22.5.17

REDISCOVERING VALUE CAPTURE.

Here's an old Strong Towns post that has come to Cold Spring Shops' attention.
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.

Let's examine the way the railroads were constructed. Nobody is arguing that there wasn't government subsidy of the railroads. There was. The land for the tracks and the towns along it were largely given to the railroad companies. Examine that investment, however. Land the government owned was given away. (I realize we can debate whether they owned it -- they didn't -- but that is another conversation.) There was no long term taxpayer commitment. There was no ongoing expense the government incurred.

The railroad then built the tracks. Did they build them and then charge a fee (the equivalent of today's gas tax) to pay for the construction? Absolutely not. That would have been far too speculative. In order to pay for the tracks they did something simple and obvious: they developed the towns along the way. The railroads owned the land, created the railroad stop, subdivided the land around it, sold it to speculators and others looking to develop and then used that money (minus some profit margin, for sure) to build the line. In other words, they used a value capture mechanism to pay for the infrastructure.

The railroads were land developers first, railroad operators second. Once the line was built and the land at the towns sold off, they were free of the need to pay off capital expenses. That meant that the fares that the railroad collected could go directly to covering operations and maintenance (and some profit, for sure). That's a viable model.

It is also a model with direct feedback. What happened when things didn't work out, when a town failed to develop properly or when the development of new towns got out ahead of the demand. If the railroads operated like today's highway departments, if the growth slowed down, we would simply build more railroads and towns. After all, the new infrastructure creates growth, right?

Of course, that is not what happened. Many railroads went out of business, and nearly all lost money, in the Long Depression of 1870, which was at least partially caused by over speculation along the railroad lines. That is what happens in a real market system when there is malinvestment and supply runs too far ahead of demand.
But trade-tested malinvestment cannot go on for as long as government-mandated malinvestment.

The history makes me optimistic about the future of Florida's Brightline train service.

No comments: