This train fare question isn’t difficult you know

The Guardian rather jumps the shark here:

The Guardian view on rail fares: unfair
Travelling by train produces benefits for everyone – less air pollution, lower greenhouse gas emissions, fewer traffic jams. Passengers should not have to pay two-thirds of the cost

Actually, a small engined car with four people in it has lower emissions, lower pollution, than four people traveling by train. So it simply isn’t true that everyone benefits from more train travel.

There are indeed some truths there though. It simply would not be possible to fill and empty London each day purely by private transport: some amount of commuting public transport is going to be necessary. And there’s no reason why those who benefit from that should not pay for it: as they largely do through the subsidy of London Transport paid for by Londoners.

But on the larger question of who should pay for the railways of course it should be those who use the railways that pay for it. Some City fund manager who commutes in from 50 miles outside London should not have his lifestyle choice subsidised by the rest of us. We should not be taxing the man who cycles to work at minimum wage in order to pay for wealthier people top travel longer distances.

The Guardian is, once again, forgetting that there is no magic money tree. If rail users do not pay for the railways then there is no unowned cash that can be diverted to doing so. Either the rest of us put our hands in our pockets or we don’t. And why should the poor pay taxes so the middles classes can live in the greenbelt?

A simple point on railway nationalisation

One point people bring up when they advocate renationalising railways (or renationalising stuff in general) is that when private companies run something they take a chunk of the total surplus in profit, but if the government were in control, that could go to them. But there’s a very basic reason why this isn’t the case: opportunity cost.

A firm, in doing business, puts capital to use. It uses a mix of physical and human capital and devotes it toward achieving tasks in order, usually, to turn a profit. The best way to measure the amount of capital tied up in a project is the market’s assessment thereof—the firm’s market capitalisation—although of course we know that market prices are never perfectly accurate, since they are only on their way to an ever-changing equilibrium, and they may not have got there yet. And what’s more, not all the relevant information will always be in the public domain.

For rail franchises—or TOCs (Train Operating Companies), as they seem to call themselves—it is relatively hard to pinpoint the exact amount of capital they are using, as they are usually subdivisions of a larger structure. But suffice to say, running trains involves tying up money on the order of billions, whoever does it (i.e. it includes Directly Operated Railways, the state body that is currently running the East Coast Mainline pretty well). You have to rent the rolling stock (trains), pay the staff, buy the fuel, pay to use the track and so on.

From this capital you get a return. TOC margins average about 4% over the last ten years. The average company got more like 10%. FTSE100 companies seem to enjoy higher returns. Of course, operating profits are not share returns, but they tell more or less the same story. The extra couple dozen billion the government would need to spend on trains could equally be spent on equities or anywhere else for more or less the same risk-adjusted return. The return they got here could be put into trains.

But even doing this makes no sense. If the government returns that couple dozen billion to the population at large, the government can tax the income that the private citizens make on the wealth, at a glance dealing with the problems of governments holding wealth—principally: they are not very good at picking winners. Or they could pay off debt and reduce their repayment costs—since the risk-adjusted return of gilts is priced in just the same way as other assets.

Either way, and whether or not rail re-nationalisation makes sense from any other perspective, it is simply not the case that government, by nationalising rail, could get a bit of extra cash to put into our network.

What would we consider a successful railway system?

Under many measures, the railways have performed remarkably since privatisation. It is not surprising that the British public would nevertheless like to renationalise them, given how ignorant we know they are, but it’s at least slightly surprising that large sections of the intelligentsia seem to agree.

Last year I wrote a very short piece on the issue, pointing out the basic facts: the UK has had two eras of private railways, both extremely successful, and a long period of extremely unsuccessful state control. Franchising probably isn’t the ideal way of running the rail system privately, but it seems like even a relatively bad private system outperforms the state.

GBR_rail_passenegers_by_year

Short history: approximately free market in rail until 1913, built mainly with private capital. Government control/direction during the war. Government decides the railways aren’t making enough profit in 1923 and reorganises them into bigger regional monopolies. These aren’t very successful (in a very difficult macro environment) so it nationalises them—along with everything else—in the late 1940s.

By the 1960s the government runs railways into the ground to the point it essentially needs to destroy or mothball half the network. Government re-privatises the railways in 1995—at this point passenger journeys have reached half the level they were at in 1913. Within 15 years they’ve made back the ground lost in the previous eighty.

But maybe it’s not privatisation that led to this growth. Let’s consider some alternative hypotheses:

(more…)

Yes, planning regulations really have driven up house prices

Not that we ever suspected differently of course. But there are those who do insist that it’s not planning regulations, who may build what and where, that increases the cost of housing in the UK. It’s just some combination of rising population and perhaps not enough council houses or summat. Definitely not, it couldn’t be, State restrictions on housing that make housing so expensive. So it’s nice to see news of a paper that addresses exactly this question. What actually is it that has contributed to the sky high house prices of today?

What about the physical restrictions? In a hypothetical world where they could be magicked away, prices would be 15pc today lower than they would otherwise have been. The majority of these constraints can be felt in highly urbanised areas, for obvious reasons: there is not as much space available in city centres and lots in the countryside. Some parts of the country are easier to build on than others.

Everyone wanting to live in the South East, where all the jobs and money are, obviously has some effect. Housing is, at least in part, a positional good in that we can’t all actually live in Central London. But that’s not the only effect:

They find that house prices in England would have risen by about 100 percentage points fewer, after adjusting for consumer price inflation, from 1974 to 2008, in the absence of regulatory constraints to housebuilding. In other words, they would have shot up from £79,000 to £147,000, instead of £226,000. Another way of putting this is that prices would have been 35pc cheaper.

Had the south-east of England, in practice the most regulated English region, been as liberal as the North East, the least regulated over the past 40 years, house prices would still have been roughly 25pc lower. As it happens, the authors aren’t necessarily advocating deregulation: they are trying to calculate, using sophisticated econometric techniques and a wealth of detailed data, the effect of constraints.

The authors aren’t advocating deregulation but of course we are. For example, those greenbelts where it’s almost impossible to build houses cover rather more land than we have actually already covered with houses. Relax those restrictions and housing will become cheaper. To put the blame where it really lies, the reason British housing is so expensive is because the Town and Country Planning Act exists.

The most bizarre complaint yet about rising train fares

We’ve all, at some time or another, stood aghast when listening to one or another outbreak of lefty intemperance. The stamping of the foot as they insist upon absurdities like all people are born equal in every possible skill and talent, it’s only society that makes us turn out different. Or to move from one of Danny Dorling’s misconceptions of the world, how about Thomas Piketty’s insistence on an 80% income tax plus an annual wealth tax in order to avoid the fate of France which is a country with a 75% income tax and an annual wealth tax. Or today’s example, that it really is outrageous that rail fares should rise as subsidies to railways fall:

In reality, fare increases aren’t really paying for infrastructure but are instead covering the gradual withdrawal of government subsidies, which have fallen by 9% in real terms since 2010-11.

Well, yes, and?

Agreed, we here think that privately run railroads are a wonderful idea, that’s why we campaigned for that privatisation. We’re aware that there’s some people who don’t agree with us on that too. But look at that specific reason that’s being given. That it’s right and proper that people be taxed in order to make middle class commuting cheaper. That the dustman must pay to subsidise the stockbrokers’ travel in from Surrey. It’s an absurdity when put that way but that is the argument being made. That it is somehow wrong that those who wish to live a long way from their work should pay their own costs of doing so.

How about that for an absurd insistence?