Happening Now

It's the externalities, stupid!

December 23, 2013

Written By Colin Leach

Amtrak's Pere Marquette stops at Grand Rapids, MI. Photo Credit: Jim Hulsebus

While millions of Americans are busy heading home for the holidays, opponents of passenger rail are hard at work rehashing tired attacks. One such attack appeared in this morning’s edition of the Detroit News. Michigan taxpayers, the newspaper contended, “should not be dinged” to keep Amtrak services in the state running. At a time of tight budgets and limited transportation dollars, the state should instead invest the $40 million operating subsidy of “lightly used” service into highway repair and maintenance. Highways are, according to the editorial, in greatest need of increased investment and should be prioritized.

To support its arguments, the editorial’s authors rely on the results of a study conducted by Ohio State University economist Michael Farren. Farren, who penned his own editorial in Michigan Capitol Confidential, concluded that the state’s subsidy per round trip passenger stood at $98.11. Additionally, he contends that Amtrak’s services in Michigan only attract 700 passengers per day. Why, then, should taxpayers subsidize a what is apparently little-used, overly-expensive service?

Unfortunately for both Farren and the Detroit News, these conclusions are incorrect and do not reflect the reality of passenger rail operation. By considering the “round trip passenger” as the basis for study, Farren ignores the fact that many passengers on the route undoubtedly make connections in Chicago and travel to other points on the system. It is a fallacy to assume that all travelers on the Michigan services will necessarily be engaging in round trip travel from one stop in Michigan to another. NARP has long defended the reality of passenger rail transportation as a network of interconnected lines and corridors. Simply considering one service in isolation and lambasting its “unprofitability” ignores its role in a larger system.

From there, Farren’s arguments become progressively sillier. His logic is undermined by a claim is that passenger rail is not a public good. Why? He writes, correctly, that “public goods”, as defined by most economists, are those things for which “the benefits cannot be restricted to those who pay”. Thus, matters such as defense and water pollution are traditionally handled by the government, as no private entity could be expected to provide them and make a profit. But in context, this is a bizarre accusation to make given Farren’s support for highway expansion. Highways (and for that matter airports) alsocannot be considered public goods in the formal sense as they similarly employ user fees as well as indirect subsidies. Other economic justifications for investment exist.

Most economists also understand the concept of externalities. As we reported to you back in May, recent studies have suggested that improved passenger rail service offers considerable savings to the public due to reduced highway fatalities and cleaner air, and induced economic development. Farren too attempts to respond to rail’s benefit to cleaner air, but argues instead that intercity bus services are more energy efficient and cheaper to operate. Yet, with the rising dominance of curbside bus services whose safety and on-time performance records are questionable, is intercity bus really the only viable alternative, considering that they used the same gridlocked highways?

Are these not also “private goods that receive taxpayer support”, like he claims passenger rail is? While he attempts to cover his error by claiming that highways are supported by fuel taxes and vehicle registration fees, we know that this is no longer the case. The Highway Trust Fund is sustained only through continuing transfers from general appropriations, effectively bailing out the fund with taxpayer dollars.

The same can be said for much of the budget of the Transportation Security Administration and the Federal Aviation Administration. A substantial percentage of these agencies’ budgets are not covered by user fees, and so require an influx of taxpayer dollars. Furthermore, when one examines the fact that most airports are owned and operated by state or local governments, the issue of public subsidy looms even larger.

The simple fact is that there is no mode of passenger transportation anywhere in the world that exists without government support. Given the huge capital investment required for all modes, whether road, rail, or aviation, as well as comparatively smaller revenues from carrying passengers as opposed to freight, all private passenger transportation is in some way dependent on government support. Not even the Northeast Corridor, which the Detroit News incorrectly terms “profitable”, can survive without significant government investment, be it in capital investment or due to revenue generated from passengers on other parts of the network.

No modern economy can exist without passenger transportation. Policymakers have long recognized this reality. It is, after all, the reason why the federal government undertook the construction of the Interstate Highway System. It’s also why the federal government opted to bail out the airline industry in the aftermath of the September 11th attacks, recognizing that the airlines could not weather the short-term crisis without some form of assistance. A healthy transportation network cannot survive without effective partnerships between private operators and public authorities.

As a believer in balanced transportation, NARP insists that all modes, particularly passenger rail, require increased investment. The transportation system America needs for the 21st century cannot be built by privileging one mode at the expense of others. But we firmly believe that passenger rail can and must be an integral part of this solution. Passenger trains offer an economically efficient, environmentally friendly, and stress-free alternative to crowded highways and airports. Despite what the Detroit News suggests, Michiganders appreciate the benefits of rail; their state’s trains are among Amtrak’s most popular services.

The simple fact is this: passenger rail serves as much a public good as any other mode of transportation. And rather than demonizing one good while praising others in a generalizing and petty fashion, we should encourage all modes while we build the network of the future.