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New Purple Line Study Fails Economics 101

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New Purple Line Study Fails Economics 101

April 27, 2015

A new study by Transportation Economics and Management Systems (TEMS) purports to show that Maryland would gain by building the Purple Line, a 16-mile light rail project just north of Washington D.C. that is anticipated to cost $2.5 billion. 

Embarking on this project would be a mistake, and the new study, released last month, does not prove the project’s value. The study comes at a time when Maryland residents are asking Governor Hogan for more funds for education and pensions. Maryland taxpayers would pay $2.4 billion and the federal government, if Congress approves, would pay $900 million.  

This TEMS report states that it updates a 2010 study.  But after five years the new report presents itself as “preliminary.” There is no discussion in the report of how many years or how much it would cost to reach a final study.

Students in introductory economics classes are usually familiar with the concept of consumer surplus, the additional value that consumers benefit from prevailing prices in a market. The recent TEMS study, rather than use concepts of consumer surplus, relies on the concept of economic rents to bolster its case for the $2.5 billion project. Economic rents add business benefits in a transaction above normal competitive returns.

Most economists, as well as laymen, will ask why a project that supposedly benefits consumers relies on economic rent for support. Presumably the benefits of the project accrue more to local businesses than to local consumers. Most studies of large public works rely on supposed benefits to consumers to rationalize large expenses.  One can only infer that benefits to consumers are too small to justify the expense of the project.

The report presents many diagrams and equations, some with Greek letters and some without. But it is impossible from the report to reconstruct any of the empirical results.  It simply is an exercise in irreproducible analysis.  

For example, at Exhibit 4.2 on page 25, the authors present selected estimated coefficients from their travel demand model. However, they do not show information about the underlying data, including the number of observations in their model.

Even if the underlying data had been presented, it is doubtful that they would be useful. Appendix B presents information about a “stated preference survey.” Most meaningful economic research is based on actual consumer behavior.  With actual consumer behavior, economists can measure the reaction of consumers to changes in prices and other factors.

The new Purple Line study is not based on actual consumer behavior, but on a “Maryland travel survey.”  After asking people about their demographic status, the survey asks consumers about a hypothetical scenario in which a person is to assume that a travel time is 50 minutes and the total cost of the trip is $12.  The survey gives some fine-print definitions of what this all means.  The person is asked five questions concerning hypothetical increases of cost in the trip and time savings associated with these higher costs.  The individual is asked to offer an opinion as to whether he would be willing to pay more to save time.

Most economists mistrust opinion surveys because they do not reflect actual consumer behavior.  These surveys, responded to only by those with time and patience to understand hypothetical questions, are little more than idle opinions that cost people nothing to respond in any particular manner.  Such opinion surveys, awkwardly worded and handed out at transit centers, appear to be part of the foundation of the new Purple Line study.

Even if such surveys were remotely reliable, which they are not, the new Purple Line study was careless in its survey technique.  To begin with, the study does not report the dates on which the survey forms were completed.  The reader does not know if they were from 2015, 2010, or some year in between.  Further, many of the respondents were interviewed at transit sites.  Motorists were underrepresented. 

Section 6 of the report presents the economic rents results.  The purported benefits of the Purple Line are so extraordinarily large that, if true, no government subsidy would be necessary.  Commissioning this and other studies by state and local governments for the single purpose of justifying government spending of $2.5 billion indicates that the project cannot stand on its own.

But let’s review the fantastic results of the study.  The study claims that the Purple Line will create 27,183 new permanent jobs.  These are not the temporary jobs associated with construction, but permanent jobs based on an assumed increase in productivity of 0.5 percent. With this economic illogic, practically any government program could be justified through increases in productivity.

Household income is purported to increase by $2.2 billion annually in the region. Again, the study provides no credible evidence for this increase.  Total property values are supposed to increase by $12.8 billion, and tax revenue is forecast to rise by $635 million annually.

To measure the benefits over time, the study uses a three percent discount rate. With the low rate, the study concludes that the Purple Line will generate $12.4 billion over the next 30 years. No rational business of any size or any risk profile would use a discount rate of three percent.

The Washington Post reports that the study was commissioned by Montgomery and Prince George’s counties, but the study makes no mention of sponsorship, nor of the study’s cost to taxpayers.

As I have written elsewhere, when time for train transfers and regularly-occurring delays are added to estimates of Purple Line travel time, the benefits of buses or cars become even greater. 

The Purple Line’s $2.5 billion projected price tag, as well as about $58 million a year for maintenance, is likely to understate the actual cost. The Purple Line is not forecast to cover operating costs, much less construction costs, because no one wants to pay its true costs, which are steadily rising.

To summarize, the new Purple Line study has no economically reliable content. It uses the wrong economic concepts of measuring the value of a public project.  It uses survey rather than actual data.  Its survey technique is not representative of Maryland’s population.  The conclusions it reaches defy economic logic.  The state of Maryland and the federal government cannot reasonable rely on this study for any purpose.

 

Diana Furchtgott-Roth, director of Economics21 at the Manhattan Institute, is the coauthor of "Disinherited: How Washington Is Betraying America's Young." Follow her on Twitter here.

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