David Hughes sends the following:
Given the headline (“Amtrak to spin off Northeast Corridor“), one could be forgiven for thinking that Amtrak is about to privatize its most (and perhaps only) profitable region:
But then one reads the fourth paragraph:
“The plan, which would require action by Congress, is to transfer the corridor to a consortium including the federal government and the governments of the states in the region that would share the costs to maintain it.”
What, one wonders, is the point of privatizing Amtrak, if the spun-off sections of track right-of-way will also be taxpayer-financed, apparently with no private capital whatsoever? Furthermore, if it must choose between one or the other, why doesn’t Amtrak privatize the operation of its profit-draining trains first, and only later the real estate, which is among the most valuable in the world? Charging rent to private train firms could be quite lucrative — though few entrepeneurs would want to put their clients in the hands of Amtrak’s track maintenance.
The National Rail Passenger Alliance story cited by the Times is here:
It’s useful to note that Conrail was split amongst private railroad companies in 1985:
And, of course, JetBlue’s new $25 JFK-BOS service may render the point moot in any event. Amtrak charges $54-$106 for the same route.
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So when do we know when its time to privatize, or when efforts are better targeted on reforming and improving the performance of SOEs. The World Bank is having an online discussion on this, let them know what you think?
http://rru.worldbank.org/Discussions/topics/topic69.aspx
Back in the late 80s to the early 90s, I wrote privatization policy papers for various government agencies, I learned that in government, privatization is defined as using contract labor, not ending government involvement.
The unique problem with Amtrak is that you have a federally subsidized national railroad pyramided atop state and city-funded regional railroads, all of which cross-subsidize one another to present the appearance of a workable system that is just beyond profitability, and thus needs “small” subsidies to produce “huge” benefits. What is really happening is that regional and national passenger service is like trying to get from here to there by burning thousand-dollar bills. When an enterprise that was “supposed” to be self-supporting has instead soaked up $25 BILLION in its lifetime in DIRECT subsidies (not counting indirects and infrastructure spending that has probably been twice that), it is time to pull the plug. If the service Amtrak offers has value, someone will provide it. Those who favor continuing this insanity point out that highways and airports are subsidized too, and they have a point – walking away from Amtrak must not be accompanied by then turning around and doubling subsidies for highway or air travel, however. All operating and infrastructure spending on transportation should be halted, and all privatized.
As a die-hard libertarian in most matters, I always find it interesting when my fellows (and libertarian-leaning conservatives) single Amtrak out as an inefficient government monopoly that should be let to die if it cannot make a profit in the market. This perception is an example of just how much distortion government subsidy creates.
What’s Amtrak’s competition in ground transport? The federal highway system. The highway system is a massive subsidy to the automobile industry, the trucking industry, long-range bus services such as Fung Wah and Greyhound, and the other industries which today use roads rather than rails to move people and goods.
It is true that long-range passenger rail transit is unable to turn a profit in this country. Is this an indicator that it should be scrapped, and the rail system capital left to waste? No. It is, rather, an indicator that passenger rail is up against insurmountable competition — the highways, which almost all drivers treat as a “freebie” … or at least a sunk cost in the form of taxes.
Simply privatizing Amtrak would, of course, lead to its bankruptcy — “proving” to some people that rail is obsolete … but in reality only proving that you can’t make a profit competing with the government that steals from everyone to “give away” its service for “free”.
The market distortion created by government subsidy at all levels is truly massive in the transportation business — road, rail, shipping, air, whatever you care to name. Unfortunately, this means that cancelling a *single* subsidy (e.g. Amtrak) would create even greater waste, by destroying the capital of that one subsidized business whilst allowing the others to reap the benefit of reduced competition.
It would be much less destructive to roll back all the subsidies over time — localizing and privatizing, while encouraging (by inaction and deregulation!) new developments.
Fubar, I agree that air travel and highway travel are subsidized too – I stipulated that in my post. But decreasing subsidies over time is always a loser, because it gives the parasites time to get a foothold and pervert the intent. Better to privatize it all in one “Big Bang”. A fire sale. Actually, just turning off the lights and walking away is enough – someone will homestead those resources and make them work.
Fubar – one more thing – the cumulative property Amtrak has glommed onto is in no way “capital”, but rather “sunk costs” which can be ignored. None of their “assets” are employed productively, in fact, those “assets” have cost the American taxpayer tens of billions of dollars, so they are not capital assets at all, but rather liabilities. And as bad as subsidized highways are, the taxpayer isn’t asked to directly subsidize both the infrastructure and the operation of all of the vehicles theron as they are with Amtrak. Besides, SOME roads are paid for by tolls, a few of them are even privately run at a profit (E 470 in Denver for example).
Not to indulge in too much shameless self-promotion, but I blogged the latest Amtrak fiasco on libertyguys yesterday;
http://www.libertyguys.org/articles/detail.asp?ArtID=1018
Fubar’s is one of the few analyses I’ve seen that’s spot-on. It’s good to see a libertarian (or Republican or Democrat for that matter) who can set aside ideology and be pragmatic (I’m a libertarian-leaning conservative, and many of us have no great love for neo-conservatives). The government should subsidize all transportation or none of it. 50-60 years ago we had a transportation system that was much more market-driven than today. As a result, it was dominated by the railroads. The system we have today required massive government funding to overcome and permanently distort market forces. If people had to pay the true costs of driving or flying, there would be much less of it. As a society, we may have decided that publicly funded transportation generates private economic activity that outweighs the costs. Our founding fathers even realized this in the Constitution – Article I, Section 8. One mode should not be put at a competitive disadvantage as a result; however, which has been the case with rail travel since the 1950′s. Moreover, public investment in rail is in our national interest as a way to reduce dependency on foreign oil. It’s unique as it’s the only form of transportation that can be electrically powered which, in turn, can be generated domestically by nuclear, coal or hydro. Lack of refining capacity and competition from the far east in oil markets makes America’s competitive disadvantage even worse (as we’re already a high-cost producer, but that’s another story of government distorting the market).
I can’t agree with you there Mark. I’m going to have to side with Vince. We have to always advocate moving in the proper direction and away from subsidy as much as possible. If eliminating all subsidies were an option, we should take that, if eliminating one subsidy is the option, we must take that. We can never advocate waiting for the right time to gradually de-subsidize and de-regulate. And we are not likely to be able to do it all in one fell swoop, as ideal as that would be. Insisting on all or nothing, or any other approach that delays the reduction of government intervention, is very likely to take us no-where.
Paul, I agree with Fubar about the effect of cancelling a single subsidy. It’s too risky to pull out a single thread in hopes the whole doesn’t ultimately come unraveled, especially since we have a transportation system already straining at the limits of capacity. Amtrak is a symptom of the problems in the railroad industry in general. When the Staggers Act deregulated railroads, it allowed them to divest the excess capacity in redundant lines (which did indeed save the railroad industry from extinction). Today, freight traffic on the railroads is so great, they don’t have the infrastructure to handle it all, and need some of those lines back. That’s prohibitively expensive to do today in the private sector. Rebuilding the lines from scratch subjects them to current environmental and other regulations which wouldn’t be the case if those lines had been kept in some minimally functional state during the last 25 years. For Amtrak, there’s a direct correlation between financial losses and on-time performance. The worst-performing train on both counts is the Sunset Limited because the Sunset Route suffers horrible congestion. Union Pacific, a private company that owns the tracks, is working as fast as they can to increase capacity. They’re limited by the fact that if they put too much resources into the route, their bottom line will suffer. Wall St. won’t tolerate bad quarterly results even if it is to ensure long-term viability. Union Pacific can’t raise prices enough to fund the capital improvements because they’re competing with a trucking industry which uses government-owned infrastructure that, while not ‘free’, is available for use at incremental cost.
Other government distortion of the market is less obvious. Safety regulations are a prime example. Amtrak is often criticized for not using an existing European or Japanese design for the Acela. The fact is that none of those designs could meet US safety regulations. They had to create the Acela from scratch, and in the middle of the project had to do a major redesign because the government further tightened safety regulations. All this extra safety adds weight, and lots of it (workers at Bombardier called Acela Le Cochon – the pig). Railroading is all about the laws of physics. Extra weight needs more energy (i.e fuel) to get moving, and bring back to a stop. It’s rough on suspension, wheels, brakes (e.g. cracks in Acela rotors) and tracks. This all adds to the cost of running the trains. Put them on a railroad infrastructure designed in the 19th century, and the problem gets worse.
If Amtrak can’t overcome these obstacles to break even, how would a private company do it given they’d be subject to the same reality (and likely inherit existing labor agreements as well). Railroads are capital intensive, and as such subject to the ‘laws of big numbers’. Even in its current state, Amtrak is not big enough to effectively spread its fixed costs. How could a number of smaller private companies ever hope to do better? One day, we will need passenger trains, and it will be much more expensive to bring them back from extinction than what we spend on maintaining them now.
Pulling the plug on all subsidies and regulation in the transportation industry would do the trick. The market will compensate, but markets sometimes correct by forcing the business cycle into depression. To my market ideology, this is capitalism doing what it’s supposed to do. In reality, it would be seen by the public and politicians as a failure of the policy. The resulting re-regulation and re-subsidizing would be worse than what we have now. And the first time people are killed in an accident attributed to relaxed safety regulations, all bets are off.
Then privatize the highways first. Let the states or private companies charge tolls or not. The added cost will drive marginal passengers and marginal freight off highways and onto rail. Since rail freight is already privatized, that part is solved, done. There are only two current situations where passenger travel on rail is a substitute for highways – Amtrak’s Northeast Corridor, and local and regional rail lines. Sell or close everything else. Privatize the NEC and use the money from the sale to realign the tracks so freight and passenger are parallel but not interconnected. Sell all public “rails-to-trails” that are now viable routes, and suspend all environmental rules on rebuilding them into rail infrastructure. Finally, rescind the Railway Labor Act and the Fair Labor Standards Act.
Once this has been done (day 1), turn to air travel. Privatize airlines (Railway Act again), airports, and air traffic control, as Canada has. Oh, and get rid of the Jones Act to free up ocean shipping.
At the end of day 2, we will have de-federalized the entire transportation systems of the United States, and be a hell of a lot closer to a truly free society.
As for those who worry that this would “cause” a depression – don’t. Only government action can cause depressions and recessions, and we have already well on our way. Now is as good a time as any to start the recovery.
How is Amtrak supposed to complete with Southwest, Jet Blue, AirTran, and the like? It can’t. These upstart airlines have flipped the cost of long range travel from cars and rail to air.
Amtrak is under assault by the airlines in its most profitable markets. As far as I can tell they are not doing very well. And guess what it is getting worse despite all the government security crap.
If you want to know where the big bucks go look at car rental services. The conglomerate around AIRPORTS not rail stations. That is where the customers are.
For trips under something like 300 miles, rail has a time and cost advantage vs air travel. This is before the hassles of dealing with the thugs at security. Rail was never going to be able to compete with modern jet service, and should not try over long routes. Again, the NEC and some other inter-city routes can be profitable, the rest of the system is always going to be heavily subsidized unless it is cut off. If the NEC were privately run, it would be possible for it to turn a profit, and the car rental companies would eventually find their way there.
But let me be clear – cut ALL subsidies. ALL. Then let the chips fall where they may. I personally do not care whether rail, highway, or air wins out over any given route, and neither should anyone else. A totally free-market transportation system will rationalize itself. There is NO need to do ANYTHING except cut any and all transportation spending. This is the only action that is consistent with Misesian thought, and the only one that will not end up in more chaos and debt.
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