Oct. 8 (Bloomberg) -- U.S. President Barack Obama wants to jump-start a world-class high-speed rail network, but Republican candidate Mitt Romney wants to end Amtrak’s run as a government-controlled, subsidized rail company.
This debate mirrors the larger conflict between Obama’s optimistic vision of a public sector that enriches our lives, and Romney’s skepticism about what the government actually delivers.
We will never arrive at good decisions about either Amtrak or anything else, if we fall back on simple ideology. The president is right that the federal government has done some very good things, but the political decision-making process is so hit-or-miss that the Republicans’ small-government views are also legitimate.
Any decision on Amtrak should be based on whether the subsidies provide enough social benefit to offset their cost, and they should be tied to the measured advantages to society when people take the train instead of driving cars. Passenger rail is defensible in the Northeast Corridor and California, where the congestion costs of driving are considerable. But it is hard to imagine that the less-traveled rail corridors in Middle America provide benefits that offset their costs.
In the Oct. 3 debate, Obama praised President Abraham Lincoln’s support of the transcontinental railroad as an example of one of those “things we do better together,” reminding us that the Republican Party was once a great champion of railroad subsidies. The Pacific Railroad Acts of 1862 and 1864, signed into law by Lincoln, provided land grants and government bond financing for the budding rail network.
While Obama sees the transcontinental railroad as a symbol of America’s once-great infrastructure, it can just as easily be seen as a forerunner of the corruption and waste that comes with government aid. Congressional rail subsidies led directly to the 1873 Credit Mobilier scandal, which involved a future president, James Garfield, and other legislators. Credit Mobilier appeared to be an independent contractor paid by Union Pacific, but the company was actually owned by the same large stockholders as Union Pacific.
Congressmen were given shares in Credit Mobilier at far below their value, not in exchange for more subsidies, but “to enlist strength and friends in Congress who would resist any encroachment or interference with the rights and privileges already secured.”
The railroads were right to worry, for C.C. Washburn, a founder of what would later become General Mills, was already proposing rate regulations that would reduce the profitability of the subsidized railroads, and presumably help mill companies that were shipping on their trains. Washburn didn’t get his legislation, but Congress passed the Interstate Commerce Act of 1887, which limited price discrimination, railroad collusion and established the Interstate Commerce Commission.
These early interventions were seen as correcting the market failure of monopoly, the great bugbear of Progressives. In 1906, the Hepburn Act gave the ICC the direct power to set railroad rates, which was later strengthened by the Mann-Elkins Act of 1910. When governments start price fixing, the big worry isn’t corruption (which will typically lead to toothless rules), but populism, which pushes for prices that are too low to sustain either decent service levels or minimal profitability.
By the 1960s, the ICC-regulated railroads had fallen from proud symbols of U.S. capitalism to a sluggish, declining industry. Trucks, cars and airplanes eliminated any monopoly power that railroads had once enjoyed. Penn Central declared bankruptcy in 1970, partially because the ICC required it to run unprofitable passenger services as well as shipping freight.
In the same year, the Rail Passenger Service Act created Amtrak, which accepted passenger lines into its system in exchange for eliminating rail companies’ ICC-mandated obligations to run unprofitable passenger lines.
In the 1970s, a series of laws culminating in the Staggers Rail Act of 1980 deregulated the railroads, enabling them to focus on the most profitable routes. Penn Central was merged into Conrail, which benefited from public investment before it was reprivatized in 1987. Even the unprofitable shorter routes abandoned by the major railroads have had a comeback, increasingly plied by nimble, smaller companies. Freed from their obligations to provide passenger service by Amtrak, American rail operators now carry a larger share of total freight than their European counterparts.
The history of Amtrak has been less rosy. The system’s original interim “emergency financial assistance” has become permanent. Amtrak’s current capital and operating subsidies of more than $1.4 billion work out to almost $50 a passenger, as the Republicans point out. That subsidy seems like an injustice partially because many Amtrak’s customers are well-heeled.
The usual defense of this support is that highways receive far more money. This is true, but a terrible argument for waste in one area doesn’t justify overspending in another. By that logic, every industry should be asking for more subsidies because, after all, agriculture gets more.
The better arguments for Amtrak focus on congestion, accidents and pollution. In a better world, we would tax drivers for the social costs of driving, but we don’t, and that creates a justification for moderate rail subsidies that keeps drivers off the roads.
If every rail passenger would have otherwise driven or taken a plane, then the right subsidy is the difference in total social costs, such as pollution and congestion, between taking a train and going by car or plane. The economists Ian Parry, Margaret Walls and Winston Harrington estimate that the social costs of driving that aren’t paid by the driver are typically somewhat less than 10 cents a mile.
That figure means that the maximum subsidy for a 200-mile train trip in less crowded parts of the country should be about $20. The number would be lower if people are flying commercially, or if they are paying significant gas taxes or tolls, or if there is some chance that the train traveler might not have traveled at all. If I am right in guessing that the current subsidy per trip in the lower-density corridors is more than $50, then discontinuing service in these areas seems sensible.
But in those dense areas where rail carries plenty of riders, the social costs of driving are higher because congestion is more severe. Parry and his co-authors estimate that the social cost of congestion can rise to as much as 60 cents a mile when roads are extremely crowded. If driving creates 50 cents of harm per mile, then Amtrak subsidies are eminently defensible, but not even the Northeast Corridor is that crowded everywhere.
This logic suggests that a sensible rail-privatization plan should focus, perhaps exclusively, on the system’s busiest lines -- the Northeast Corridor, San Diego to Los Angeles, and San Jose to Oakland.
If these corridors can survive as truly private profit-making entities, then the path forward seems clear. Gradually shut down the money losers and eventually follow Conrail into nonsubsidized privatization. The benefits of ending the permanent subsidies should eventually offset the considerable shutdown costs.
The more difficult scenario occurs if these corridors can’t break even. Continuing rail service would require more government funding, and a publicly subsidized private entity could again become a wellspring of corruption. A great virtue of Amtrak today is that since it doesn’t make money, it doesn’t bribe Congress, either.
Perhaps the safest approach is to tie the subsidy to something obvious and measurable: engineering assessments of the social costs of congestion, pollution and accidents from driving along particular corridors. Amtrak would receive a per-rider subsidy equal to some fraction of the social costs that would have occurred if this passenger had traveled by car.
We would then be able to have a legitimate debate about the right subsidy for Amtrak. Moreover, the subsidy could be provided entirely with gas taxes levied from the states in which Amtrak operates, to avoid the injustice of having taxpayers in Nebraska paying for rail transport in Massachusetts.
A privatized system offers the possibility of needed cutbacks in the number of corridors that would reduce waste. But even a pared-down system may involve some subsidizing. The key is to design one that doesn’t become the train equivalent of Fannie Mae, where private shareholders benefit at the public’s expense, and that requires the discipline created by tying the subsidy to the social benefit of reducing road traffic.
(Edward Glaeser, an economics professor at Harvard University, is a Bloomberg View columnist. He is the author of “Triumph of the City.” The opinions expressed are his own.)
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