The “Invisible Hand”
by Andrew C. Selden, Minneapolis, MN
Too many rail advocates, private individuals and public sector employees alike, hobble the advancement of rail passenger service in the U.S. by viewing trains from a classic socialist point of view: rail passenger service should be (”must be”) provided in any given market by a single provider, using other peoples’ money, applied through a centralized planning and administrative process. Lip service is paid to consumer preference, but infrequently and grudgingly. The planners “know” that rail is “good” and they know where and how it is best deployed.
Somewhere in Kazakhstan there is no doubt a retired commissar of the former Soviet Union who shares that point of view. But that’s not how free market economies work, even for capital intensive, public-service oriented, businesses. It’s not always how even regulated utilities operate. And, it’s not how even rail passenger services are (increasingly) being provided in Europe or elsewhere in developed countries, or even in some of the less developed countries. Despite what you have heard about the bungled breakup of British Rail in 1994 (more on that below), privatization of intercity rail passenger services is proceeding aggressively and quite successfully throughout Europe, including England, as well as New Zealand, Japan, Central America, and elsewhere. What is really missing in the U.S. rail passenger business is not billions in new subsidies, but the chief element of the free market economy: competition. Competition isn’t just “good” for consumers and providers - it is indispensable. That’s why (not to put too blunt a point on this) we won the cold war, and it is why even China has converted its national economy to a blended capitalist system.
Competition is what drives core values that our western, liberal society celebrates: efficiency, innovation, growth, and responsiveness to consumer preference. Monopolies don’t advance those interests. Competition does. Adam Smith proved this 300 years ago. We re-prove it every day throughout the American economy. We do not and would not tolerate for one minute - legally, economically, or socially - a single, monopoly, national airline, truck company, fast food chain, car company, or railroad. We successfully abolished the monopoly telephone company almost 20 years ago. We are moving to de-regulate and open up to competition more and more of our monopoly utilities and social services. The reason is that a national monopoly provider of anything, including rail transportation, would stifle the manifest benefits of competition. We would end up with something pretty much like Amtrak: an organization that is wildly inefficient, high cost, indifferent to customer preferences, not growth oriented, stifling to innovation, and heavily political. This does not have to be the case with intercity rail passenger service any more than it was with long distance telecommunication services, and we have an opportunity to test the concept of competition in providing rail service in the U.S.
In the “good old days” - as recently as the late 1960s - private railroads competed for passenger business between many major cities. For example, as recently as the 1950s, four railroads competed seriously (and two others less seriously) for Twin Cities - Chicago traffic. They monopolized the rail segment in most intermediate markets, but that’s inherent in the technology of rail. (Ironically, today, smaller non-hub cities like Sioux Falls, Sacramento, Portland, and Omaha have more air competition, more service [in proportion to their populations] and lower prices than major cities monopolized by a major airline’s “fortress hub.”) The competition (within the institutional and technological limits of the railroad industry) tended to foster innovation, efficiency, and if not growth at least the preservation of services in main line markets in the face of steadily dwindling consumer demand as increasing use of automobiles took away most of the short distance “corridor” traffic. Widespread introduction of jet aircraft and the loss of the mail contracts after about 1960 killed the sleeping car and head end business that had sustained these trains through the 1950s.
In 1971, Congress nationalized intercity passenger trains into a monopoly service provider, Amtrak. We all know what happened since 1971. But, isn’t privatization and competition bad for rail? Doesn’t the experience in England teach us that privatization and competition is a disaster? Well, no, actually. The UK government bungled its breakup of British Rail: it created too many operating “franchises” that were individually too small, financially and economically, to succeed; it failed to mandate coordination among them in operations, ticketing and information; and, it created an infrastructure company, called Railtrack, which was a publicly-traded, for-profit entity which - gasp - took its profits (track rent from the operating companies) and paid dividends to its shareholders so they could reinvest those profits elsewhere at much higher rates of return. Good capitalism, but not so good for inherently uneconomic privately-owned rail infrastructure. This isn’t just a UK/Railtrack problem either: the shareholders of BNSF have done exactly the same thing here in the US by refusing to allow management to put more capital into the railroad’s infrastructure because of the appallingly bad return on investment, and we now all understand that Amtrak’s 450 miles of railroad in the NEC consume more than a billion dollars a year in free federal capital subsidies.
But what you don’t often hear is that rail traffic in England is growing by leaps and bounds since privatization. Private companies that own operating franchises have invested many billions of dollars (private sector investment by rational investors) in new trains, new technology, and buying up weaker operating franchises. They are not lunatics: these are publicly-traded businesses who are investing in rail passenger assets because they believe they can earn their shareholders a good return on the investment. The same thing is happening throughout Europe, although other governments there learned from Britain to keep the railroad track and infrastructure in public agency hands (which is exactly what the Amtrak Reform Council recommended here). This is good policy development by economically rational and pro-rail governments. Only the neo-Socialists at Amtrak and NARP squealed when ARC said we, too, should follow the successful European model. Where (and how) can competition be brought back into the rail business today? There is one market where existing public ownership of the infrastructure and higher densities of traffic flow would allow overlapping competitive services to flourish, and that is the NEC.
Nearly half of all Amtrak’s NEC ridership consists of local traffic between New York, Newark and Philadelphia, a mere 90 miles of high density urban development. Other rail passenger carriers also serve this market already, although using them requires a change of trains (at Trenton) and separate tickets. The combined cost of a Philadelphia - New York ticket on SEPTA and NJT is a small fraction of Amtrak’s fare. Many price-conscious travelers use this service now to get between points beyond Trenton, including the Philly - New York “end” points. The service “quality” is lower, too, because the trains are multi-stop locals with 3 x 2 seating and no food service, and, at present, don’t run through.
But what if they did? What if SEPTA and NJT each offered through trains between Philadelphia and New York? Or either of them? Or both, in a joint venture? What if we let each management, Amtrak’s and the commuter agencies’, decide what service to offer and at what price, and let consumers, instead of some faceless federal bureaucrat, choose which services best suits their preferences? That’s how the car industry functions. It’s how the food industry functions. And, after the 1984 deregulation of the telecom industry, that’s how it functions (point: since 1984, long distance calling volume has quadrupled and prices have plummeted; pretty much the same thing happened to US commercial air transport since it was deregulated in 1980. When has output quadrupled with sharply lower prices in rail passenger service?)
Why would moribund eastern transit agencies behave entrepreneurially? One reason would be customer demand; another would be to make money. If they can project a net positive cash flow from the new service, it helps their other budgetary challenges. Another would be monetary but more coercive: Congress could offer incentive payments to the agencies under their FTA grants if they run through trains, at whatever prices and levels of service their management believes passengers will be willing to pay for. Wouldn’t it be interesting to see who would flourish in open competition: low cost providers of basic transportation between Philadelphia and NYC or a high cost provider of fancy, high frill, fast, non-stop service?
This idea isn’t all that unprecedented, either, or limited to the NEC. Metro North already competes with Amtrak between New York and New Haven, as does MARC between Washington and Baltimore. Metrolink overlaps Amtrak between Oceanside and Los Angeles (87 miles) and San Diego’s “Coaster” runs between Oceanside and San Diego (42 miles). Numerous other opportunities could be developed: Metra from Chicago to Milwaukee, or to Springfield or even St. Louis; MARC between Washington and Wilmington or even Philadelphia; TriRail between Miami and Orlando or Miami and Washington; or, Seattle’s Sounder between Portland and Vancouver.
If a market exists, i.e., if real people spending their own money want, rail service in any of these high density corridors, why shouldn’t public policy encourage competition for that business? Won’t we as consumers and taxpayers be better off in the long run? Shouldn’t consumers, rather than the now departed George Warrington and Michael Dukakis, decide whether we should have multi-billion dollar “high speed rail” corridors, or more modest 90 mph service, or some of each? And if you don’t agree, do you also believe the US government should consolidate all fast food chains into one? Because it’s more “efficient” that way? Or merge every airline into “American United Airlines” (formerly known as Aeroflot)? Even Red China has multiple competing airlines, flying the newest Boeing 737NG and 767 airliners — why do we suffer Monopoly Rail (still known as Amtrak) as the only service provider in almost all US markets when capable regional rail providers are available and could compete effectively, if only nudged in that direction?