to the railroads was in the form of a natural resource. Government ‘owned’ or controlled land and the towns along it were basically given to the railroad companies at no cost. Whether or not the government actually paid for the land, as in the case of the Louisiana Purchase, or this was seen as part of this nation’s Manifest Destiny I do not know, but the railroads did not have to pay for the land and the government was not burdened with any long term maintenance obligations. This makes a substantial economic difference and would be impossible today due to constraints that Chuck has talked about, particularly from my experience in just compensation for eminent domain and relocation costs. The cost/benefits calculation sheet arguably started off with only figures on the benefit side.

The railroad owners were then able to start building the tracks and to monetize their assets by developing towns along the way. As Chuck explains, since the railroads owned the land, it could create railroad stops, subdivide land around it and sell it to speculators and other developers and then used that money (minus a profit margin) to build the line. It was, again, based on a positive balance sheet.

The towns built around the railroad stops could then be used as a value capture mechanism to pay for the infrastructure. One could also ask whether cash was raised through the sale of shares before this value capture but that does not have an impact on the system’s general financial viability, only inquiries into the economics of the nation at the time. This method provided enough value to pay off the capital expenditures (the railroad lines not the land) and provided a profit to the railroad companies.

The fares the railroad started to collect to move people and goods could then go directly to covering operations and maintenance and were a further expansion of the value enhancement and capture system by bringing in people and goods.

Charging a fee or what would be the equivalent of today's gas tax to pay for the original construction would have been according to Chuck too speculative. The system that Chuck describes, or at least its expansion, did depend in part though upon speculation, just not perhaps on the part of the original railroad companies. My historical question is to what extent the original companies that received the land grants from the government participated in this extended speculation or was this done by subsequent companies or the equivalent of franchises that followed later on providing yet another means of monetizing the original grantee’s assets.

The Long Depression of 1870, Chuck argues, was at least partially caused by the over speculation along the railroad lines, the result of what happens in a real market system when there is malinvestment and supply runs too far ahead of demand. If a town failed to develop properly or new towns development exceeded demand (A new town bubble?) the result was that many railroads went out of business, losing money. Raising another question, beyond the government’s original subsidy, what was the public sector’s role in this effort or if essentially private wasn’t the 1870 Depression private-based as well? I suspect that much of the land was in territories and not in states that had been adopted and therefore without much influence, good or bad, from legal or regulatory oversight.

Chuck goes on to make a number of other points with which I have no argument. Railroads compared to highways, last a longer time without needing to be replaced and require less maintenance. Highways require enormous amounts of maintenance and only last about a third as long as a railroads. Maintenance charges for railroads can be amortized (which I can appreciate can be different from deficit spending) over longer periods of time. All true, and while this is likely obvious, the railroad system could not however be expanded though to have taken place of the highway system. We may have binged on the highway system (OK, we definitely did) but some form of individual or household transportation was going to be and needed to be created. Our mistake is basing our community development solely on it.

This brings us back to our current Suburban Experiment which arguably replaced an affordable, efficient and long-lasting mode of transport that was funded privately by direct value capture (and large resource subsidy by the government) and maintained by direct user fees and replacing it with an expensive, inefficient and maintenance-intensive system that is funded by politicians with deficit spending and a non-correlated fee. While I can agree with the expensive, inefficient, maintenance-intensive deficit spending and perverse fee system of politically influenced funding part of the current system part being true, I am less convinced that saying that railroads were overall a superior system economically is a fair comparison.

Chuck usually takes the perspective of local communities, but this time he takes the role of the DOT assessing local governments wanting new infrastructure improvements, for the value that is created by that improvement.

This is, in large part, a poison pill approach as Chuck asserts that this won't cover the second and third life cycles, but instead would stop a lot of stupid projects from happening. Better yet according to Chuck,

“In fact, it would probably stop every project from happening, and understand why.

When you are assessing someone, you are capturing the value created by the project.

Highway enhancement projects wouldn't happen today because either (a) there is not enough value created to capture, or (b) the property owners won't be willing speculate that they can recoup the cost of the assessment.”

On the surface, there is a reasonableness to this argument but I still feel the need to examine this more closely. Now I started off saying that I did not want to merely split hairs for the sake of argument and I have to admit that I have not as of yet made any viable counter argument. Simply questioning an alternative argument is not sufficient. This will require though going back through some of those previous Strong Town articles the Chuck cited, particularly the series on cost/benefit analysis. I can then return to Chuck’s suggested means of correcting the process with an assessment of proposed projects.

I am still questioning.

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