Mr. Semmens is an economist for the Arizona Department of Transportation and is studying for an advanced degree in business administration at Arizona State University.
By virtually any measure, public transit is clearly a declining industry. In 1945 one third of the total urban passenger miles were accounted for by public transit. By 1973 public transit’s share was under three per cent. In terms of income on passenger trips, urban bus line revenues declined by 24 per cent in the 1960-70 period. Of the 33 largest Standard Metropolitan Statistical Areas, every one of them showed a drop in the proportion of urban work trips made via public transit. At the end of World War II there were 33 billion urban transit trips taken per year. This had dwindled to 5 billion such trips by 1972.
All of this decline in public transit has been accomplished in the face of enormous economic growth in other sectors of the economy, a great increase in travel in general, and in spite of massive doses of government financial aid. The message seems to be that, as has been practiced and is being practiced, public transit is not meeting consumer needs for transportation. Yet, despite this message, more money, time and effort is continually being poured into staid and traditional transit systems in the pitiful hope that shiny new vehicles or more frequent empty route miles will turn the tide.
There are important economic reasons why traditional public transit has consistently failed in city after city. There is less of an explanation as to how or why these economic realities can have been ignored in the making of public transit policy.
The policy implications of the "natural monopoly" concept are that since it appears that the economics of the situation can only efficiently support one firm, then only one firm should be permitted to exist under law. In this way, territories are established within which only one firm will be legally allowed to operate. Thus, it is believed that public policy can enforce efficiency and hold down the final price to the consumer by excluding all but one firm.
This policy has been applied to the provision of transit services. Throughout America, in city after city, single firms have been granted exclusive rights to specified territories or routes, in implementation of the "natural monopoly" theory. The only problem with the enforcement of monopoly in transit is that it is completely inappropriate.
The evolution of the motor vehicle and the development of an extensive road system must dispel any claim to "natural monopoly" status in transit. Whereas rail transit must rely upon a highly specialized roadbed, which can be amortized only by a limited number of users, motor vehicle transit is entirely liberated from the fixed cost of roadways.
Streets, which must be constructed anyway, as the sole means of access to most businesses and residences, serve as the nonspecialized fixed assets of a broad spectrum of users. Consequently, the fixed costs of motor vehicle transit are very low.
Despite the potential for a wide degree of flexibility in routing and scheduling based upon the extensive publicly financed road system, most motor vehicle transit is operated as if it were confined to rail beds. This practice appears to have survived as an imitation of fixed rail services. The first public transit in many cities was performed by street cars. As technology produced alternative modes these were either outlawed (jitneys), severely restricted (taxis), or molded to mimic street cars (buses).
Just as the street cars enjoyed monopoly franchises to specified roadbeds, the practice was continued even after buses largely supplanted this fixed rail system. Since the heavy fixed investment argument on behalf of transit monopolies became rather ludicrous with the change to publicly owned roadways, a new justification for monopoly had to be devised. Thus was invented the theory of the inherent superiority of the "comprehensive integrated system." True, there were no fixed costs in terms of roadbed, but there was a perceived need for uniformity of service, the need for ease of transfer between vehicles and routes, and the belief that only if given a captive ridership via the banning of all competition would a transit operator have the incentive to develop the market.
The error implicit in the monopoly policy toward transit has been effectively demonstrated over time. Transit is not best served by monopolistic franchises. The operational characteristics do not impel a market structure of monopoly. The attempt to force such a structure has shaped the development of urban transportation for the worse. It is as if, King Canute style, public law has commanded the tide of transit technology to recede. The command has, predictably, failed. Instead of strengthening the public transportation system, enforced monopoly has played a significant role in destroying the prospects for public transit. The insistence on monopoly when monopoly was not appropriate has resulted not in channeling riders toward the only legally permitted service, but rather, has induced people to opt out of the system entirely in favor of privately owned automobiles.
If price controls worked we could all live like kings. But, alas, they don’t work. In fact, the enforcement of price controls has a much greater probability of enabling us all to live like beggars. Unfortunately, this sad fact has not proven much of a deterrent to the recurrence of such controls.
Early in this century it was perceived that in order to maintain "reasonable" prices in public transit, the supply would have to be limited. In exchange for the elimination of competition, the favored transit operators were made subject to rate regulation by a state or local agency. This seemed a good deal for the protected firms, since the initial impact was to outlaw price-cutting competitors. As the years passed, though, the price controls became more constraining. Today, the more typical situation in transit price control is one in which the decreed selling price is less than the real cost of providing service. Predictably, shortages developed as operators sought to shuck unprofitable routes or territories, cannibalized their operation through neglect of maintenance or nonreplacement of worn out equipment, and, in general, proceeded to go out of business.
The fact that public transportation may be viewed by many people as a necessity, or even declared a necessity by prominent public figures, does nothing to reduce the real cost of providing that service. Regardless of who may claim that public transportation is too important to be left to the free market, the amount of service that can and will be provided is still subject to the same economic incentives and disincentives as those enterprises blessed by the relative inattention of public policy makers.
The transformation of many urban transit systems into publicly owned and operated concerns has done nothing by way of controlling the cost of providing service. On the contrary, the transformation has more often ushered in higher costs and greater deficits. Real costs of providing service soar to new heights, but the fares charged can remain low as the required financial resources are extracted from the taxpayers. While this arrangement may temporarily hold down the prices charged to the transit rider, it also tends to create unrealistic attitudes that will carry substantial potential for bankrupting the whole system.
Perverse Federal Intervention
With public transit, many people hoped that the appearance on the scene of the federal government would bring urgently needed medicine to the dying patient. Instead, the ministrations of federal nostrums have been akin to dosing the patient with poison while opening up his veins to let the "bad blood" out.
The "Feds," it seems, possess a kind of magical power—call it an inverted Midas touch—that ends up destroying nearly everything it comes into contact with. They can’t even give money away without attaching conditions that assure failure. The federal government’s role in "assisting" public transit has been variously described as inconsistent and ill-conceived, self-defeating, ineffective, a total failure. To be sure, these are only opinions of some of those who have critically examined the various federal aid programs. The record, however, does little to dispel these negative assessments.
The rationale for federal aid to public transit is that in some undefinable way the services to be provided are needed, but unprofitable for any private firm to supply. Two major themes in this line of argument are (1) that those persons needing the service the most are least able to pay for it and (2) that while the financial results of public transit may be portrayed in red ink, in terms of social benefit and total social costs, public transit is solidly in the black.
The standard rationalizations for the traditional approach to public transportation range from the cavalier disdain for the consumer preferences of those who "need" the service to the incredibly dense notion that there is no other way of doing things. One must suppose that it is only natural that an attitude of "beggars can’t be choosers" would tend to develop among those who take a paternalistic view of the government’s role in transit. Transportation is not the only thing that the low income person may not be able to afford. The specific provision of transportation of a particular kind is the embodiment of the belief that in-kind benefits must be supplied by government experts because the recipients are incapable of wisely choosing on their own. There is some logic to this position. After all, if low income individuals were as capable as the bureaucrats who determine what manner of in-kind services must be provided, there’d be no need for the whole government aid program.
Marked to Fail
Whatever the motivation behind the choice of what type of service will be provided, the fact remains that the government has been bolstering very traditional types of transit systems. Many times, the program of federal aid is kicked-off by the purchase of a bankrupt or failing transit operation. This procedure alone makes for an inauspicious beginning. If a private bus line with substantial incentives to operate efficiently goes bust, what can we expect from a government-owned operation?
At the outset, we are faced with a suboptimal investment prospect.
The calculus of consumer choice has already indicated the inappropriate nature of the service offered, otherwise the firm would not be failing. Add to this the tendency for the government to pay outrageously high prices for the assets of the defunct private line, and the potential for reasonably cost-effective performance is exposed as hopelessly wishful thinking. These salvage jobs on failing transit operations are expensive ways of perpetuating the types of services and practices that encourage patrons to abandon public transportation.
That the intervention of government has driven up the cost of providing "essential" service can be illustrated in two ways. Nationally, the financial burden of public transit on government resources has increased by 17,000 per cent since 1965. Proponents of the service supplied are wont to cite the "turnaround" in ridership under various municipally operated bus systems. However, each new rider is added at increasingly higher levels of marginal cost. The expenses incurred in order to attract each new passenger exceed the revenues generated by that passenger. It is a real life reenactment of the old joke about the shopkeeper who lost money on every sale, but hoped to make it up on the volume.
Even the sorry record portrayed above overstates the "success" of the bus system. The officially admitted losses are based only on operating expenses. No provision is made for capital expenses—neither interest cost nor capital consumption allowances are factored into the reported financial results. What this means, of course, is that the losses are grossly underreported. The capital equipment is accounted for as if it were a free good. Such a distortion results in misallocation of scarce resources and real social losses to the general welfare. Local administrators of public transit operations are induced to follow this course by the generous federal subsidies to transit. The federal government will pay up to 50 per cent of operating costs, up to 80 per cent of capital costs, and in some special programs, will bear the entire cost of vehicle acquisition.
These "good deals" are nearly impossible to refuse. Even a fairly sensible local transit administrator will find it difficult not to join in the waste of funds, knowing, as he does, that any money not expended on his own local system will be given to someone else. Under contemporary standards, the local public transit official who disdains to take his allotted place at the trough would surely be accused of neglecting his responsibilities.
The most humiliating feature of the federal intervention is the utter lack of success in achieving the professed major aims of the program. As a method of enhancing the mobility of the urban poor, federal aid has been ineffective and is unlikely to become effective in the foreseeable future. As a method of reducing traffic congestion, federal aid has been a colossal flop. The massive outlays have not significantly altered urban travel patterns. Research has not been able to find a single example of a significant and permanent reduction in auto traffic resulting from the federal transit program. Of the new passengers attracted to the Dan Ryan Express in Chicago, for example, fewer than 8 per cent of them were previously transported by automobile.
The net effect of government involvement in transit has been negative. The infusion of funds, far from improving service, has more often helped to undermine the prospects for a sound urban transit system. The widespread "liberation" of transit networks from the milieu of "greed," which has been held as a cause of the downfall of many private transit firms, has not led to improved operating results. Relieving transit operations from the necessity to earn a profit has, as might have been expected, opened the floodgates of perpetual deficits.
The absence of financial profit as a measure of the success of a transit service severs the operations from any objective criteria with which to evaluate performance. Mere measures of seat-miles supplied, or even of ridership itself, reveals nothing of value if the costs to achieve these goals are ignored. How many seat-miles should be provided? What level of ridership is optimal? So far as can be ascertained, in the absence of a profit and loss gauge, not only do we lack any idea of the answers to these issues, but the federal transit program is carried out as if such issues didn’t exist.
The most egregious error of government intervention in transit, though, has been the reluctance to consider liberation of the private sector. The unleashing of private enterprise transit would reduce the degree of control over the supply of this form of transportation that can be exercised by the public sector. But control is not a proper end in itself. It is only desirable if it can serve to improve the final product, which is the transportation itself. The historical experience of government-run or government-controlled business is not one to inspire confidence in mandatory centralized planning for transit.
There are substantial and convincing reasons to expect that a liberation of the private sector would significantly improve public transit. Natural market responses to transit needs would very likely be superior to even lavishly subsidized "planned" transit in a number of respects. First, private solutions to consumer demands are less costly than their government-sponsored counterparts. Second, private solutions to transportation needs would be more quickly implemented. In the marketplace, speed in bringing a product to market is a matter of utmost importance. In contrast, the lethargic responsiveness of state owned and operated enterprise is legendary. The very legitimate requirements of due process and representative government are handicaps when it comes to meeting consumer demands. Finally, private enterprise is more adaptive to changing conditions. In fact, private enterprise is one of the sources of changing conditions, as firms invent new ways of gaining advantage over rivals. The public sector is, by nature, conservative. It has no mandate to create new products and diluted incentives to adapt to changing conditions.
There is a strong temptation to find someone to blame for the decrepit condition enjoyed by the transit industry. Conspiracy theories are all the rage these days. What’s more, it would be comforting to think that a traditional lynching of the guilty would solve the pervasive problems of the industry. Unfortunately, the situation is not conducive to such conveniently simplistic solutions.
The poor service and high cost of public transit is a consequence of bad institutions. This is not to deny that corrupt government officials, and the like, may play significant contributory roles in the debacle that is mass transit. What is to be emphasized is that even were all the ne’er-do-well villains to be replaced by honest regulators, competent managers, and efficacious government officials, the results would be only marginally better.
We need to change the public institutions that impinge on the Transit industry. Transportation in this country can do very well with-out price controls, barriers to entry, federal subsidies, and the like.
The public sector has enjoyed its greatest successes in establishing conditions of civilized conduct that have freed men to create material abundance. In so far as the public sector must become involved in transit, its most productive line of pursuit would appear to lie in the creation of conditions conducive to the private solution of transit needs. The comprehensive, multimodal, integrated planning will take care of itself. The same market forces which turn raw land and seed into the bread in our noontime repast are eminently qualified to make public transportation once more a viable commodity.