Tuesday, December 16, 2008

Has Mass Transit Finally Arrived? - Guest Blog by Emil Frankel

An online forum hosted by the National Journal magazine recently posed that question to a diverse group of transportation stakeholders, myself included, and I will share here the reponse I posted for them.

While the question of whether mass transit’s time has arrived is an interesting one, I think it is a component of a broader question: how can transportation best serve national goals and purposes like economic growth, environmental and energy sustainability, national connectivity, metropolitan accessibility, and safety? Improved transit can and should be an important component of transportation programs that serve those purposes – but objectivity is required to assess realistically how far transit can move us in the right direction.

Transit is well-suited to many situations, but not all. Improved transit in high-density areas can improve accessibility, reduce environmental and energy security damages, and foster economic growth in ways that simply adding more highways might not. At the same time, however, transit works best when used in conjunction with a program of policies, such as road pricing, that encourage system flexibility and incentivize transit usage. Transit capacity will meet the goals people want it to serve only if it is actually used. An approach that integrates the planning and prioritizing of road, rail, and transit programs is key to maximizing each mode’s performance towards national goals.

The long-running debate about how to allocate money between the various modes is out-of-date. If we are speaking about the federal role, we should be focused on funding that achieves outcomes tied to national goals, not in preferring one mode over another. Many people would agree that significant transit expansion in major metropolitan areas is likely to be a valuable tool in meeting national goals – but we also cannot ignore that improving the operations of existing highway and road networks might also play an important role. We need to understand trade-offs and to prioritize operations and projects within broad, cross-modal programs.

So before we jump to a conclusion about how to allocate funding - whether to give transit or highways more money - let’s ensure that we have a performance-based approach that can help us identify and prioritize programs that achieve national goals.

To that end, the Bipartisan Policy Center's National Transportation Policy Project, which I direct, is bringing new voices to the transportation debate and creating a dynamic and enduring framework for the next transportation authorization and beyond.

-Emil Frankel

Thursday, December 11, 2008

Obama's Department of Transportation (Possibly)

As President-Elect Obama names the key personnel in his new administration, one department he has yet to address is Transportation. The Washington Post recently profiled some of the people who may be up for the top job - including Jane Garvey, a member of the National Transportation Policy Project - and it is certainly a talented group. Regardless of who is appointed, however, they may face both the necessity and the opportunity to dramatically restructure how the Department is organized. The current DOT structure is divided by modes (e.g. highway, transit, aviation), when it really should be built around goals.

What does that mean exactly, and how would it change things? The leading example of such a departmental restructuring comes from the United Kingdom. Following the release of the Eddington Report, which we have mentioned in previous blogs, the UK set out to restructure its Department for Transport in a way that aligned with the report’s recommendations. For instance, the report presented five governance principles, two key ones we will mention here being:

  • 1.       The geographic scope of decision making should allow a whole journey approach – reflecting the economic and geographic reality of travel.
  • 2.       To ensure decision makers consider all modes and policy options, they need power or influence over all modes and policy options.

To incorporate these principles the UK switched from a modal structure, like the US currently has, to one centered on goals and places.

The key impact of this kind of restructuring is that it better aligns priorities, objectives, and process; it reduces inefficiency and sets up incentives for success. A restructuring would help clarify and consolidate the grant-making agencies within the DOT (like merging the highway and transit agencies into one) and the more regulatory-oriented agencies that deal with goals like safety.  If America is to renew its transportation system so that it can meet environmental, energy, and economic goals, the DOT should be organized around ends not means. The current divisions along modal lines foster destructive competition about how much money each mode gets instead of a focus on what those modes are trying to achieve in cooperation. The transportation system is just that, a system composed of many parts that should be working in coordination, and it’s time that the DOT’s organization properly recognized that fact.

-Daniel Lewis



Friday, December 5, 2008

The Cost of Gas and Transit

A recent article in the Los Angeles Times highlighted some signs that transit ridership is declining as gas prices fall. Although much of the ridership evidence is anecdotal at this point, given the roughly 50% drop in gas prices over the last few months a return to cars would not be unexpected. However, more data will need to be gathered (and numbers from recent months more fully analyzed) before any firm conclusions can be made about driving trends. Even then the implications may not be clear, because several questions cloud the situation.

The first x-factor is the weak economy. Economic growth or weakness has in the past correlated quite closely with vehicle miles travelled (VMT) - with growth increasing VMT and weakness hurting it -although vigorous debate still exists about which way the causation flows. In fact, recent events may yield some insight for this debate. For example, a year ago the economy was still fairly healthy and gas prices were rising sharply – two forces that should pull VMT in opposite directions. In recent months the economy has been hit hard, yet gas prices have also plummeted, once again creating forces that usually pull VMT in opposite directions. The data is not yet available to clearly assess how this is playing out, but it will be interesting to look at more closely in the near future.

The second x-factor is uncertainty about future gas prices. As we have discussed in past blogs, a decision between driving and transit can be made day-to-day, thus gas prices have an instant short-term impact on transit usage. But expectations of higher prices in the future may be continuing to shape longer term consumer decisions about vehicle purchases and the location of housing. If that is the case, a full rebound to previous VMT levels (per capita) may not occur, despite current cheap gas.

The LA Times article underlines the importance of having a flexible transportation system with multiple ways to get from point A to point B. But more than just current gas prices are at work in influencing transit usage today, and it would be a mistake to draw conclusions about the long-term health and viability of transit from recent anecdotal evidence. 

-Daniel Lewis

Monday, November 24, 2008

Transportation in a Stimulus Package, Part Two

Debate about an economic stimulus package continues to dominate the news. Obama recently called for a plan that will save or create 2.5 million jobs by January of 2011. It is unclear how large this package would be and how it would be spent, but he has indicated that a substantial portion of it would go towards rebuilding transportation infrastructure. Some people disagree about whether transportation should be part of a stimulus, while others disagree about what types of projects should be funded if transportation is part of a stimulus. These questions are best illuminated with data, so let’s get into the figures.

The Federal Highway Administration’s most recent 2008 estimate is that $1.25 billion in highway capital investment supports (not creates) 34,779 one-year jobs. As other scholars and government agencies have pointed out though, these figures must be treated with caution. There are several important caveats to transportation spending, among them: 1) federal deficits to fund spending can “crowd out” private investment, causing job losses in other economic sectors (Ronald Utt at the Heritage Foundation articulates this point); 2) the FHWA cautions that only short-term resurfacing and preservation projects spend funds quickly in the first year and thus have a timely impact; 3) unless there is excess unemployment, job demand for construction will merely be met by shifting workers from other sectors.

In short, it is very difficult to be certain about how many jobs will be created from increased transportation spending in the short term. Nevertheless, it might be a good time to invest in transportation. For instance, data from the Bureau of Labor Statistics indicates that there have been significant job losses in the construction industry in the past year (although there is significant variation between states/regions), meaning that highway construction jobs might bring people back to work without substitution. With regards to the immediacy of transportation spending, our system is in such a poor state of repair that now is an opportune time to focus on fixing what we have, which fits nicely with a fast stimulus. Perhaps the most important caveat, however, is the fundamental proposition that government spending in one sector inherently stifles growth in other sectors. This is a classic economic question, and we will leave it to more sophisticated economists. For two contrasting opinions compare the views of Brian Riedl and Paul Krugman. Riedl, of the Heritage Foundation, argues that stimulus fails because “every dollar Congress ‘injects’ into the economy must first be taxed or borrowed out of the economy. No new spending power is created.” Krugman, a New York Times columnist and Nobel prize winning economist, makes the case in a series of columns that increased government spending, on infrastructure instead of rebate checks, can play a decisive and vital role in restarting a stalled economy.

While the short-term impact of transportation spending is perhaps unclear, it is more broadly accepted that government investment in areas like infrastructure and education can pay greater dividends in the long-run. These investments increase productivity by improving human and physical capital – and the private sector generally under-invests in these public areas because it cannot fully capture the gains.

It seems increasingly inevitable that transportation will be part of a stimulus package. Although we may lack a perfect understanding of the exact benefits of transportation spending in the short-run, there is some understanding about the most valuable transportation investments overall, like system preservation. An effective stimulus package should focus on the most valuable and timely transportation investments, and this need not conflict with a broader view on promoting long-term prosperity.

-Daniel Lewis

Wednesday, November 12, 2008

How Infrastructure Fits Into An Economic Stimulus

As the economy worsens, transportation is being linked more directly to economic stimulus packages. Congress and the new administration have indicated a desire to include infrastructure spending as a component of an economic stimulus, and transportation is almost always mentioned as a substantial element of that infrastructure. Now there is also strong support among Democrats for a larger bailout of American Automakers, with President-elect Obama tying such a proposal to cleaner, more energy-efficient vehicles and President Bush insisting upon free trade as a prerequisite.

With complicated issues such as these, it is important to separate goals and actions because they are often confused. There are two goals that seem to be on everyone’s minds – short and long-term economic growth. But these are two different timeframes that necessitate different actions.

For example, a bailout of the auto companies is an action that is likely to be more effective in the short-term. Letting the auto companies fail would cause tremendous short-term hardship for many individuals, with ripples potentially felt across the economic spectrum. However, in the long-term a bailout would have the unintended consequence of rewarding, or at least not allowing the market to punish, an inability to effectively compete in the marketplace. This could mean the stifling of innovation and entrepreneurship, while encouraging entrenched corporate interests, and this could be economically damaging if extended to additional sectors.

By contrast, spending on transportation infrastructure is more likely to have minimal short-term benefits, but many long-term benefits. Assuming that the infrastructure spending is tied to potential benefits in some way, rather than just sent to states with no strings attached, it can have a marked impact on economic competitiveness. However, it can often be years before this impact can be seen, and at least a few months in most cases before people can even be put to work. In the short-term, there are better ways to protect people from an economic downturn.

This leads to the observation that some combination of short and long-term strategies is necessary. This will mean borrowing the best components of the two proposals discussed above so as to maximize the strength of each. The auto bailout, with its potentially dangerous long-term consequences, should be limited to a bailout of the workers and retirees who will be in real trouble as a result of their companies failing. These individuals should not be forced to endure hardship because of the missteps of management. The bankrupt companies can then either retool or be replaced by eager competitors. This would also be a place where the feds could play a role by providing seed money, or rewards, for developing the most fuel-efficient vehicles. Instead of picking winners, the government could instead encourage faster innovation on a level playing field. Such a strategy should be put forward with all due haste.

The stimulus package, on the other hand, should be carefully considered to ensure that it actually will accomplish something. People can be put to work digging a hole and filling it, but this will not create long-term economic growth. Funds to be spent on infrastructure should be tied to performance measures that evaluate whether their proposed use is likely to enhance economic growth in the long-term. Then the federal government should track these funds to find out whether they actually accomplished what they predicted.

-Joshua Schank

Tuesday, October 28, 2008

Transportation "Theater"

A recent article in The Atlantic about airport security argued that most of the measures put in place after September 11 to prevent more attacks are almost entirely for show, what the author dubs “security theater.” Not only is it still possible to sneak dangerous items through security, or components of dangerous items, it is easy to produce fake boarding documents and avoid the government's “no fly” list in the purchasing of tickets and screening of passengers. The most important safety improvements have been the strengthening of cockpit doors and the new awareness of passengers that they should take action if hijacked. The huge resources being poured into airport security and screening are thus doing little to actually further security and stop clever terrorists. Obviously this is troubling by itself, but it also holds lessons throughout the transportation industry in terms of theatrical solutions trumping real fixes.

As we have argued repeatedly on this blog, putting more resources into transportation infrastructure may be important, but it is not sufficient to ensure the system actually improves. There are important difference between band-aid solutions and fundamental restructurings. For example, fighting traffic congestion by adding more lanes attacks the symptom but not the problem. Congestion results from too many people wanting to use too little capacity at the same time. The optimal solution involves not only expanding capacity and alternative travel methods/routes, but pricing the existing capacity properly to ensure that people use it efficiently. This is really a fix it first philosophy – maximize what you currently have before building new stuff.

The ribbon cutting “theater” currently so popular in transportation ignores this strategy – and wastes valuable resources in the process. Similar to how current airport screening may be costing more than it’s worth, many transportation policies and programs give the impression of helping when they are really not long term solutions.

To fix transportation you must be able to assess the effectiveness of solutions. If we as a country keep spending more and more money on transportation but traffic congestion gets worse, emissions keep increasing, and the cost of business logistics rise, then clearly our policies are failing. The costs, priorities, and incentives built into current transportation policies are outdated. If the current way of doing things is allowed to persist for much longer, if theater trumps practicality, then transportation problems will only worsen. The time for transportation theater is over – there is not enough money to keep putting on a grandiose show. 

-Daniel Lewis

Friday, October 10, 2008

Airport Pricing at New York's Airports

Yesterday brought news that the US Department of Transportation is moving forward with a plan to auction off up to 10% of the takeoff and landing spots at New York’s three busiest airports: JFK, LaGuardia, and Newark. Essentially, the DOT intends to cap the number of flights at the airports to increase on-time operations (too many flights can lead to major backups when problems arise) and auction some of the slots (all of which are currently free) to ensure that they are used by the airlines that value them most. In response, there has been an immediate outcry from airlines, the Port Authority, and some politicians all claiming that the DOT is overstepping its authority and that the plan will raise fares at the airports. Other options like more runways and better air-traffic control technology exist to improve on-time operations, but proper pricing seems like an important and valuable part of any proposal. In fact, pricing may work better in the long term than these other options: you cannot increase capacity forever, and technology improvements will eventually yield ever-smaller gains.

To elaborate, it should be noted that while the New York airports are important because of the large market they serve, they are also deeply interconnected to a broader national air and ground transportation system. Improving the performance of these three airports is crucial because their backups cause roughly two-thirds of flight delays around the country. The DOT believes the auction plan will cut flight delays at LaGuardia by 40%, which will create positive impacts felt around the nation. (For a neat map of global plane traffic check this out.)

There are obvious complexities to properly pricing airports, especially involving equity issues like ensuring flights to small markets (a 747 flight to Los Angeles with hundreds of passengers on-board can pay more for a flight slot than a small plane headed for upstate New York), and a large cause of air-congestion is weather related, not due to capacity constraints. But at airports facing capacity-based congestion problems, the pricing of slots or of certain routes will likely yield benefits – especially if pursued in conjunction with an integrated ground transportation policy. For example, one way New York could ease congestion is by reducing the numerous flights to Boston and Washington, DC, via a better and faster train system to connect the cities.

There are major political problems to implementing pricing at airports, and it is unclear if the DOT plan will be implemented in the end. But the fact is that flight congestion and delay is a major problem that imposes high costs on passengers. Solutions are needed. Technology improvements, capacity additions, effective pricing, and a more integrated air and land transportation system are all important parts of a comprehensive answer. Yet each of those pieces also has some merit standing alone. Given that a comprehensive solution seems unlikely any time soon, the question becomes whether a partial solution is better than nothing at all.

-Daniel Lewis

Friday, September 26, 2008

Our Commentary on the Department of Transportation's Reform Proposal

In case you missed it, last week we released a commentary on the DOT's reform proposal. If you are interested in reading it, the document can be found here.

Thursday, September 25, 2008

The Financial Crisis on ALL Streets

One of the biggest worries about the current financial crisis on Wall Street is that it will spill over and affect “Main Street”. Yet Main Street is not the only street we should be worrying about, ALL streets could be affected. In other words, this economic emergency will surely impact the next transportation bill in a variety of ways.

To begin with, the large increase in transportation spending that many in Congress are calling for may not be possible given the massive amounts of debt the government will soon take on if it finances a bailout. The current transportation revenue mechanism, the Highway Trust Fund, is already faltering, unable to raise enough money to keep up with authorized spending. Forget about increased spending, even spending at our present level in the future is impossible unless either new transportation fees are levied or money from the general fund is appropriated. Given that the general fund is already maxed out, something has got to give: either more national debt or higher transportation charges for users.

It is highly unlikely, but conceivable, that spending on transportation would decrease, but that would be a huge mistake. An efficient transportation system is fundamental to economic growth, and while underinvestment in infrastructure may not cause pain today, it surely will down the road. But, as we have mentioned in various other places, there are at least two things that can be done to improve transportation without increasing spending: more effectively invest what we already have, and better price the existing system to increase its efficiency.

We cannot expect to improve the transportation system simply by throwing more money at it; that was tried with the last transportation bill and it has failed. What is needed is smarter investment, investment that is prioritized on national goals and on performance outcomes. As obvious as that sounds, it would be a sea-change in how things are done today.

In addition to performance based investment, better pricing of the current system would improve efficiency overnight. For example, a free, bumper-to-bumper lane on the highway carries many fewer cars per hour than a priced lane that has free flowing cars.

These are simple ideas, but recent transportation bills have not addressed them directly. Perhaps the financial crisis will necessitate a back to basics approach in the next go-around, which would help the transportation system without costing a dime.

-Daniel Lewis

Friday, September 12, 2008

The Highway Trust Fund: Passing the ($8 Billion) Buck

Yesterday the House approved legislation transferring $8.017 billion from the general treasury into the near-bankrupt Highway Trust Fund.  President Bush is expected to sign it quickly and thus temporarily fix what could have been a crisis in highway funding nationwide.

Although Congress has justified the transfer based on the fact that interest was owed to the highway trust fund from years past, the reality is that we probably need to accept two things about this turn of events:  1) This solution is terrible and 2) This solution was better than the alternative.

The solution is terrible because it fundamentally destroys whatever was left of the user pay principle in highway funding.  Sure, the fuel tax is a poor substitute for a user fee as it fails to take into account key externalities.  But general fund revenue is way worse, as it leaves almost no connection between who pays and who benefits, thus worsening the continued perception among the driving public that roads are “free.”  Moreover, given the lack of any actual general fund surplus, this “transfer” is really just increasing the national debt at a precarious time.

The solution is better than the alternative because without it, states would have begun to receive less than anticipated highway funding, causing project delays across the country.  These delays would have a substantial economic consequence that is probably much worse than an increased debt or people paying for roads through their income taxes.

In the end this lesser of two evils stems from an inability amongst leadership of both Congress and the Executive to convince Americans that they should pay explicitly for their transportation infrastructure.  There is a reason why no increase in trust fund revenue has been proposed despite this long-anticipated shortfall – a complete lack of vision for transportation policy.  Rather than confront this problem, federal leadership has chosen to pass the buck for the past six years.  This buck-passing will keep going into the next administration for sure, but at some point it will become unsustainable.  We can only hope that perhaps then a new vision will be welcomed and spearheaded by the leaders we need so desperately to do so.

-Joshua Schank

Thursday, September 4, 2008

What Are The Candidates Saying About Transportation?

Not much, is the correct answer. (You can bet that they're not whispering about transportation in that photo). At the Democratic convention last week, and at the Republican convention this week, the topic of transportation policy and infrastructure has been absent. Now, maybe some have been talking about it, perhaps minor speakers at non prime-time hours, but of the major voices? Very few. There has been a great amount of focus on clean, renewable energy, and that ties in with transportation in a serious way – but it is separate from the policy and infrastructure issue of roads, rails, and transit.

For example, at the Democratic convention, both Bill and Hillary Clinton mentioned energy, but not transportation. Same story with Joe Biden and John Kerry. Michelle Obama spoke of neither. Transportation made one brief appearance in Barack Obama’s speech when he called for government to “invest in new schools and new roads.”

From major Republicans in Minneapolis there has also been no talk of transportation. President Bush, Rudy Giuliani and Sarah Palin all mentioned energy but not transportation, and Fred Thompson and Joe Lieberman mentioned neither. Perhaps John McCain will throw in a one-line reference like Obama.

Two of the only events we know about that focused on transportation were roundtable discussions held by the Rockefeller foundation at each convention. In fact, National Transportation Policy Project Members participated in Denver and Minneapolis, Jane Garvey and Senator Slade Gorton respectively. Other big names attended, like Pennsylvania Governor Ed Rendell, but so far as we know the forums were not televised.

It is tempting to write that transportation has been conspicuously absent from these conventions, but that’s not exactly fair to the phrase. Transportation would had to have been a common topic beforehand for it to go conspicuously absent; but no politician, going back as far as the early presidential primaries, has made it a key campaign focus.

In many ways this is shocking. For most Americans, transportation - alongside public schools and taxes -is their most frequent interaction with government. Driving their car, taking a bus, these activities are on infrastructure paid for by government. And everyone knows how poor that infrastructure is these days. Congested commutes, potholed roads, infrequent trains, these are problems that when fixed earn deep gratitude from the public. This is not to mention high gas prices, the Minnesota bridge collapse, and recently renewed discussion about the Bridge to Nowhere earmark. Why aren’t politicians talking transportation?

Perhaps most people don’t consider the situation as troubling as I do. That goes against my personal experience, and the experience of almost everyone I’ve talked to regarding the subject, but it’s possible. The more likely cause might be that people have become accustomed to mediocre infrastructure, and just enough is being done to stifle complete road rage. Politicians can get by spreading out projects here and there rather than tackling the larger and tougher choices about how to fund, prioritize and invest in transportation. Given all the talk about leadership at the conventions you would think there is plenty to go around, but transportation is one area that is still crying out for it.

-Daniel Lewis


Friday, August 1, 2008

How Much Does It Cost To Get There/Anywhere?

About 5 hours from now I will clamor onto a bus in Washington, DC and four hours later emerge in New York City. 12 hours after that I will board a plane at JFK airport and get off 16 hours later in Hong Kong. Soon after that I will climb aboard another jet and 5 hours and one layover later I will emerge on the tarmac in Penang, Malaysia, the merciful end to my journey at least for a few days. Surprisingly, every mile of that trip will cost roughly the same amount, whether it is traversed 37,000 feet above the North Pole at 600 miles an hour or at 55mph on the Jersey Turnpike. The cost per mile, based on a back of the envelope calculation, is somewhere between 9 and 13 cents.

Here are the calculations (all distances are as the crow flies, more important than the actual route):
· DC to New York: 205 miles, Bus $19 = 09 cents/mile
· New York to Penang: 9230 miles, $1200 (Cathay Pacific) = 13 cents/mile
· Bonus calculation: Penang to Kuching, Malaysia on Malaysia Air: 948 miles, $100 = 10 cents/mile

The similarity between the per mile bus fare and the per mile airplane fare is striking, and perhaps coincidental. But it raises some interesting thoughts about whether there is a rough baseline cost to travel across modes, something of a “natural level” as economists might like to call it. Are the most competitive fares per mile about equal across modes? In reality, at 9-13 cents per mile this trip to Asia falls somewhere between the cost of other trips and modes. For example, my daily metro ride into downtown DC costs about 51 cents per mile. Driving around in my car costs 34 to 38 cents per mile. When I sometimes fly home to San Francisco on a cheap ticket it can cost as little as 6 cents per mile. Looking at this wide variance, the similarity noticed in the Asia trip seems to become mere coincidence.

The calculations:
· Metro ride Van Ness to Metro Center: 3.6 miles, $1.85 rush hour fare = 51 cents/mile
· Mazda 3: 7500 miles a year, 25-35 mpg, $4.20/gallon gas, $1700 annual insurance = 34-38 cents/mile
· DC to San Francisco on Virgin America: 2437 miles, $150= 06 cents/mile

Taking a step back, what can account for these differences? When it comes to transportation, you are really paying for three things: convenience (i.e. proximity to where you begin you trip and end it), quality (like space, service, and privacy), and speed - plus the provider’s overhead costs of labor, capital, fuel, etc. Obviously there are significant differences in all of these categories between cars, trains, subways, buses, and planes; logically they should be priced very differently.

Yet there remains that surprising price similarity between the bus and two different airlines on this upcoming trip. What does it mean? It’s still unclear to me. But I will have plenty of time to think about it during my upcoming flights, so hopefully I will have an answer two weeks from now.

-Daniel Lewis

Thursday, July 24, 2008

Paying More and Getting Less - How $8 Billion for Transportation Could be Better Funded

Just this week the US House of Representatives overwhelmingly passed a bill to provide the Highway Trust Fund with $8 billion from general revenue. The fund is expected to have a multi-billion dollar shortfall in 2009 because it is not bringing in enough revenue from the gas tax to cover all of the projects for which it is supposed to pay. This shortfall is a result of two things, and although the House bill postpones an inevitable reckoning it does not address the problematic lack of vision in the 2005 transportation bill. That 2005 bill predestined the current shortfall by authorizing more spending than the gas tax could fund (because it did not raise the gas tax), and it doomed the fund to shortfall when oil prices rose and driving declined (thus depressing gas tax revenue, which is fixed and not tied to the price of gas). The White House has threatened to veto the bill, saying it is a gimmick and shifts costs away from users to taxpayers in general. They recommend moving money from the mass transit account to the highway fund. This is also an inadequate response.

The basic problem in funding our transportation system today is that there is little public or political recognition of three truths:

1. Good infrastructure costs money.
2. People are not currently paying the full cost of their transportation, whether it is by vehicle or transit.
3. The best projects are not being funded because no prioritization process exists.

Of most importance in this current blog is truth number two. This is the situation, in very broad strokes: Drivers are not paying the full cost of driving. They create external costs in terms of environmental damage, congestion, injuries, and the national security harm of oil dependence. Transit users also don’t pay the full cost of their movements, and transit systems are generally quite subsidized, yet they create external benefits in that they are often more environmentally friendly, ease road congestion by diverting travelers, and can boost real estate value around subway stops, etc. Both have additional costs that are not mentioned, and both provide other benefits. The key though is that transit’s additional benefits outweigh its externalities, whereas highway’s do not. Funding these systems should stem from that context.

If there was no Highway Trust Fund then obviously there would be a public value in paying for transportation from the general fund. But that’s not the most efficient way to run the system. Charging users an accurate, true-cost price for their driving and transit not only helps maximize the use of already built infrastructure but ensures that enough funding exists for new infrastructure, both roads and transit. Getting the prices right holds a lot of promise for improving the system.

But getting the prices right also means people need to come to terms with the true cost of transportation. In short, it probably means paying more. If they don’t want to directly pay the full cost of moving about, then the system needs to be subsidized, and that means money must be diverted from uses like education, healthcare, and defense. A good transportation system is not free. But funding the system from the general tax fund does not get the same bang for the buck as when users pay directly for their use, either through vehicle-miles-travelled charges, gas tax, pay as you drive insurance, congestion pricing, or combinations of those charges and others. If users pay more directly for their transportation, they really do end up paying less for better system performance in the long run.
-Daniel Lewis

Thursday, July 17, 2008

The Future of Cars

In earlier posts we have commented on how high gas prices appear to have a densifying effect, encouraging people to live closer to where they work and play so that they can avoid the cost of driving. Transit ridership is up. Home prices in urban centers appear to be holding their value better than those in the suburbs. Yet while these trends may develop permanence, it is also important to note that the high gas prices driving this shift are having an equally potent impact on vehicle technology. As technology improves vehicle fuel efficiency, it would make sense that the densifying power of gas prices will be moderated to some extent.

Most people have heard that more hybrid and several new plug-in electric vehicles are coming to auto showrooms in the next few years, signifying a step change in car technology. But there are also significant developments occurring in conventional cars that run on gasoline. And most experts agree that gas will still be an important source of fuel for years to come. It will likely take both innovations to conventional engines and the increasing use of electric cars to wean the country off of oil. Importantly, for vehicles running on gasoline, reductions in fuel consumption translate directly to greenhouse gas reductions: each gallon of gas avoided prevents the emission of about 20-25 pounds of carbon dioxide.

To improve efficiency car makers are focusing on all aspects of a vehicle: its engine, transmission, weight, drag, and rolling resistance. Surprisingly, only a fraction of the energy stored in a gallon of gasoline ever makes its way into the actual powering of a vehicle’s wheels. In fact, more than two thirds of the energy in gasoline is lost by the engine to heat, friction, and idling. More still is lost to the transmission. Automakers are turning to a host of new technologies to fight these losses.

Similar to how the airplane technologies developed for fighters and bombers in World War II led to the first jet-powered passenger aircraft, high gas prices are driving innovations in vehicles that only a few years ago were unimagined or seemed futuristic. Automakers are in some ways facing their own war time situation. Locked in struggle with their competitors, a weak economy, and producing a portfolio of cars that don’t meet consumer’s fuel efficiency needs, it literally is a battle for survival for companies like General Motors. The only way to stay afloat is to innovate and create cars that consumers want – that is, cars that can get more miles per gallon. Whether produced by Ford, Honda, Toyota or GM, it is likely that better cars will emerge from these tough times.

So while transit is alive and healthy, it is also possible cars may emerge from this mess looking better than ever. Which brings up interesting policy questions – assuming we reduce or eliminate the negative environmental externalities associated with automobiles, what should their role be in our future transportation network? How will growth patterns continue to change? Would we seek to infinitely expand roadway capacity? Or would a multimodal approach still be necessary? We’re a long way from needing to answer these questions, but they are worth pondering.
-Daniel Lewis

Thursday, July 10, 2008

Washington, DC Transportation and The Future of Metropolitan Regions

The Washington Post ran an article on Sunday that rekindled old and lingering divisions in the debate about what the future holds for metropolitan transportation, as can be seen in Alan Pisarski’s response. The article points to some of the strategies the District of Columbia is considering for improving transportation safety and increasing revenues. These include their successful bid to change Constitution Avenue NE from a one-way street to two ways, as well as proposals to remove a reversible lane on 16th St. NW, closing the I-395 tunnel, expanding the use of speed cameras, increasing parking fees, and increasing fines for crosswalk encroachment.

The merits of these proposals are debatable, but instead of having a reasoned debate on the subject, those involved seem to have fallen into the trap of the typical cars versus transit, suburbs versus city dispute that has paralyzed transportation policy for decades. Pisarski argues that these types of proposals are “suicidal” for DC because they attempt to consciously make the city less welcoming to vehicles. The city admitted as much, saying that they want to put the needs of their residents and businesses before those of suburban commuters.

This argument misses the point that both the city and the suburbs are part of one large economic engine for the region and the nation. The flow of people and goods through and throughout the region is essential for both the local and national economy. Attempts to separate the economies are pointless. Inner city, inner suburb, outer suburb, and exurb – these are all components that work together to create a vital economic unit of labor and jobs.

The real question that needs to be asked of each of these proposals is “would this proposal benefit the metropolitan area?” (and by extension, the region and the nation). Unfortunately, there is no one to ask or answer this question effectively because there is little impetus for comprehensive regional planning in this country. Neither the federal nor state government effectively encourages the type of regional cooperation necessary to make good decisions about these types of proposals. The end result is a counterproductive clash between city and suburb for resources.

So what would a regional planning body do if it had the power to do it? We actually know the answer to that question because Ron Kirby of the local Council of Governments is quoted in the article as essentially agreeing with the regional policy of trying to get more people living in the District and downtown. This is not at all surprising. When overarching goals such as energy and climate change are considered, of course it makes sense to encourage more people to live and work downtown rather than commute from the suburbs. It is economically and environmentally more efficient to redevelop downtown areas than to build more and more suburban developments dependent on non-existent cheap gas. Moreover, the true cost of driving and parking in cities has been vastly underpriced for decades.

That said, closing roads and raising prices for commuters without making corresponding improvements in mass transit and affordable housing within the city is not a good economic strategy for metro areas. But this is the type of incomplete planning that will continue to occur in the absence of regional planning bodies with the power of the purse. With real power, these bodies could provide comprehensive solutions that, instead of pitting us against each other, could unite us around common goals.

-Joshua Schank

Thursday, July 3, 2008

Can buses compete with trains?

This week, the Metropolitan Transportation Authority (MTA) and local officials in New York announced the beginning of the “Select Bus Service”, the city’s first Bus Rapid Transit (BRT) line. The new line replaces existing limited stop operations on the heavily-travelled Bx12 route across the central Bronx. In other words, it is an express bus that only stops at major stations. The BRT includes a combination of technologies that planners hope will provide faster and more reliable travel. It integrates clearly-marked “stations” with unique street furniture, dedicated bus-only lanes, signal preemption and more widely spaced stops than the service it replaces. Importantly, riders will need to swipe their farecards or deposit coins in curbside machines located at each stop and receive a proof-of-payment before getting on the bus. By reducing boarding times and delays due to traffic congestion, the MTA hopes to eventually shave 10 to 12 minutes off of the 58 minute trip, a roughly 20% reduction in travel time. Since the trip will now take less time, each bus can make more trips, improving efficiency.

This new service is just the most recent example of the fresh ideas that planners are using to spice up the most unglamorous of transit technologies—the bus. While novel to New York, cities across the world have been implementing BRT systems and technologies to considerable success for more than a decade. Bus speeds of up to 25 mph (on average) and subway-like reliability on Bogota’s TransMilenio system have garnered that network global recognition. Today, more than 63 BRT systems operate on six continents, and as many as 93 more are planned worldwide. By integrating new technologies, exclusive rights-of-way and novel service policies, the goal of BRT is to approach the customer satisfaction and service quality of rail transit while avoiding the often prohibitive fixed costs of such systems.

There are some good reasons why the general public is often more favorably predisposed to rail service than buses—particularly local and collector routes. Rail cars are usually more spacious, offer more freedom of movement and are easier to board and exit. The ride on rail is often smoother with fewer sharp turns, no potholes and gentler stops and starts. More importantly, however, rail has a reputation for reliability and frequent service – most subway and light rail riders don’t typically check a schedule, they just show up at the station and wait for the next train. Rail riders generally feel confident that the system will get them where they’re going on time and in relative comfort.

As a result of the inherent operational differences of bus service (running in mixed traffic, often lower operating frequencies, on-board fare collection), it has been difficult for traditional buses to compete with rail in terms of service quality. However, in order to retain the influx of new transit customers driven to bus systems by $4 gas, transit operators need to innovate. By integrating BRT-like technologies on more routes in their networks, transit operators can decrease the uncertainty involved in bus travel—capturing new segments of the market in the process. Particularly on low-frequency collector or suburban routes, providing easily-accessible real-time service data—so that riders can minimize their wait times—may be more important to improving service quality than adding an extra bus or two. In the same way, adding a dedicated bus lane and/or signal preemption along a heavily-travelled corridor will make it easier for buses to keep to a reliable schedule that users can depend on.

As a result, though transit operators in the US can engage in concerted efforts to roll out comprehensive BRT systems along major corridors where they are appropriate, they should not neglect the local service that feeds much of the network. The same technologies and procedures that make BRT a unique and increasingly important transport option can play a significant role in increasing user satisfaction and service quality on all of the other elements of a regional bus network—finally putting rubber and steel on a more even playing field.
-Contributor Andrew Lukmann

Monday, June 23, 2008

New Sources of Traffic Congestion Data

If you haven’t already seen it, we recommend checking out an important new source of real-world traffic congestion data provided by the company INRIX. Bryan Mistele, the president of INRIX, is a member of our National Transportation Policy Project, and his company is the leading provider of real-time, historical, and predictive traffic information. INRIX’s data collection is unique in that it combines Department of Transportation road sensor information with GPS and toll tag data from commercial vehicle fleets like taxis and trucks. In addition, the company can incorporate factors like weather, construction, school schedules, and sports events into its traffic predictions.

This type of hard data seems imminently more valuable than the modeling that has traditionally tried to define congestion, such as the work by the Texas Transportation Institute (TTI), and it is little surprise that TTI’s ranking of the most congested areas differs from INRIX’s. INRIX ranks the top five congested areas as Los Angeles, New York, Chicago, Washington DC, and Dallas. TTI ranks them (based on 2005 data) as Los Angeles, San Francisco, Washington DC, Atlanta, and Dallas. TTI bases its estimates primarily on survey data of travel habits and broad statistics such as traffic volumes and highway lane-miles. The flaws in this type of methodology have long been apparant, but no better alternatives existed. It will be interesting to see how INRIX's data is harnessed gonig forward to overturn other pieces of flawed conventional wisdom. Comments on this thought are encouraged.

In addition to better defining the congestion problem, INRIX’s data enables the pinpointing of specific trouble spots such as interchanges, construction zones, and merge lanes. The value of such cutting edge analysis is that it allows metro areas to identify and fix the flaws in their transportation systems. Experts and planners in the transportation community have long called for better data to help them understand and predict how transportation networks function, and that call is finally being answered by the sophisticated technologies of companies like INRIX. With more real data becoming available each day, let’s hope that real improvements in mobility soon follow.

-Daniel Lewis

Monday, June 16, 2008

A toll by any other name

A recent article in the Washington Post noted the phenomenon that some commuters drive significantly out of their way just so they can use the Dulles Access Road, which has very little traffic because it’s only intended for people on “airport business.” For those unfamiliar with the DC area, the free Access Road to the airport runs parallel to the Dulles Toll Road, which is priced at 75 cents in each direction but is still severely congested at rush hour. Put simply, people coming or going from the airport are able to use the Access Road for free and quick travel, and everyone else is supposed to pay for the Toll Road which still ends up having heavy traffic. As the Post observed, however, some people are rerouting their commutes through the airport just so that they have an excuse to use the Access Road, thus avoiding the traffic and cost of the Toll Road. Two conclusions can be drawn from this sneaky behavior: the Access Road is being underutilized, and the Toll Road is underpriced.

While some people might argue that the Toll Road is overpriced since people are trying to use the Access Road to avoid the toll, this is the wrong conclusion to draw. When people go out of their way to use the Access Road they are not only paying for extra gas, but they are often also paying for a coffee or newspaper from the airport gas station to prove that they are on “airport business.” They are primarily using the Access Road not to avoid the toll, but to avoid the heavy traffic congestion on the Toll Road. If the cost to use the Toll Road was increased in accordance with time of day to fight congestion, then people would have to pay more but would benefit from free flowing driving speeds in return (because some people would choose to change their route or time of commute, thus taking cars off the road).

The lower traffic on the Access Road indicates that it can serve a greater number of people than just those on “airport business.” To take advantage of this, anyone who wanted to use the road but was not on airport business could be charged a toll, and that toll could vary to make sure that the road stayed uncongested for all users, airport travelers and commuters alike.

The current phenomenon is a strange example of congestion pricing by accident. People who sneak onto the Access Road are actually paying a toll to avoid congestion, in the form of extra gas or a cup of coffee. Rather than trying to stop this sort of behavior, the Metropolitan Washington Airports Authority should seek to encourage it by charging a legitimate toll. Many people are clearly willing to pay to avoid congestion, and both the Toll Road and the Access Road should give them that option more directly and explicitly.

-Daniel Lewis

Monday, June 9, 2008

The Surprising Flexibility of American Motorists

In recent days more evidence has emerged of the serious changes Americans are making due to $4 a gallon gas. According to a recent American Public Transportation Association (APTA) ridership report, 85 million more trips on public transportation were taken in the first three months of 2008 than in the same period of 2007, a 3.3% increase over last year’s record total. The largest increases were seen in the nation’s light rail systems, which experienced an average of 10.3% ridership growth over last year, though increases were seen on all major modes. At the same time, the number of auto vehicle-miles travelled (VMT) is beginning to decrease at levels unprecedented in recent history.

Major papers like the New York Times, the Washington Post, and the Associated Press are all writing more frequently about not just increased transit use but also about the purchasing decisions we discussed in our previous blog. Reading between the lines a bit, one detects a bit of shock that Americans are actually changing their transportation habits, because for years the conventional wisdom has been that in the short term our demand for gasoline is what economists like to call “inelastic.” In other words, it was thought that our transportation system was so car and gasoline dependent that people had little flexibility in the short term when gas prices rose.

While it’s true that Americans are feeling a serious sting from these prices, it’s also true that many have been surprised to discover that they have other options they had never really utilized. The conventional wisdom discounted the fact that America is no longer a rural nation: roughly 70% of Americans live in urbanized areas, and many of those areas have public transportation systems whether they are subways, ferries, street cars, or buses.

The fact that we have recently seen such significant shifts in consumer behavior should indicate to policymakers that the auto fuel market is more elastic than most have imagined. Increased transit usage and decreased VMT are only a reflection of the more permanent changes that will likely accompany higher fuel prices, including increased fleet fuel efficiency, urban redensification and more public transport-oriented development. Policymakers should be conscious that they can have a hand in changing (or preserving), the status-quo of transport behavior in this country through their treatment of the fuel tax and other fees. This newly discovered tool in the policy tool box is good news for the unusual alliance of interests that care about our high oil dependence, environmentalists and national security hawks alike.

-Andrew Lukmann and Daniel Lewis

Thursday, May 15, 2008

The Not-So-Strange Impacts of High Gas Prices

News reports have recently started to provide interesting real world examples of what economists have always known: higher gas prices affect the behavior of drivers. Not only are high gas prices causing a dramatic and rapid increase in the use of transit services, but they are also leading drivers to change their vehicle purchasing choices. Although the extent and permanence of these changes are not yet known, these two different effects are interesting indicators of separate consumer decisions. The decision to use transit is a choice that can be made on a day by day basis, if you live in an area with transit availability. If gas prices are high, you can let your car sit and take transit for a few days or weeks, and switch back to a vehicle once prices drop. However, the purchase of a more fuel efficient car indicates a belief that higher gas prices are here to stay for a least a few years – it is a significant investment that goes beyond the choice of whether to take the bus today or not. These changing decisions do not end with car purchases.

If a daily decision can be made about whether to take transit, and buying a vehicle is made with perhaps a 3-6 year future in mind, then the most serious choice consumers make affected by gas prices may be buying a house. This is a decision that is typically in consideration of an even longer time period. Housing decisions are affected by a number of other things besides gas prices, like schools, acreage, and proximity to work, but as gas prices rise and transportation eats up a more significant portion of household budgets, it’s not unreasonable to expect that housing patterns will start to change (assuming that tradeoffs for these other things remain constant). Given the current tumult in the housing market it is hard to see what trends may emerge, but it wouldn’t be surprising to see an increased rate of densification in the following years. Gas prices may be joined by another transportation cost in the near future: variable road pricing. The onset of this additional driving cost could have an even more dramatic effect on land use, vehicle, and daily transportation decisions.

The price incentive to increase the density of land use is not likely to go away, and it may in fact intensify. The ripple effect of high gas costs has not played out in its entirety, but we are certainly seeing some fascinating indicators of how higher transportation costs will alter people’s movement choices and land use patterns.

-Daniel Lewis

Wednesday, May 7, 2008

Two Strategies for Fighting Traffic Congestion

Several days ago Chicago was awarded $153 million by the US Department of Transportation to implement the first ten miles of a bus rapid transit system in coordination with a variable price parking scheme downtown. Compare this strategy to that of Los Angeles, which is moving forward to get $213 million in federal funding for converting HOV lanes to HOT (High Occupancy Toll) lanes as part of its regional congestion reduction demonstration initiative. Why are these two cities going after congestion in such strikingly different ways?

The Chicago plan envisions an eventual 100 mile system of dedicated bus rapid transit with a parking pricing strategy that charges more during peak times. Taken together, these steps will encourage commuters to drive downtown at off-peak hours or to use transit. By using innovative technologies, like traffic lights that automatically change for buses, this system promises to be cutting edge.

Chicago is making this bet: that the indirect cost of congestion in the downtown area is currently so high that putting a direct price on driving will provide benefits that outweigh the costs to the economy. In other words, downtown Chicago has such allure for businesses that they are willing to bear higher costs (i.e. their employees may need to pay more or travel more inconveniently to get to work) to locate there. Improving transit is a key element of this strategy, and a viable one, because of the city’s density.

Los Angeles is going about it differently: the city is implicitly recognizing that the LA region is so diffuse that the allure of the downtown is not strong enough to bear higher commuter costs – instead they are raising the price of driving on the freeways in general for those who want to pay for quicker passage, and investing more in buses and park and ride lots. Taken in isolation, this plan creates few new incentives for the use and viability of alternative modes like transit or walking. But if the metro area proceeds along these lines to a region-wide road pricing scheme it could, in fact, encourage densification of the area’s economic activity - making transit a more viable and attractive option in the long term.

This is not to say that increased transit use should be the end goal of every region. Nevertheless, increasing useful alternatives for commuters is an economic benefit (be they buses, walking, bikes or rail), and those alternatives become most feasible in dense urban areas – which, through no coincidence, are the engines of growth for the nation’s economy. Moreover, while shifting commuters to transit is often a challenge in cities like Los Angeles, it will be an even greater challenge to meet energy security and climate change goals by increasing the overall capacity of the freeway system there. If capacity expansion is necessary for economic growth, that capacity needs to be provided with a sustainable energy source and climate change in mind.

-Joshua and Daniel

Friday, May 2, 2008

Metro to Dulles

Federal aid for the construction of a metro line to Dulles Airport has finally been approved, years after planning began. Sadly, once completed the metro ride from downtown won’t save much time compared to the existing options, which are generally considered poor. One look at the proposed line and the problem becomes clear: from Metro Center there would be 18 stops to the airport and the ride would take an hour or longer. Is this really the best connection to the airport that DC can devise?

Without a doubt, the proposed line, which will connect Tyson’s Corner to the region’s transit network, will promote substantial economic development along the corridor. However, in terms of moving people to the airport it will be less than optimal. Travelers benefit most from an express service – which the proposed line is certainly not. The plan could be revised to remove some of the planned stops, but that doesn’t appear likely or economically practical, since the extra stops may provide more societal value than an express service would.

The struggle here is the split purpose of the line: on one hand it is intended to support economic development along the corridor, on the other hand it is supposed to move travelers to the airport. The two goals are less than perfect companions.

A third option which got only cursory attention was increased utilization of the existing Dulles Expressway. An express bus service with dedicated rights of way out of downtown and onto the Expressway is one of the ideas that may make more sense purely in terms of the best route to the airport. Such a bus with dedicated rights of way would still require significant infrastructure investment, but considerably less than a metro extension all the way to the airport.

Suffice it to say that if multiple options had been equally and objectively considered in the decision of how to get people to Dulles a metro extension may have not topped the list. That being said, it is high time and economically essential that DC finally connects to Dulles via effective transit. Metro service to the airport may not be a perfect solution, but it will certainly be an improvement over the current choices.

-Daniel Lewis

Wednesday, April 30, 2008

Gas Tax Suspension - An Alternative

It is rare that the Presidential campaign has touched upon issues directly related to transportation policy. However, recently two of the campaigns – McCain and Clinton – have come out with proposals to temporarily suspend the federal fuel tax over the busy summer travel season. The reasoning behind their proposals is that both candidates believe the economy needs a boost and that a suspension of the gas tax would accomplish that goal. There is some question about whether a suspension would accomplish that goal. As Len Burman points out, a gas tax suspension might not actually result in a lower price for gas, given that demand would increase. Furthermore, Steve Mufson and our own Paul Bledsoe note that this policy seems to contradict the candidate’s positions on climate change. These two points make this policy proposal questionable from an economic and environmental perspective.

What has not been covered as much in the press is whether this proposal makes sense from a transportation policy perspective. Transportation policy and planning generally operates on the principle that user fees should be aligned with costs in order to maximize efficiency. If a network component is severely underpriced, this creates congestion and potentially other inefficiencies. If the network component is priced too high, no one will use it and this is also inefficient for society. Using this principle, transportation planners typically advocate for things like congestion pricing, which better aligns user fees with the cost of driving.

Most highways, roads, and bridges in this country are perceived as “free” because they are not tolled. The gas tax is the closest thing we have to a user fee for this infrastructure, despite the fact that highways, roads and bridges help to create negative externalities such as congestion, pollution, oil dependence, and climate change. Our gas tax is well below that of other industrialized nations, and this combined with a lack of tolling makes driving relatively inexpensive. Although inexpensive and underpriced driving may foster some economic benefits, is also fosters an inefficient transportation network. User fees need to be brought more directly in line with costs, and suspending the gas tax accomplishes the opposite.

A more innovative and effective proposal could have called for suspending the gas tax in all states that agreed to impose variable pricing on the congested parts of their federal-aid highway system. The new revenues could substitute for the gas tax in those states, with money left over for the states to use as they wish. This would provide economic benefits all around, while still providing for a solid stump speech.

-Joshua Schank

Thursday, April 24, 2008

Pay-As-You-Drive Insurance and True Cost Pricing

In an April 20th article for the New York Times Magazine, Stephen Dubner and Steven Levitt, economists and authors of Freakonomics, argue that Americans drive too much and that Pay-As-You-Drive (PAYD) insurance can forestall some of the excess. A question they leave unanswered, however, is whether federal policy should play a role in incentivizing PAYD insurance and other forms of pricing externalities. Further, they don't elaborate on why PAYD insurance doesn't address the other externalities.

They note that driving has three main external costs, i.e. costs to other people that a driver doesn’t pay: congestion, carbon (and other pollutant) emissions, and traffic accidents. In essence, each time you drive you increase congestion for other people, emit pollutants that harm them (and the environment as a whole), and raise the risk of a causing an accident that hurts them – but you don’t pay anything to compensate them for these effects. Combined, these externalities cost society hundreds of billions of dollars a year. The basic issue then is how to structure the cost of driving so that drivers pay the true cost in terms of congestion, emissions, and accidents. If drivers know and have to pay the full cost of driving, they are likely to adjust their behavior according to how much they value the benefits of driving.

Their full article can be found here.

The most efficient way to price driving is by pricing at the margin, which means charging drivers the true cost of driving one more mile (a true cost factors in the value of externalities, as well as the cost of gas, insurance, etc). With traditional insurance you pay maybe $1000 at the beginning of the year regardless of how many miles you are going to drive, and so there is in fact a strange incentive for you to “get your money’s worth” by driving a lot. The more you drive, the less the insurance costs you on a per mile basis. This incentive is removed with PAYD insurance. By using in-car tracking devices your insurance rate is based on how much you drive, and potentially, on how you drive (i.e. the speed you travel and the severity of your braking). Several insurance companies globally already have PAYD pricing schemes, and Progressive is starting such a plan in the United States soon.

PAYD insurance is, however, directed at the externality of traffic accidents. It is less effective in mitigating congestion and emissions, which need their own pricing systems. Federal policy needs to incentivize all methods of pricing that reduce the Big 3 externalities. Congestion pricing, which charges drivers based on the time of day they drive (you get charged more during rush hour than at 3am), is one such method. PAYD insurance doesn’t diminish congestion by time of day and it doesn’t directly encourage drivers to reduce the emissions caused by their driving. While reducing overall driving will lower emissions (other things held constant), other methods more directly affect driver behavior in that regard, such as charging more at the dealership for inefficient cars, and pricing fuels based on their CO2 emissions.

A sound federal approach to dealing with externalities is one that encourages and incentivizes pricing innovation. The federal policy role for reducing externalities associated with driving is clear, but the federal role in PAYD is not. The widespread offering of PAYD insurance would be a welcome boon to many consumers and the country as a whole, but it only gets us part of the way towards reducing the other important externalities of congestion and pollution.

-Daniel Lewis

Thursday, April 17, 2008

The Delta + Northwest Airline Merger

The proposed merger of Delta and Northwest, which would result in the largest airline the world, is not a surprise to industry observers. Analysts have recognized for years that consolidation is most likely the only way for the major carriers to survive. Rising fuel costs along with a slowing economy and intense competition make this a difficult time to be an airline. By consolidating their networks, airlines can affect the only one of these factors within their control, which is the competition component.

However, federal regulators have prevented such mergers before, and there is no guarantee that this one will go through. Congress often argues against such mergers in order to protect the traveling public from higher fares, though this is probably less a concern to them than likely strife from the necessary consolidated labor agreements. The reality of airline competition is that despite the fact that airlines rarely make money, there is almost always another startup waiting to come in and lower fares. As long as the FAA protects the new entrants from being squashed by the larger carriers through predatory pricing (intentionally losing money with drastically low fares and high frequency in order to put a weaker competitor out of business), competition goes on.

Therefore, it is almost certainly in the interest of the public for this merger, and the subsequent ones that will no doubt follow, to go through as long as the FAA does not simply leave it there. Consolidation does not necessarily mean decreased competition, and so long as a proper balance between economically sensible consolidation and energetic competition is maintained, both consumers and airlines will benefit. In the face of this proposed merger, and the others that may follow, government scrutiny and regulation of the industry might increase to ensure that proper balance is maintained.
-Joshua Schank