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Backgrounder #750 on Smart Growth

January 30, 1990

Sam Skinner's Sensible National Transportation Strategy

By

(Archived document, may contain errors)

. 750 I Jan~ary30,.1990 a Secretary of Transportation Samuel Skinners highest priority has been to design a M~~OIM~ transportation strategy that would be a comprehensive statement of federal transportation policy. This has generated much understandable apprehension among supporters of market-oriented transp o rtation policies, evoking images of centralized industrial planning and national industrial policy. By contrast, many opponents of market approaches eagerly have awaited Skinners plan, expecting it to signal the beginning of greater federal involvement in transportation.

Though the Skinner strategy is not to be unveiled formally until mid February, the Secretary offered a sneak preview of it earlier this month. It surprised both camps. Far from calling for centralized planning, Skinner indi cated that the policy document would be a strong statement of market prin ciples. A U.S. transportation policy, Skinner said, should increase our reliance on the private sector and state and local governments stimulate competition and allow the magic of the marketplace t o work Market Core. Skinner should be applauded for this strong reaffirmation of the-marketspotential contribution to improving Americas transportation system. By placing this at the core of his transportation strategy; he indicates clearly that deregulat ion and privatization are not transitory phenomena, but instead are permanent parts of the transportation landscape i 1 1990.

Samuel K. Skinner, Remarks before theTransportation Research Board, Washington, D.C January 10 I i. 6 0 In light of this, Skinner ordered a top-to-bottom review of Americas transportation policies and called for a formal, written strategy.This idea stenbed from his experience as chairman of the Chicago-area Regional Transportation Authority which formulated a comprehensive strategic plan under his direction. Development of a such a policy at the federal level has been much more complicated, involving massive amounts of infor mation and public comment on what has been going right and wrong with federal transportation policy. working g r oups within the Transportation Department to examine intercity passenger travel, intercity freight shipping, international transportation urbdsuburban mobility, rural transportation, and what he called innova tion and human factors Gathering Comments. The transportation strategy study officially began last July, with a day-long seminar chaired by Skinner at the National Academy of Sciences in Washington. Since then, the six working groups have held some 117 public hearings, focus group meetings, and other e vents in 43 cities across the country, gathering comments from over 1,100 organiza tions and individuals tions. Two already have been issued: Budding the National T-oHatibn Policy, summarizing the goals of this effort, and Moving America- A Look Ahead to t he 21st Century, containing the proceedings of the July seminar. A third publication,America Speaks Out on Transportation, summarizing the comments received from the public, is expected soon tant, detailing the federal governments transportation strategy a nd making specific policy recommendations 2 I I rc c To collect this information and examine the issues raised, Skinner created This effort will produce at least four Department of Transportation publica The final report, scheduled for a February release w ill be the most impor PLAN VS. STRATEGY: THE CRITICAL DISTINCTION This transportation strategy project understandably caused concern that it would become a blueprint for a federal industrial policy for transportation Thomas Gale Moore, a member of Ronald R eagans Council-of Economic Advisors, for example, wrote that no one knows what the secretary intends to propose, but the signs are ominous. Moore pointed out that the last time the government came up with a plan for a major industry, the country got an in d ustrial policy for energy that resulted in fraud, foul-ups, and fuel lines.3 Fred Smith, President of the Competitive Enterprise Institute, a Washington I I 2 See Regional Transportation Authority, Sbutegic Plan, January 1989 3 ThomasGale Moore, A Jimmy C a rter for Transportation? The Wull Swet Joumul, September 22,1989 3 based think tank, was even more direct, writing that with the pressure for centralized planning, consumers dont stand a chance.4 Inviting Misleading Comparisons. Skinner hkelf appeared to f uel such speculation. First, by referring to this project initially as a transportation plan or a transportation policy, he seemed to invite comparisons to M tional industrial policy. More generally, in describing why such a policy docu ment was needed, S k inner often compared his role to that of a manager of a private firm. Just as a manager would not conduct business,without a strategic plan, neither should the federal Transportation Department, Skinner would explain. 5 The problem, however, is that priva t e managers require plans because they must decide where, how much, and in what to invest the firms resources. Ex cept in the few areas under its direct control, like air traffic control, the Transportation Department does not allocate resources, but merel y estab lishes the rules under which the private sector or local agencies do so. There fore Transportation has little need for a business plan.

A national transportation strategy, however, is something quite different from a plan. While the word plan conno tes centralized allocation of resources, and while even the word policy connotes industrial policy strategy merely indicates a set of guidelines to assist Transportation in day to-day decision-making.

Such a strategy is a useful, if not necessary, endeavo r. Transportation is one of the federal governments largest and least manageable bureaucracies. Its component agencies long have been known for their independence. This has meant that the overall strategy indicated by aTransportation Secretary has not alw ays been the one eventually pursued, for instance, by the Federal Avia tion Administration or the Coast Guard.

Important Distinction. Apparently sensitive to the important distinction be tween a p1anand a strategy, Skinner in recent months has emphasized t hat his forthcoming document is not a transportation plan, or even a policy, but rather a strategy. The degree to which the final written docu ment fits this description will be a major test of the transportation strategy project. If the document is not a plan it will avoid substantive conclusions concerning the allocation of transportation resources. It will not call for federal efforts to develop particular new technologies, promote particular changes in traffic patterns, or support particular favored tr ansport modes.

Instead, if the report is a transportation strategy, as Skinner suggests, it will outline the regulatory framework needed to allow transportation services 4 1989 5 to the 2lst Centwy (Department of Transportation, 1989 p. 2 Fred L. Smith, Jr mlnmiw Sam Skinner: Secretary of Re-Regulation, CEI Updufe No. 11, November See Samuel K. Skinner, Remarks by the U.S. Secretary of Transportation, Moving Amencc A Lodc Aheud 4 I to be provided most efficiently. It will not dictate any particular results , but will establish good rules for the transportation game without dictating who wins the game FILLING IN THE DETAILS OF THE TRANSPORTATION STRATEGY In his January 10 speech, Skinner outlined five basic goals that will be at 1) Stimulating private investm ent in transportation 2) Removing unnecessary regulations 3) Applying the user fee principle 4) Strengthening local flexibility; and 5) Promoting research and development.

These principles provide an excellent start toward defining an effective transportat ion strategy. They make clear that the federal governments role in transportation is not to dictate results, but to create an environment in which the private sector and markets can work. To be even more effective, however some of the criteria could be mo dified or expanded.

For instance, the phrase stimulating private investment focuses on the private sectors role as an investor in projects. It is not clear that the phrase envisions, as it should, the private sectors more comprehensive role as an operator or owner. Private investment is just the first step; there can be even greater gains in efficiency from increased private involvement. The phrase stimulating private investment thus should be expanded to reliance on the private sector. Similarly, removing unnecessary regulations could be ex panded to the more inclusive principle using market processes. And Skinners fifth principle, promotmg research and development, actually could be dropped, since its purpose could be fulfilled through application of the other four. Research and development, for instance, usually is best spurred by the incentives present in an unhindered market system 1) Reliance on the Private Sector.

In contrast .to those in many other countries, most American transportation carriers alw ays have been primarily privately owned, including airlines, truck ing firms, and shipping firms. Since thesale of Conrail by the federal govern ment in 1987, all freight railroads have been privately owned. Large portions of the American transportation n e twork, however, are still government owned.The air traffic control system and Amtrak, for instance, are owned by the federal government, while local governments own most airports, roads and urban transit systems systems, the lack of private sector involve m ent imposes costs. The most ob the heanof his final ra.tegy,s,ta.t.ement Thesgare q I c The four core principles of national transportation strategy thus would be While there are varying justifications for public ownership of each of these 5 vious is mone t ary. Transit studies have shown, for instance, that private operators can cut costs of transit s stems 30 percent on average while main taining or even improving service A less obvious, but perhaps even more important advantage of private ownership is inc r eased innovation. Competition and the profit motive lead private organizations to look constantly for efficient ways to deliver goods and services to the consumer. By contrast, public organizations have little reason toinnovate andLoften face political,di sinentives to do so. They usually have neither competition nor shareholders to whom they are account able. Innovations that would decrease the number of employees or reduce spending, moreover, often generate political resistance.

While innovation is diffic ult to quantify, an overwhelming share of the major transportation innovations seem to have been developed by the private portion of the system. Overnight package delivery, airline hub-and-spoke routing systems, computerized airline ticket reservation sys t ems, just-in-time freight delivery systems (through which goods can be ordered just hours before they are need d and containerized shipping have been all developed in the private sector. A list of innovations stemming from the public sector meanwhile, wou ld be relatively short. In fact, most public systems, such as air traffic control, long have been criticized as being unable to keep up with ad vancing technology.

Because of this, the Skinner strategy should state clearly that his depart ment supports ext ension of private sector involvement, ownership, and opera tion in transportation systems possible. This should include Airports. Although all major U.S. airports are now owned by government mostly by units of local governments, they can be turned over to the private sector and efficiently operated? Several localities in the U.S. recently have expressed an interest in airport privatization, including Albany and Los An geles. One impediment, however, has been an uncertainty concerning the federal policy tow ard privatization of airports that receive federal funds. The Transportation Department should state clearly its support of private involve ment, and should work to eliminate federal barriers to airport privatization.

Air trafKc control. The air traffic co ntrol system long has suffered from in flexibility, obsolete technology, and even inadequate funding; These problems could be eased through increased private involvement. Possible ac f 9 6 Wendell Cox and Jean Love, A Public hqme For Public Twit, Reason F o undation Local Government Center Policy Study No. 207, January 1990, p. 22 7 See, William B. Johnston, "Transportation for the Next Century in Moving Ameicu, opht., p. 28 8 In Britain, for example, the major London airports are already privately owned. Se e James L. Gattuso Privatization of Britain's Airports: A Model for the U.S Heritage Foundation Intemutionul BnGng No. 17 January 23,1989 6 I tion ranges from contracting with private firms to run discrete parts f the sys tem to creating a new private comp a ny to operate the entire system; 8 Highways. Despite the need to improve the highway system, federal and state governments are hard-pressed to find the funds for doing so. The private sector can help toward a solution by providing financing for roads, or b uilding needed roads itself. For instance, a major private toll road, the first in Vir ginia this century soon will be built near Washington, D.C.TheTransporta tion Department should,encourage such endeavors Urban mass transit. An increasing number of loc a l governments are lowering mass transit operating costs and improving service -by letting private firms, chosen through competitive contracting, operate transit sys tems." Federal policies have, and should continue to, encourage this ap proach Passenger r a il. While Amtrak, the federally owned passenger rail system loses money, certain portions of the system, such as the Northeast Corridor between Washin on and New York, possibly could become self-supporting in private hands. The Transportation Department s hould take steps to ex plore this option. fl 2) Use of Market Processes.

Since the late 197Os, reliance on the market processes of supply and demand to determine the prices, volume, and quality of services, has been a cornerstone of federal transportation policy. Before that time, many major modes of transportation, such as trucking, railroads, and airlines, were heavily regulated by the federal government. The result: they were forced t o respond to the dictates of regulators rather than to the demands of consumers. With passage of the Airline Deregulation Act in 1978, and the Motor .Carrier Act and Staggers (railroad deregulation) Act of 1980, this began to change.

The results have been remarkable. Air fares fell about 20 percent to 30 per cent after deregulation, making travel affordable for millions more Americans. In 1978, U.S. airlines carried only about 275 million passengers.

Next year, due to deregulation, this figure will approac h 500 million. At one time a luxury affordable only by the wealthy, air travel now is an option for al most all Americans 9 Butler, e Privatizdon: A Stmtcgy for Tming the FedemI Budget (Heritage Foundation, 1987 pp. 51-58 10 See Cox and Love, op. CiL 11 S e e, Stephen Moore Privatizing Amtrak's Northeast Comdor,"in Moore and Butler op. cit, pp. 83-94 See, James L. Gat Creating A Private Air Traffic Control System b Stephen Moore and Stuart M 7 Rail and truck shipping also have improved tremendously with ship p ing costs dropping by about 17 percent for rail and 12 percent to 25 percent for truck shipping in the years after deregulation. Even more important, safety has continued to improve: the airline accident rate is down by about a third and rail accidents by about two-thirds, since deregulation It is crucial that Transportation continue to defend these deregulation suc cesses against any possible rollback. Over the past twelve years, the Depart ment has done this well, successfully protecting these-reforms fr o m numerous assaults. Skinner must now make it clear that he will do the s&e.Then he should declare that his Department wants to extend market processes to new areas or to where they are only partially applied. This should include Airport landing fees. At m ost U.S. airports, landing fees are set without ref erence to the demand for or availability of a particular landing slot. Example Planes taking off or landing during times of peak customer demand pay the same fee as planes at non-peak hours. This contrib u tes to the difficulty that airports have handling increased traffic loads. The Transportation Depart ment should encourage use of market-oriented systems, such as peak-hour surcharges or periodic auctions, of available landing slots. By more closely tying cost to supply and demand, such procedures would encourage better use of airport capacity 13 Trucking. While interstate trucking mostly has been deregulated, some cumbersome regulation remains. Many states, moreover, still impose com prehensive trucking r e gulation Skinner should urge repeal of both state and remaining federal regulation 14 Railroad costs. A variety of federal laws restrict the ability of railroads to lower their costs of doing business. Rail labor protection rules, for instance require pay m ent of up to six years' salary for employees laid off due to mergers or track abandonments. The 1926 Railway Labor Act and the 1908 Federal Employers' Liability Act restrict the ability of railroads to negotiate new employment contracts and establish effi cient compensation systems.

Each of these statutes should be reformed, and rail management and labor al lowed to establish their own terms of employment with a minimum amount of federal intervention 12 See generally, Ralph L. Stanley he Department of Trans portation in Charles L. Heatherly and Burton Yale Pines, eds Man fbrLea&mh p>
111: Policy Smegies for the 1990s (The Heritage Foundation, 1W) pp 419-437; see also Matthew B. Kibbe, Furring conslcmers on the Far Tmck (Transportation Reform Alliance 13 See Ja mes L. Gam A Propod to Untangle America's &Travel Heritage Foundation Backpunder No. 600, August 27,1987 14 See James L. Gattuso, Time to CompleteTruclring Deregulation," Heritage Foundation Buckgmder No 481, January 16,1986 1989 8 3) User Fees To a great extent, the U.S. transportation system correctly operates on the assumption that users should pay the cost of the services they use.This not only encourages efficient use of transportation services by sending signals to consumers and suppliers concerning the relative value of those services, but also protects non-users from bearing undue costs t66de'd to ares where'users are' not now chaged in proportion to the services they receive, or are now receiving subsidies from the taxpayer or other users.

Among th e opportunities that Skinner's staff should explore are Toll roads. Although highway costs today are indirectly paid for by users through gasoline taxes, direct tolls would distribute costs much more precise ly, creating incentives to reduce congestion. S t ates, however, currently are barred by federal law from charging direct tolls for highway use. Skinner should seek repeal of this prohibition. Tolls should be permitted, at least where the revenues do not exceed the sum needed for highway purposes Airport fees. Some groups of aviation users, particularly small private aircraft, pay minimal fees for use of airports, sometimes as little as $25 per 1anding.These fees should be adjusted so that all users pay their share. While these fees are set by individual airports and not the federal government, Skin ner should make clear that the federal government will not stand in the way of any needed adjustments.

Amtrak passenger rail senrice, although the typical Amtrak user has an in come well above the national aver age. Transportation should seek elimina tion of this subsidy as part of a privatization plan for Amtrak Maritime shipping. The American maritime industry enjoys a variety of subsidies, ranging from direct operating funds to mandated cargo preference for U . S.-flag ships in shipments by the federal government. Skinner should order a thorough examination of these subsidies, and suggest eliminating those not needed for national defense. The cost of those subsidies that are found to be needed should be transfer r ed to the Defense Department budget 4) Local Flexibility ments the flexibiliq to determine and address their own transportation problems. Many areas of transportation policy, such as highway and urban mass transit questions, are primarily issues of local c oncern. Local officials not those in Washington, know best where new roads are needed, or whether and what kind of mass transit system is needed. Local officials, much more so than Washington, can be held accountable by the voters when those needs are not met -or when tax money is being wasted.The federal government in recent years, however, has been encroaching increasingly upon the flexibility and responsibility localities need to properly do this job.Two major areas of concern are TheTransportation Depa r tment should urge that this principle be ex Amtrak The U.S. taxpayer now pays some $600 million per year to support Federal transportation policy has and should continue to give local govern 9 Highways. Under the interstate highway program, the federal go v ernment pays for the construction of, and additions to, interstate highways.The federal government increasingly has used this program to dictate transportation policy. The 1987 highway reauthorization bill, for example, mandates over 100 "demonstration pr o jects" that typically are pork barrel, including an ac cess ramp for an Ohio amusement park and a parking garage in Chicago. The federal government also imposes requirements that increase the cost of high- way construction, such as the 1931 Davis-Bacon Ac t , which effectively re quirk payment of uni6n wages'in fdderdly supported projects even when less costly labor is available As a first step toward giving localities greater flexibility in transportation policy, federal requirements such as these should be lifted. More generally with the interstate highway system nearly complete, poli makers should con sider returning highway funding completely to the states Urban mass transit. The federal government now provides about $3.5 bil lion per year to states for c o nstruction and operation of transit systems.These subsidies can seriously distort the incentive of local officials to spend funds sensibly. For instance, since the federal government now pays up to 80 per cent of the capital cost of a new rail or bus syst em, such systems may be built even if they are uneconomical or if another type of system is more suitable.

Rather than requiring federal funds to be spent by local governments on specific kinds of projects, theTransportation Department should urge Con gres s to create a transportation "block grant" that localities could spend oy6 whatever systems they find to be best for their urban transportation needs ci CONCLUSION As outlined so far, Skinner's transportation strategy is a welcome statement of what the fe d eral government can and should do to improve the nation's transportation. While Skinner's project has caused many understandable anxieties, his recent speech previewing the strategy indicates that it will be a strong reaffirmation of market principles, ra ther than a call for central plan ning. For this he should be congratulated including in his final strategy statement, expected in mid-February, recom mendations for specific actions and reforms to reach his general goals.

Moreover, he and his department-s hould apply these principles routinely in the decisions they make and the policy initiatives they propose, so that they become more than just words in a report. In this way, this policy statement Real Benefit. Skinner now needs to follow through on this e x cellent start by 15 See Stephen Mm "The Highway AuthoriZatian Bill: Inviting A Presidential Veto," Heritage Fouadation Issue Bulletin No. l27, February 27,1987 16 See, Stephen Moore Rx for Aiting US. MassTransit Poky A Dose of Competition Heriw Foundation Backpundm No. 542, October 29,1986 I unlike most such documents produced in Washington, could be of real benefit to U.S. travellers and consumers.

James L Gattuso Mcbnna Senior Policy Analyst in Regulatory Affairs 5 11

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