A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.
Tuesday, November 13, 2012
Transcript: Rail's possibilities locked up in inefficient markets
We are on the Demand Sidelines in the latest recession debate, as you know, put there by ourselves and our own obtuseness in not realizing that there was an end to the last recession. And still we peer at our screen looking for the business cycle recovery and not finding it. Sales, incomes, investment and particularly employment reacting not to any recovery in business confidence and expansion, but to massive public policy. Policy in the form of zero interest rates, now on four years. Policy in the form of federal deficits of, this year, $1.3 trillion and no end in sight. Policy in the form of big bank bailouts and absolution from criminal prosecution.
The Demand Side Forecast continues to be bouncing along the bottom with downside risks. We did predict a post-election slump, from an already weakening trend, on account of the political business cycle, the practice of incumbent presidents arranging federal spending to target the final months of a campaign.
But although we are on the sidelines, we do like to highlight the latest debate, which focused on a new series added to FRED, the data center organized and run by the St. Louis Fed. Titled "Recession Probabilities," produced by Jeremy Piger of the University of Oregon. It aggregates Retail Sales, Incomes, Industriaal Production and Employment – good real economy metrics – and produces an index which purports to show the likelihood of recession. The index – you can see it on the transcript – has not been at the level it is currently without the economy being in or being at the onset of a recession. That said, it is based on available data, which may be revised and thus revise away the indicator's level. Thus, the likelihood percentage is listed at just below 20 percent.
Ah, the ridicule. Bill McBride at Calculated Risk relayed posts from Piger's critics, suggesting the data was shakey or manipulated badly, in language that would make even Demand Side blush. The chief critic also suggested Piger claimed a 100% conviction that the recession was at hand, when at the top of the chart it says 19.56 percent.
Others such as Laksman Achuthan at ECRI and Gary Shilling have pointed to recession, and brought on themselves similar scorn for their recession calls. It's funny scorn is not heaped on the bulls, but only the bears. Funny. The Fed, for example, has been wrong consistently and badly, but seems to get a pass, or at least until recently. Here is an exhange between Shilling and Bloomberg's Tom Keene.
So we put up Piger's FRED chart plus those of its components on the transcript. Although, as we repeat, this is not recovery or expansion we have been in, it is artificial respiration from massive policy inputs – as in zero percent interest rates, bank bailouts and legal immunity, and $1.3 trillion deficits. Absent these, there is no business cycle support, the economy continues in recession.
Another indicator of renewed weakness – Rail.
From the Association of American Railroads latest release, we see mixed results in rail car loadings, a good real economy indicator. Basically total carloadings continue to weaken, on the back of terrific slowing in coal loadings and in spite of a spike in petroleum and petroleum products. Intermodal – that is, container – traffic has been relatively stable. Hurricane Sandy had substantial, but not easily quantifiable nor probably long-lasting impact.
Rail is our seque into a cameo appearance by the Real Economy.
No, by "real" we do not mean the inflation-adjusted economy. We mean the real economy of industrial infrastructure and the services that use it to produce and deliver real stuff to real people. There is a real economy. We do not have to stare like hypnotized chickens at stocks and bonds and deriviatives and interest rate spreads.
Forty percent of US freight rides on the rail. Compare this to less than ten percent in Europe. Of course, North America is a huge land mass, and a great portion of that freight is bulk (as in coal, grain, timber) or intermodal (as in containers landing in Seattle and getting on a car for Chicago). Also, of course, the passenger rail in Europe dwarfs in scale and efficiency the passenger rail use in the US, where aside from the Northeast Corridor – Washington to Boston – Rail is a nonfactor. Within cities, Chicago, Boston, New York, maybe Portland Oregon, may have good rail for commuters, but elsewhere, not so much.
Part of the paucity of effective use of rail for commuters arose from teh Great American Streetcar Scandal, where in the 1940s GM and others bought up and dismantled trolley-based surface transit in order to leave the field clear for diesel buses and automobiles. Commuter rail – a return to the pre-1940's scheme – are on the drawing boards, actually they are in blueprints in a cabinet, shovel-ready, in a dozen or more cities, mothballed for lack of funding.
A great part of the problem of rail is the legal framework, and the absence of partnership between the public and private sector. The railroad boom of the Nineteenth Century resulted in mega-corporations with lots of political power and lots of assets, notably land beside the rail, given by the government to incentivize construdction. Control of rail by these corporations means coordination is baffled by their profit calculations, which are driven by the metric return on capital, that capital constructed and embedded many years ago.
Backing up a bit, when the railroads were built in the West, they were incentivized by land giveaways to the railroad companies. It is well known that people wereenticed to buy the land with deceptive and predatory practices. One great slogan was, "Plowing will bring the rain." Thousands of farms came into being on the premise that dry land would become fertile by simply plowing. That aside, after this sell it to the credulous phase, quite a bit after, and in spite of stipulations in law which prevented them from doing so, the rail companies assembled the land for their own account. These were stipulations as to size and use of parcels. Here in Washington State Plum Creek Timber is a massive spinoff of the railroads.
The point that is most crucial, and one that we are getting away from a bit, is that Rail is a crucial part of the Real Economy. And it is stuck. Demand Side thinks of Rail as a public good, see our book at DemandSideBooks.com for a treatment of public goods – that ought to be managed for the public benefit. It is a utility. Far from making things more efficient by having private markets dominate here, things are vastly less efficient. Rail's owners have been paid many times the original investment from the public purse.
In intercity passenger rail, aka Amtrak, for example, priority to passenger trains receives far more emphasis in theory than in practice. The use as a freight carrier is skewed dramatically to the higher margin bulk and containers, the long-haul, low labor uses.
The bottom line, Rail needs to be the first freight choice. It needs to be a far bigger player in intercity passenger. And it needs to coordinate much better with the other surface transportation modes – marine and highway. There is enormous value locked behind the current doors. And big new investment could garner high returns in opening those doors. We should do it, before we choke to death on the highway.
So that's it for today. The Demand Side Podcast, brought to you by pragmatism. If it works, do it. If it doesn't work, don't do it. Make a science of metrics that display clearly what works. Erase the politics of pragmatism, which is what is good for my donors is what works. (more on that next time, with the disgusting pivot from jobs in the campaigns to cutting spending to avert a fiscal cliff in the actual legislative action). If it doesn't work, don't double down on it. If it does work, maybe we should try more. If nothing is working and we haven't tried something, maybe we should try it. If an economist was proven right by events in his predictions, perhaps we should listen to him. If he was demonstrably wrong, perhaps we ought not. Just saying. So. Pragmatism. A little goes a long way.
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