Opportunity Cost, CBA and the CRC

Opportunity cost is one of the most important concepts in economics.  It is the measure of the next best alternative that could be done with the time/money/resources dedicated to a given activity. It is part of what economists think of as the true cost of any activity and its essence is its ability to focus attention on forgone opportunities whenever one action is taken.

People use the concept naturally all the time, but there are also many situations in which opportunity costs are forgotten.  A good example of opportunity cost as used by average people is with frequent flier programs.  You may have accrued enough miles to qualify for a 'free' ticket on an airline.  You may also know that you have to go to Seattle in a couple of weeks and consider whether you should use the miles and fly 'free' and save yourself the three hour drive.  But you know intuitively that it is not 'free' in the sense that if you use it for a trip to Seattle you will not be able to use the tickets for a trip to NYC or Miami or wherever and that the cost of such a ticket is probably a lot more than buying a ticket for Seattle.

This is opportunity cost in a nutshell, by using the ticket for a trip to Seattle, you are foregoing the use of the miles on a ticket to another destination you might like to visit.  Thus the 'cost' of the Seattle ticket is the forgone ticket to Miami.

Perhaps no where is the concept of opportunity cost more important to focus on than in Cost-Benefit Analysis (CBA).  I tell my students, who are often frustrated at their inability to come up with good numbers, that the very act of identifying the relevant costs (accounting and opportunity) is incredibly valuable exercise in its own right.  It is valuable because the relevant question on public works projects is never "do we have enough money to build it and does the benefit of the project justify the amount we are going to spend?"  Rather it is "is this the best use of the resources we need to devote to the project?"  Answering this second question is built into CBA because a good CBA accounts for opportunity cost as well.

Which is all to say that we need to take a good look at what critics of the Columbia River Crossing (CRC) project, like Joe Cortright, are saying about the true costs and benefits of the project and how divergent they are from the CRCs own CBA.

I have not studied the topic in any great detail (and, in fact, can find no evidence of the CRCs actual CBA on their website) but there some very compelling points that Cortright makes about the project's CBA that raise serious questions about the quality of the CBA and the assumptions contained therein.

One of the first things that worries me is the obvious and fundamental error in counting the benefits of the project: the double counting of the benefits from reduced travel times.  Though I cannot find the CBA itself, there are tables from it reproduced in this document.  Here are two:

Oops.  This is such a fundamental error, I used it as an example in my own class.  In fact, this is precisely the double counting mistake that Gruber uses as a hypothetical in his public economics text.  The expected increase in property values in Clark county are due to the decreased drive times.  So the travel time savings and the property value increase are measuring the same thing.  The increase in market values of homes are the market outcome of the fact that the travel time savings make potential buyers willing to pay more.  If this kind of mistake can be in the CBA, what else in it is suspect?

In fact, I have seen testimony by the author of the CBA who was asked about this and his response was that he understood that there was some controversy about including both benefits in CBAs but his personal belief was that both should be included.  But this is simply wrong and disingenuous, there is no controversy at all and the only reason both are in there is to seriously, and wrongly, inflate the benefits of the project.

Now I don't claim to be any sort of arbiter about projections, but given this, I begin to wonder about other things pointed out by Cortright in this document.  [Keep in mind that this is an analysis being funded by an opponent of the project, but equally, I suppose it is fair to mention that Cortright's concerns predate this commission]

Here are two striking graphs that raise concerns about the forecasts for traffic levels (and thus the necessity for a new bigger bridge):

Now, part of this decline may be due to the recession, but note that the peak and subsequent decline started prior to the recession.  Perhaps it is due to gas prices then? And in fact gas prices did rise preceding the recession (this is a chart of DOE national retail gas prices for regular grade gas):

They did move up to the 2 to 3 dollar range in 2005 but didn't peak to $4 until 2008 and gas is notoriously price inelastic, meaning people do not adjust to much to increases in gas prices (at least not in the short run).  Besides, $4 gas is probably the new reality not a temporary spike give the huge increases in demand from the rapidly developing middle income countries.

In addition, Cortright also shows the overall peak and decline of vehicle miles traveled in Oregon which clearly precedes and seems unrelated to the current recession:  

ODOT responded to the Cortright report and a fair hearing includes both their response (here) and Cortright's response to their response (here).

One bone of contention which is a point on which reasonable people can disagree is how the CRC and the Rose Quarter bottleneck should be related.  The CRC says it is not within the scope of their project to include the Rose Quarter and Cortright contends that any benefit that comes form the CRC is only realized if the Rose Quarter bottleneck is fixed.  I imagine that most daily trips that originate in Clark county do not end before the Rose Quarter and it is hard for me to imagine that you will get significant travel time savings without fixing the Rose Quarter save for local travel times in Clark County.  If CRC benefits that are being counted are contingent on the solution to the Rose Quarter than I agree wholeheartedly with Cortright on the need to include the cost of fixing the Rose Quarter in the CBA.

In the end I do not wish to take sides, but I do wish that I could come to a conclusion about how worthwhile a project is the CRC and to do so requires good information and a good CBA.  I am convinced that we currently have neither.  

Which gets us back to the start of the post.  Is the CRC the best way to spend $3.6 (or $8 or $10) billion dollars in the region?  Sure some of it is federal money that would not come without the CRC, but a ton is local and we are currently dealing with a pathetic excuse for a public education system and a collapsing public service infrastructure.  I do believe that transportation and infrastructure are important to economic growth, but we do have a perfectly good bridge in place and congestion serves the purpose of increased density, reliance on transit and the like.

A good discussion then of the opportunity cost of the CRC project is a necessary first step before we divert billions of public dollars that is desperately needed elsewhere. I hope that the legislature will stop and attempt to have this discussion before committing to the project.