279 July 25, 1983 CHARTING A NEW COURSE FOR TRANSPORTATION POLICY INTRODUCTION It seems to be a common congressional misconception that more federal money leads to better services As such, Congress likely will '!see and raise" President Reagan's budget request for a 3 billion (14 percent) increase in EY 1984 fun ding for the Department of Transportation (DOT).

The president threatens to veto appropriations that exceed his requests and there is no better candidate for a Reagan veto than the DOT appropriation suring for a bigger, more intrusive department it has ign ored the many lessons teaching that the centralization of transporta tion spending leads to burgeoning costs and inefficiency. It is time that Congress was forced, by a presidential veto, to reexamine the whole thrust and rationale of the DOT budget nearl y 250 percent in the last ten years, federal policies have resulted in few efficiencies or improvements in the nation's infra structure and transportation systems. A major reason for this is that four fundamental flaws distort the allocation of national tr ansportation expenditures Not only has Congress continued pres Despite federal transportation expenditures which soared 1) Although 69 percent of DOT'S budget supposedly is financed by ''user fees," these charges are not in fact true user fees.

They are si mply excise taxes that distort the demand for mass transit, interstate highways, and airport activities. They are not a market clearing price 2) DOT finances many expensive and unnecessary "pork-barrel construction activities, the costs of which are infla t ed due to the Davis-Bacon Act, which requires employees to be paid at the prevailing rate" (normally union scale), and restricts the use 2 of lower-paid unskilled workers. altered by federal regulation, and salaries and payments are bloated by special int e rest handouts .by Congress Projects also are delayed or 3 DOT'S policy of matching grants encourages new construc- tion where rehabilitation and maintenance of existing facilities would be more economical such as AMTRAK and the air traffic control system h is money until these underlying structural problems are corrected To do so requires DOT to: redesign its "user fees" into a rational price system; remove federal funding of local roads and mass transit systems and support only genuinely federal priorities restructure grants so that they are investment neutral; and reverse*the nationalization of inefficient industries by shifting MTRAK and the air traffic control system to the private sector These measures are part of a strategy for the entire federal gover n ment that would transfer many federal responsibilities to private or state and local jurisdictions functions need not be funded and .directed from Washington. Respon- sibility rather s.hould be shifted to a more local and thus account able level. The fede r al government should limit its active role to providing and maintaining interstate highways and bridges and to other truly national programs. Giving more discretion and cost responsibility to the user and his local representatives will cut costs and provi d e a more rational, user-sensitive system 4 The DOT budget will not give the American taxpayer value for DOT operates industries that belong to the private sector Most transportation THE FEDERAL HIGHWAY ADMINISTRATION The Federal Highway Administration's $ 1 4 billion budget rep resents more than half of the DOT budget and affords significant economies by redesigning user fees.and shifting the balance in state- federal responsibilities Federal Highway Construction Programs Most federal highway construction ac t ivity is financed by the $13 billion federal highway trust fund. DOT'S highway "user fees" contribute toward the fund, but are riddled with inequitable and inefficient cross-subsidies. The Surface Transportation Act of 1982, for instance, raised the feder a l gasoline tax from 4 to 9 cents per gallon. Although most of the funds are for the general purposes. of the highway trust fund, 1C of the tax is deposited in a mass transit capital fund. As such, California automobile drivers end up subsidizing New York C ity subway riders the expense of needed repairs Such cross-subsidies distort demand leading to excessive new construction-often at 3 Failure to differentiate between federal and non-federal needs also results in the use of DOT funds for projects of exclu s ively parochial value. These range'from local secondary roads to access roads at recreation areas to railroad crossing demon strations to school buses. All have highly particularized benefits Worse still, the federal government finances construction that a locality has already rejected as being uneconomical. Thanks to Itfree federal money, these politically popular but economically unsound local projects go ahead able The New York Times in an editorial supporting the contro versial $2 billion Westway proje c t on Manhattan's west side, is qui.te candid about where the money will come from The sums involved can be consider New York designed the project to take maximum advantage of federal highway subsidies. As approved, this 90 percent federal funded project w o uld create several hundred acres of new land, including 93 acres of water front park. The Feds would also spend $25 million to demolish rotting piers, $76 million to replace an obsolete incinerator 28 million for a bus garage.l Many authorities are beginn i ng to acknowledge the negative federal rde in the development of the U.S. transportation system A Department of Commerce study, for instance, recently concluded that Itthe federal aid highway programs may have set the stage for deterioration of the nation ' s highways by effectively subsidizing state *and local construction, but not maintenance The General Accounting Office has reported that Itin one state we studied we were told that there are no incentives for the state to maintain its federal aid roads. W e were also told of the possibility of states intentionally allowing their roads to deteriorate until they reach a point where feder.al funds would be available for major rehabilitation I Recommended Reforms oils: Congress should authorize toll facilities o n as many inter state highways as possible. Transportation economist Fred Smith of the Council for a Competitive Economy estimates that up to 10 billion a year could be collected in such tolls.* Where tolls are impractical, interstate highways should be f inanced by re gional taxes or general revenues. Tolls provide clear measure of 1 "The Westway 'Luxury' is a Bargain," The New York Times, May 4, 1983.

A Study of Public Works Investment on the U.S U.S. Department of Com merce, April 1980 3 4 re tww, Novemoer IYOLI ion, A.Quasi-Market Solution, (unpublished Wnrbine Damn* PnnrnP41 Cnr a Pnmmntitiwn Prnnnnnr Wsehinotnn n f! 10111\\ 4 the need for investment or disinvestment. As Adam Smith noted over two centuries ago, "when roads are supported by the com merce...carried on...them, they can be made only where the com merce requires them."5 Over 4,000 miles of toll roads were constructed in the United States p rior to the development of the federal interstate system in 19

56. In fact, at that time the U.S.

Treasury recommended that the planned interstate highway system be financed by tolls. Today Austria, France, Italy, Spain Portugal, and Yugoslavia have more than 6,000 miles of toll roads open to traffic.

Cancel Projects: New interstate highway construction can be re duced from 4 billion to $1.7 billion per year by cancelling the 56 percent of uncompleted interstate highway pro] ects which-the Congressional B udget Office concludes are economically unattractive.6 Return Responsibilities to the States Congress. should restrict federal funding to the national interstate transportation system.

Most other highway projects eventually should be-turned back to the st ates, along with the responsibility of financing them. In the interim, all non-interstate highway projects should be con solidated into a block grant, to allow states to adjust their spending patterns to match their plans for state financing block grant w o uld be financed until 1988 by general revenues at 1983 level This In 1989, Congress should return the financing responsibility Mean- for non-interstate highway projects totally to the states while, the national gasoline tax should be reduced to its 1981 l e vel so that states could finance their new responsibilities by state gas taxes In addition to other appropriate means as they saw fit such as tolls local voters and users would have every incentive to insist on efficiency and accountability in highway spe nding.

Because they would bear the burden MASS TRANSIT The Urban Mass Transit Administration (UMTA) provides con struction and operating expenses for 434 local transit systems throughout the country. Despite decreasing ridership in the 1970s federal mass t ransit aid soared an average.of 40 percent annually faster than any other DOT program. Total federal UMTA authoriza tions are 3.7 billion for FY 1983, with projections for FY 1984 exceeding $4.5 billion Adam Smith, The Wealth o.f Nations (Cannon Modem Lib rary Edition, 1937 D. 682 brk S. Strotzki Economics of Completing the Interstate Highway Systems,"

Congressional Record, December 15, 1982, p. S24841 5 UMTA capital and operating subsidies have led to resource misallocation which has stifled proper respons es to changing urban ridership patterns capital programs by distorting their real cost, and operating sub- sidies have become de facto subsidies to powerful mass transit unions, rather than70 riders. The goal of Congress and the Administration should be t o transfer the entire UMTA budget to state and local governments and consequently the privatization of as many services as possible Capital grants encourage inefficient new The Growth of Subsidies Many proponents of federally supported public transit claim that the systems are needed to correct a permanent "market failure by bridging the lfsupply gap Yet, the existence of these systems has undermined innovative private responses to changes in the transportation market. Sometimes this is done explicitly; per h aps by limiting competition through right of way monopolies, such as lfbus-onlylf lanes, or taxi medallions. More often the subsidies pose effective obstacles to newcomers by masking the real cost of the publicly provided service therefore, private transi t operators would have to operate uneco- nomically federal government to supplement mass transit capital grants with operating subsidies. But as many had predicted at the time, these subsidies have led inexorably to managerial inefficiency and spiralling d e ficits. According to DOT, transit fares cover be tween just one-fifth and one third of the actual cost of a journey, depending on the mode of transportation.2 To compete with subsidized services By the late 1960s, there was increasing pressure for the Man y of these.federa1 subsidies are diverted into labor com pensation.

DOT has estimated that between 1970 and 1980 some 24 percent of all federal monies took the form of labor compensation.8 Despite declining labor productivity, total earnings of transit emp loyees rose 222.6 percent between 1965 and 1980, whereas the consumer price index climbed 127 percent. By 1979, the average annual compensation of an urban public transit worker was over 23,000, compared to a $14,400 average for private industry. New York City bus drivers averaged $29,705, while drivers of the most expensive private alternative earned only $26,8Olo9 excesses, federal capital grants distort local investment decisions. While operating subsidies encourage inefficiency and labor Douglass B. Le e , Evaluation of Federal Operating Subsidies to Transit U.S. Department of Transportation, Cambridge, Massachussets, March 1983 p.22 Ibid 9 P* 17 Ibid p. 23 and James B. Ramsey, "Selling the New York Subways," National Review, February 4, 1983 6 For exampl e, the 80 percent federal matching grants available for new bus purchases have led many local authorities to ignore the economic merits of rehabilitating older buses covered this, all it did was reduce.the grant to 75 percent.

Capital grants also encourage overdevelopment and expanded public ownership by rewarding local communities with federal monies for usurping private transportation services When UMTA dis The Underlying Failure of Public Transit service should come as no surprise to transportation expe rts.

Efficient mass transit is incompatible with federal subsidies public monopolies and powerful transit unions The failure of public transit systems to provide efficient The reasons 1 The dynamics of the marketplace demand flexibility and competition rai l lines are only efficient in stable and concen trated urban centers exist Fixed bus routesand permanent Such conditions rarely 2 Federal subsidies inflate costs and waste resources more than they improve service 3) Public transit has used subsidized fare s as its primary marketing tactic. Yet lower fares have failed to encourage significant increases in rider ship. Local governments then often respond to this by trying to discourage automobile use through restricted parking, tolls, and other charges. A fas t er journey is a major factor in attracting riders, but this generally requires heavy capital investment and further restrictions on automobiles, such as "bus-only" lanes 4) Large vehicles are used for they are viewed as eco nomical. Yet, the capital cost p er seat increases with the size of the vehicle, since small vehicles can be mass produced at low cost while large vehicles are often custom made. Moreover, small vehicles can usually be operated nearer full capacity is for this reason that most private tr ansit services employ small vans.l0 It 5) Union pressure has led many public transit author- ities to base labor contracts and routes on peak lo Kenneth C. Orski The Changing Environment of Urban Transportation APA Journal, Sunnuer 1982, p. 312.

L 7 hour n eeds, rather than average use. Public money is wasted on excess labor capacity and empty vehicles operating in off-peak hours Private Alternatives According to some transportation experts, fully private mass transit systems would provide better service to all but the five to ten largest metropolitan areas. Even in these cities there is room for increased reliance on the private sector, such as encour- aging private supplemental transit during peak hours as models for reducing costs by using the private sec tor. Phoenix, for example, subsidizes taxi operators to provide services at times and in areas where low levels of ridership would make city buses very costly, resulting in an annual saving of $560,0

00. Houston contracts out one-third of its bus system, w hile Oak Ridge, Tennes- see, subsidizes senior citizens' cab rides, saving 50,000 a year In Japan, private housing developers have constructed transit feeder lines from suburban developments into main metropolitan public systems. And in the Philippines, M a nila's needs are well served by privately owned minibuses, adapted from World War I1 jeep frames.11 There are dozens of cities in the U.S. and abroad that serve The main argument against such private transit is that there is a need for cross-subsidization to preserve full service to Yet subsidizing fares rather than selected individuals has distinct disadvantages It gives the power of taxation and redistribution of income to transit authorities and it eliminates true pricing-which is critical to a proper c ost basis for economic decisions and inequitable as means of targeting or providing assistance to the truly needy. Only one of every four transit users is from a low income household uneconomic areas.

It is also extremely inefficient A model exists for privatization of mass transit. It consists of subsidies for users in the form of vouchers First, local com munities would sell their bus and rail systems to private bidders.

To encourage alternative private mass transit, and to provide for proper subsidies to the needy, the community would sell transit vouchers at a percentage discount to the needy, elderly or other targeted groups. Example: a community might sell a $1 fare c a rd for 50C. These fare cards would be valid on any transit system whether taxi, bus or rail. The consumer could pay the premium for individualized taxi service or choose, a cheaper alternative I1 For further examples and information see: "Falling Ridershi p Could Redirect Mass Transit Pladng Christian Science Monitor, October 21, 1982 Rethinking Transit in Wichita Corporation For Urban Mobility (Washing ton, D.C 1983 Gabriel Roth-and George Wynne, Free Enterprise and Urban Transportation (New Brunswick: Tra n saction Books, 1982). 8 This private alternative would encourage a dynamic transpor- tation market not be squeezed out of the market by-regulations or subsidized public buses operate existing transit lines more,efficiently, and new transit operators and r o utes would appear Speedy and efficient private van services would Private developers would have the incentive to Encouraginq the Private Sector Steps should be taken to eliminate perverse incentives and to stimulate private innovation. be cut sharply syst e ms that are uneconomical on a cost-benefit basis, such as Los Angeles, Detroit, Baltimore, Buffalo and Mid, should have the authorized funds cancelled cut in half by lowering matching grants. This will help assure that communities have a considerable self - interest in assessing the value of planned projects. The formula grants, largely oper ating subsidies, should also be cut in half in FY 1984 Congress could encourage privatifation by establishing a discretionary privatization development grant. If a commu n ity demonstrated that privatization of local transportation services would involve significant start-up costs in the short term (even though opetating expenses might be much lower), it could be eligible for a grant from DOT. Such subsidies, howeyer, would end in 1989 givinq local authorities five years to restructure their systems and find alternative financing mechanisms Funding for new systems should Cities that have not yet begun constructing major Other capital funding should be AMTRAK AMTRAK, the fede rally subsidized national railroad passenger corporation, received $812 million in federal grants in FY 1983.

The President requested $682 million in his FY 1984 budget A 1982 Congressional Budget Office study notes that AMTRAK is energy inefficient, provi des service predominately to middle and upper income travellers, receives subsidies far out of proportion to all other forma of transportation, and loses millions of dollars per year.

AMTRAK conveys appear limited, continuing large federal subsidies is di fficult to justify.1112 The AMTRAK subsidy has cost the U.S. economy $12 billion and more than 125,000 jobs in its ten year existence nearly $900 million, or more than 23C per passenger mile There is no economic or social rationale for -Is subsidy It conc ludes that I1because the public benefits that In 1981 it lost This l2 Federal Subsidies for Rail Passenger Service Congressional Budget Office, Washington, D.C July 1982 p.

63. An Assessment of Amtrak 9 is more than 100 times the federal passenger subsidy received either by commercial airlines, private autos, or intercity buses.13 AMTRAK should terminate service hmediately on all routes for which variable costs are substantially higher than revenues.

This probably would allow the Boston-New York-Washingto n, the Albany-Montreal and possibly the Chicago-Peoria lines to continue until private operators are found for them sell many of its assets, such'as rights-of-way, office space and equipment, and railroad cars AMTRAK also should THE FEDERAL AVIATION AGENC Y Federal spending for air transportation is earmarked for improvement, operations, and maintenance of the national airspace system, and for airport grants, aeronautical research and tech- nology ports in Washington, D.C Robert Poole, an expert on the air t raffic control system, notes that the It also covers the operation of National .and Dulles Air The FAA suffers from the inherent problems of bureaucracy lack 'if competition removes strong incentives for eco- nomic efficiency. Obtaining revenue,via taxati o n pre cludes the direct feedback from users inherent in buyer-seller relationships in the marketplace service regulations significantly restrict the efficient use of personnel planning. difficult.14 The evidence supports Poole's hypothesis Civil And polit i cal control makes long-range The FAA's computers are obsolete year in airport development, as a result of the FAA's poor appli cation of user fees and grants. Many government studies, moreover fault FAA management. In 1976, for instance, the General Accou n ting Office cited serious FAA planning and management problems, such as a lack of cost-effectiveness analysis, for the department's poor record.15 The Professional Air Traffic Controllers Organiza- tion (PATCO) strike served to confirm the agency's seriou s person ne1 situation Millions of dollars are needlessly invested each User Fees landing fees. FAA user fees consist primarily of fuel and ticket taxes and Neither reflects accurately the relevant service l3 l4 l5 John Sennuens End of the Line for Amtrak, " Heritage Foundation Backgrounder No. 226, November 9, 1982, p. 1 tage Foundation Backgrounder No. 216, October 5, 1982, p. 2.

Issues and. Management Problems in Developing an Improved Air Traffic Con trol System (U.S. General Accounting Office, December 16, 1976 Robert W. Poole, "Air Traffic Control: The Private Sector Option" (Heri10 costs. Landing fees, for instance, are calculated on the basis of aircraft weight and do not vary by time of day a controlled airway or landing slot dt a busy time is a ver y valu able service. At a premium of zero, demand tends to exceed supply during highly desirable hours at popular airports. Morever, smaller planes and large jets differ little in the costs they impose on the control system and its other users. Yet, genera l aviation pays only a fraction of its 30 percent share of total traffic con- trol system capital and operating costs. In fact, while commercial airliners cover about 95 percent of their allocated costs, general aviation covers less than 20 percent-thus en c ouraging excessive use of facilities by small aircraft Yet access to If fees were adjusted to market levels, congestion would be reduced in the entire.system. This would lead to cost savings in two ways. proper user fees would reduce the load on the air t raffic control system sufficiently to save 10 percent in annual capital expendi tures. Further, market-oriented fees would distribute users away from peak hours and peak airports thus reducing demand for expan- sion at these facilities.

Privati2 ation Robe & Poole has noted that many of America's air traffic control (ATC) problems would vanish were the present system to be replaced by a non-profit structure owned by the airlines, with individual control centers contracted out to profit-making ATC operating c ompanies. This would provide uniform nationwide oper ating procedures, combined with the benefits of healthy competi tion in the provision of services and a rational pricing structure. 16 The Congressional Budget Office has estimated that There are alread y private air traffic control companies in And after the 1981 con the U.S. Since 1968, Barton ATC has been building and operating control towers at low volume airports trollers' strike, a group of non-striking FAA controllers set up a firm named ATC Servic e s Inc. The firm won a contract to reopen the tower at Owensboro-Davis County airport in Kentucky. One of the most competitive of these newcomers is Midwest ATC.Services of Olathe, Kansas. Midwest's price for operating the Farmington New Mexico, tower is $ 9 9,00, compared to $287,000 under the FAA system.f2 Overseas, air traffic control is provided by private sector organizations in many instances. In Switzerland, for example the system is operated by Radio Suisse, a private nonprofit cor- poration. In Saudi Arabia, the government contracts out the task to private firms on the 16 Poole J+;ITowering o lz John Doherty basis of -renewable five-year contracts Entrepreneurs Reason, May 1983.

Poole, op. cit. 11 CONCLUSION Concentrating transportation policy making in Washington is the cause rather than the solution for the sorry state of the nation's infrastructure and mass transit systems. The federal government has proved to be a poor manager. It has encouraged deterioration of billions of dollars of the highways that it helped construct, thanks to perverse incentives within federal programs It has also distorted the allocation of capital and services with inefficient user taxes, impeded progress in mass transit and air traffic control through subsidies and nation aliza tion, and it has redistributed millions of dollars from taxpayers to middle class beneficiaries.

Restructuring DOT and its policies will gain little planning simply cannot achieve compatibility between incentives and market demands America's transpor tation facilities needs a decentralized market response to demographic and technological change. This is possible only if Congress gives back to the private market and state govern- ments the responsibility for providing these vital services Central The l ong term maintenance and development of John Palffy Policy Analyst I