A Note on Transportation Subsidies

» Why do we subsidize transit? Is skewing the market acceptable?

People are armed with powerful tools that often determine quite directly the future of our society: Their wallets. With the flick of a credit card or the passing over of a wad of cash, an individual aids the society as a whole in determining which products are most desired and which services are most needed. This is an incredible tool of the market economy which — though seriously skewed by the influence of powerful economic interests whose primary goal is increasing personal wealth accumulation — allows for the modern world to be pretty efficient in offering people the things they need to survive.

The market’s power to determine what sorts of things to produce and what sorts of things to discard is an important element of a transportation practitioner’s toolkit, as the value individuals confer on mobility as compared to other aspects of their lives should play a role in deciding how much services to provide and where to do so. It would be nonsensical to promote the construction of busways no one wanted to use or buy trains no one needed to ride in, thus we estimate demand and then alter provision of transport based on use.

If the market can and should be used to determine what transportation offerings to provide, why not charge the full cost to provide those offerings to the person demanding mobility and adjust services to adapt to need, instead of subsidizing trains and buses as we have come to do in almost every city around the world? This, in essence, is the argument transportation economists frequently make and it is one that David Levinson of the University of Minnesota repeated this week. “Maybe you want transit,” Levinson writes. “But maybe you would rather have the cash I am spending to provide you subsidized transit service so you can do something else with it. The only way to know what the best allocation of resources is, is to charge for things what they cost.”

In theory, this seems like a valid line of thought. Here’s an example. You have two choices: Take a ride to your city’s most beautiful park for a fare of $2 on your local bus (with the aid of a $2 subsidy chipped in by your local government), or walk to the nearest, less exciting park and buy an ice cream on the way for $3.00. Thinking about the relative merits of the two possibilities, you might determine that the trip to the better park is actually the best deal (since it is cheaper for you), but for the society at large, it’s more expensive. If you were charged the full $4 cost of providing the bus ride to the park, you might think twice and pick the ice cream option instead — which is cheaper for the society as a whole. But the mobility subsidy is providing an inappropriate incentive to do just the opposite and is causing people, as Levinson writes, “To behave inefficiently.”

But we provide subsidies nonetheless, generally because we believe it is important to provide affordable mobility. This is a political and welfare goal shared by most modern societies. Is this a mistaken policy? Would it make more sense to encourage transit providers to be fiscally independent, so that they do not have to rely on limited allocations of public funds?

The answer comes down to two questions — whether or not the subsidy provided to transit is appropriate considering other transportation offerings; and whether a situation in which there were no subsidies would produce the appropriate social environment from the perspective of social equity.

Jarrett Walker tackled the first issue yesterday, noting that there are significant subsidies provided to highways and local roadways and their users, so eliminating aid to public transportation alone would be poor policy. In addition, he noted that there are significant positive externalities generated by transit — like more efficient land-use patterns, lessened pollution, freer-flowing roads, and decreased traffic fatality rates — that deserve to be compensated by subsidies.

While a surface-level analysis might suggest that the fares for transit should simply equal the cost to provide a ride, a more serious discussion would recognize that moving people away from transit and into automobiles would have negative side effects. This suggests that we either tax the alternatives to transit — the automobile, primarily — at their full cost to society, or we do not have an economic rationale to eliminate subsidies to public transportation. There are few if, ands, or buts around that.

The second question — whether a situation without subsidies would be acceptable — is an ideological one. Levinson describes transit providers as “Transportation organizations first, not welfare organizations. They should be considered public utilities rather than departments of government, which provide a useful service for a price to their users.” Instead of forcing bus and rail operators to run services that are less-than-efficient from a profit-maximizing perspective, politicians should be forced to directly vote and choose to subsidize those services that they consider most important. “This would entirely change public and political perception of transit services,” Levinson writes. “It might also result in fewer bad routes being funded, since it would be crystal clear where the subsidies lay.”

In my mind, this is an appealing solution in some ways, since it would take advantage of the democratic processes we already have to make what are important societal decisions about mobility. If people want better, subsidized transit services, they can vote in politicians who support such offerings in addition to the routes that are profitable.

On the other hand, isn’t that what we have done already? There is a constant battle over funding for transit, and it is because of political differences over whether and how much bus and rail routes should be subsidized. Our current situation — as topsy-turvy as it may be — is reflective of democratic conflict over transportation funding. What is the alternative? Removing transportation from the democratic sphere and simply providing those services that are directly profitable?

This would be disastrous, both for the reasons cited above by Jarrett Walker but also, and even more importantly, because the fundamental logic that underpins Levinson’s argument is flawed. While it might be nice to imagine a world in which every individual has the ability to act as a rational actor in a fair marketplace full of decisions that reflect efficiency and true costs, we do not inhabit it. Whether we like it or not, social inequality in American society has increased significantly over the past forty years, and poverty is a real problem.

Why bring up these issues? Because Levinson describes a situation in which everyone has the option to pay the true cost of transportation services, but in fact many do not. A more efficient approach to ensure that people make the most cost-effective decisions might be one in which everyone got a reasonable amount of money to begin with, but we do not live in a particularly redistribution-inclined society.

So we are left with alternatives along the sidelines. We can crusade for the elimination of transportation services that cannot pay for themselves and in the process eliminate essential mobility for people who need to get around now, all the while hoping that the poor will at some point be handed adequate funds to make economically sound decisions. Or we can recognize reality and admit that transit services are at their core not just transportation organizations but also welfare providers.

This may be a disappointing conclusion, since it provides no insight as to how the state of funding for transit could be improved, but it does suggest that there is no way of getting around the fact that subsidies will continue to be needed in the running of public transportation unless some future technological advance reduces operations costs dramatically. There are plenty of ways to improve the performance and cost effectiveness of transit systems, but we cannot ignore the fact that transit plays an important redistributionist role.

Update, 21 September: David Levinson responds, writing that “I expect that the places that would see service dropped once you went to an appropriate funding model are not the poor inner-city areas, which are (or ought to be with appropriate management/regulation/etc.) profitable given the relatively high densities, but instead the suburban routes.” The problem, in my mind, is that those suburban places are increasingly impoverished themselves. We can no longer associate density with poverty as we have in the past.