Freeman

ARTICLE

Federal Transit Subsidies: How Government Investment Harms the U.S. Economy

Public Transit's Contributions to the U.S. Economy Are Pathetically Meager

FEBRUARY 01, 1994 by JOHN SEMMENS

Mr. Semmens, a specialist in transportation issues, is an economist with the Laissez Faire Institute in Arizona.

It has been asserted by some that part of what is needed to revitalize the U.S. economy is more government investment. There is, of course, a superficial plausibility to this assertion. Every dollar the government spends becomes somebody’s income. The people working on government-funded projects do have jobs. The purchases government makes result in revenues for some businesses. All of this is formalized in the Gross National Product (GNP) wherein every monetary transaction that takes place is tallied as one measure of the economy’s health.

If we are to make an intelligent assessment of the potential impact of a prospective increase in government investment, though, we will need to do more than rely upon the superficial plausibilities. After all, throwing money out of the windows of the U.S. Mint would also provide a superficially plausible stimulation of the U.S. economy. People would catch the windblown currency and spend it on something. This spending would become someone else’s income. It would support jobs. It would even show up in GNP statistics. However, few, save Keynesian diehards, would tout currency tossing as a legitimate government investment program.

A traditional first step in analyzing any investment is to examine the historical performance record. Since one of the most frequently mentioned public sector investments is increased public transit subsidies, perhaps it would be worth our while to investigate the historical performance of federal aid for transit. While there is no guarantee that future performance would duplicate past performance, many professional investors regard historical information as indicative of what to expect in the future.

The proponents of government investment in public transit are hardly modest in the claims they make for the economic benefits to be gained from such investments. For its part, the American Public Transit Association (APTA) boasts that every dollar spent on public transit generates three to five dollars of additional economic activity. In 1984, the APTA issued a report entitled National Impacts of Transit Capital and Operating Expenditures on Business Revenues. This report asserted that every dollar spent on rail transit produced $3.15 in added business revenue. For every dollar spent on bus transit, the APTA report estimated that an additional $3.50 in business revenue was generated.

In 1991, another APTA report—Transportation Spending and Economic Growth: The Effects of Transit and Highway Expenditures—claimed even more robust returns from transit outlays. In this case, for every dollar spent on transit an estimated $5.20 in additional economic activity was alleged to result.

These impacts of three and five to one certainly sound impressive. It is easy to see how some people could become enthusiastic about this seeming fount of prosperity. However, it is important to remember that all expenditures of money generate similar ripple effects through the economy. Whether putting our money into public transit is a good or a bad investment depends upon the return we get on the investment. Before we rush to plow more billions into transit it might be wise to compare this particular investment to alternative ways the same money could have been invested.

Table 1

Impacts on the U.S. Economy of Alternative Investments
($ in Billions)

Capital       IRA:       IRA:

Public       Corporate       Gains Tax       Treasury       S&P 500

Transit       Tax Cut       Cut       Bills       Stocks

Amount Invested       $61.5       $61.5       $61.5       $61.5       $61.5

Current Value       $10       $100       $160       $130       $250

Impact on GNP       $40       $400       $650       $500       $1000

# Jobs       800,000       8 mil.       13 rail.       10 rail.       20 mil.

Federal Taxes       $8       $75       $120       $100       $190

Sources: Economic Report of the President (January 1993)

Statistical Abstract of the U.S. (1992)

Transit Fact Book (American Public Transit Association)

Looking at Investment Alternatives

The figures shown in Table 1 indicate the potential returns the U.S. economy might have experienced if the tax dollars that went into public transit had been invested differently. For this analysis, I have assumed that the $61.5 billion that the federal government has invested in public transit between 1965 and 1992 would have been put into any of several obvious alternatives. The annual federal cash flow into transit over this time period is assumed to have been directed instead into each of the four alternatives portrayed in the table.

The “amount invested” is the same $61.5 billion for each alternative. The “current value” is the estimated current value of the assets for each investment alternative as of the end of 1992. The “impact on GNP” is the estimated 1992 amount of economic activity that has been (or would have been) added to GNP by each investment alternative. The “# jobs” is the estimated number of employment opportunities that could be supported by the economic activity generated by each investment alternative in 1992. The “federal taxes” are the estimated additional tax revenues accruing to the federal government during 1992 as a result of the economic activity generated by each investment alternative.

The “public transit” investment option is, of course, the actual government investment made during this time period. The “corporate tax cut” investment option assumes that the amount spent on transit would have been “spent” on corporate tax relief (for example: an investment tax credit or a cut in corporate income taxes) and that this money would have been invested in business assets earning average rates of return. The “capital gains tax cut” investment option assumes that the amounts spent on transit subsidies would have been “spent” on reducing the capital gains tax and that this money would have been invested in the stocks comprising the Standard & Poor’s 500 stock index. Dividends were not assumed to be reinvested. The “IRA: treasury bills” investment option assumes that the amount spent on transit would have been “spent” by allowing tax-free investing by individuals and that these individuals selected a very conservative investment strategy of buying three-month treasury bills. The “IRA: S&P 500 stocks” investment option assumes the same tax-free investing by individuals, but that they buy stocks. In this case, dividends are assumed to be reinvested.

The comparison of these investment alternatives is quite startling. The contributions to the U.S. economy made by public transit are pathetically meager compared to any of the alternatives. Even the least favorable private sector investment alternative could have had an incremental impact on the U.S. economy ten times the size of that the actual public transit investment has had. If any of these alternative paths had been chosen, GNP would have been larger, more people would have jobs, and the federal deficit would have been lower.

Recent statistics indicate that there are about 9 million persons classified as unemployed. The implication of our analysis of hypothetical investment alternatives is that unemployment problems would have been greatly reduced had the government made different investment decisions. The more lucrative returns of the alternative investments would have created more job opportunities. More people would have been attracted into the workforce. Wages would likely have risen. The additional capital that would have been available would likely have improved labor productivity. So, even if it does seem improbable that the economy could sustain an additional 20 million jobs, as the “IRA: S&P 500 stocks” option implies, it is obvious that the employment environment would be far more favorable than it now is.

The projection of a lower federal deficit is predicated on the assumption that all other expenditures remain the same. This probably tends to understate the favorable impact that a different investment decision would have had. Surely, the more robust employment environment that could have existed would be expected to reduce government outlays for unemployment compensation and welfare. Likewise, the higher tax revenues that the government would have received would also have reduced borrowing costs. These factors could have lowered the deficit even more than the additional tax revenues projected in Table 1 would imply.

Profits Instead of Deficits

The reason why each of the prospective investment alternatives would have produced much better results for the U.S. economy than the transit investment that was made is that each alternative would have earned a profit. Public transit does not earn a profit. As a whole, it cannot even cover its operating costs from passenger revenues. A glance at a graph of the aggregate public transit operating results from 1965 to 1992 (see Figure 1) shows a trend of deepening annual deficits. The losses suffered by public transit mean that the value of the outputs of the investment are worth less than the cost of the inputs. What this means is that the money invested in public transit is consumed. The investment cannot sustain itself independent of continual infusions of new capital.

Figure 1

Annual Public Transit Deficits
(in Millions of Dollars)

 

Source: Transit Fact Book (American Public Transit Association)

The superior performance of the alternatives comes from the compounding of profits made on the capital invested. These profits mean that the value of the outputs of the investment exceed the cost of the inputs. Consequently, the money invested grows with each increment of profit. The process of making a profit on an investment enables one to end up with more wealth than he had when he started. Greater wealth, of course, would make the U.S. economy stronger and better able to meet the material needs of more people.

The last gasp of a defense on behalf of money-losing government investments like public transit is that a needed service is provided. Unfortunately, the fact that public transit is subsidized makes it impossible to determine the need for the service. The fact that we do not ask the consumers of public transit to pay what it costs to provide the service denies us any objective measure of need. It is probable that a substantial portion of the so-called need for transit would dissipate if taxpayers were not paying over 60 percent of the cost of every transit ride.

While the need for money-losing transit has been undemonstrated and exaggerated, the need for the products and services that would have been provided by the forgone alternatives is easily overlooked. The fact that consumers of unsubsidized products and services produced by the private sector do pay the full costs is proof that a need has been fulfilled. The voluntary payment by willing consumers is an objective measure of need. So, not only has the federal government’s 27-year investment in public transit lost money, it has also prevented trillions of dollars worth of needs from being ful filled.

The federal government’s investment in public transit currently amounts to around $3 billion per year. This is a relatively small amount of spending. But as we have seen, the cumulative economic cost of annually pouring a small amount of money into profitless transit operations in the past has had a huge opportunity cost for the U.S. economy. To place the total negative impact of excessive government spending in perspective, consider that the Grace Commission estimated that there was $140 billion per year in unnecessary federal spending. As this process of waste continues year after year the compound effect on the U.S. economy has to be devastating.

The inability of the federal government to contain its appetite for bad investments has been a disaster of major proportions. The competitiveness of U.S. businesses, the standard of living of the population, even the health, safety, and welfare of the American people have been enormously harmed by the inferior investment choices policymakers have made over the last generation.

When we see what could have been and compare it to what is, we are observing a government performance worthy of shame, not repetition. Unless we want to repeat and intensify this shame, it is clear that more government investment is exactly what we don’t need.

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February 1994

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