September 14, 2018 4:28PM

Government Crowd Out in Transportation

By Chris Edwards

The existence of government infrastructure deters or “crowds out” private investment. Many airports, bridges, and urban transit systems in the United States used to be private, but during the mid-20th century entrepreneurs were squeezed out by governments.

The provision of federal aid or subsidies to government-owned airports, bridges, and transit facilities was a key factor in pushing out private enterprise. That is one reason why I favor repealing federal aid for transportation.

AIRPORTS

In the early years of commercial aviation, private airports served many American cities. For example, the main airports in Los Angeles, Miami, Philadelphia, and Washington D.C. were for-profit business ventures in the 1930s.

The airports were generally successful and innovative, but they lost ground over time due to unfair government competition:

City governments were often eager to set up their own airports, even if private airports already served an area.
Cities issued tax-exempt bonds to finance their airports, giving them a financial edge over private airports.
Private airports pay taxes. Government airports do not, giving them another financial edge.
The U.S. military and the Post Office promoted government airports over private ones.
Federal New Deal programs provided aid to government airports, not private ones.
Congress provided aid to government airports for national defense purposes during World War II.
The federal Surplus Property Act after the war transferred excess military bases to the states for government airport use.
The federal Airport Act of 1946 began regular federal aid to government airports, not private ones.
The new Federal Aviation Administration in 1958 “prohibited private airports from offering commercial service.”

So governments banished entrepreneurs from a major part of America’s aviation industry. In the early 1930s, about half of the nation’s more than 1,100 airports were private, but by the 1960s, private commercial airports had mainly disappeared. Very sad, as I discuss here.

However, there is good news about airports. A privatized commercial airport industry is booming abroad, particularly in Europe. U.S. policymakers should let entrepreneurs take another crack at our airport industry.

BRIDGES

Bob Poole discusses government crowd out of private bridges in his new book Rethinking America’s Highways. In the 1920s, four main bridges built in the San Francisco area were private toll facilities. In the 1930s, the Golden Gate Bridge and Oakland Bay Bridge were built as government toll facilities.

Poole picks up the story:

All six of these bridges suffered declines in traffic and revenue due to the Depression, but the Bay Bridge and the Golden Gate opened closer to its end and were therefore less affected. Their financing costs were also lower, with the Bay Bridge getting low-cost financing from the New Deal’s Reconstruction Finance Corporation, and the Golden Gate being able to issue tax-exempt toll revenue bonds, rather than the taxable bonds issued by the toll bridge companies.

In addition, the California legislature voted in 1933 to relieve the Bay Bridge of having to cover operating and maintenance costs out of toll revenues, allocating state highway fund (gas tax) monies to cover those costs. The four private toll bridges all went into receivership by 1940. Unlike the Ambassador Bridge (in Michigan), they were unable to work out refinancing plans and were eventually acquired by the state, with the Dumbarton and San Mateo transfers not taking place until the early 1950s; their shares traded on the Pacific Coast Exchange until then.

A similar fate befell many of the other 200-odd private toll bridges during the Depression. The Reconstruction Finance Corporation provided low-cost loans to public-sector toll bridges, but not to investor-owned ones. Relatively new government toll agencies offered buyouts to struggling bridge owners during those years. The New York State Bridge Commission bought four private toll bridges over the Hudson River; the Delaware River Joint Toll Bridge Commission acquired at least six private toll bridges; and the city of Dallas bought the toll bridge on the Trinity River in order to eliminate tolls.

By 1940, the Public Roads Administration (the former Bureau of Public Roads, now part of the Federal Works Agency) reported that the number of US toll bridges had declined to 241, of which 142 were still investor-owned. But nearly all the bridges had been bought out by toll agencies or state and local governments by the mid-1950s.

URBAN TRANSIT

The early history of urban transit in America is one of private-sector funding and innovation, as Randal O’Toole discusses in this study. Hundreds of cities had private streetcar and bus companies moving people in downtowns and the growing suburbs in the early 20th century.

As the century progressed, however, the rise of automobiles undermined the demand for transit. At the same time, transit firms had difficulty cutting costs because their workforces were dominated by labor unions and governments resisted allowing them to cut services on unprofitable routes.

The nail in the coffin for private transit was the Urban Mass Transportation Act of 1964, which provided federal aid to government-owned bus and rail systems. The act encouraged state and local governments to take over private systems, and a century of private transit investment came to a close.

This Transportation Research Board study discusses the decline of private transit:

As the declining fortunes of America’s cities gained national recognition during the 1960s, Congress passed legislation that for the first time gave the federal government a prominent role in the provision of urban transit. The Urban Mass Transportation Act of 1964 (later redesignated the Federal Transit Act) provided loans and grants for transit capital acquisition, construction, and planning activities.

… Notably, only public entities could apply for the federal grants. Given the availability of federal aid, many cities, states, and counties purchased or otherwise took over their local rail and bus systems. Thus by the 1970s, a largely new model of transit provision—public ownership—had become increasingly prevalent in the United States. Many jurisdictions consolidated the operations of smaller private and public systems under the auspices of regional transit authorities. A few states, such as Connecticut, Rhode Island, and New Jersey, formed statewide transit agencies.

… In 1940, only 20 transit systems in the country were publicly owned, and they accounted for just 2 percent of ridership. By 1960, although the vast majority of all systems were still in private ownership, properties in public ownership accounted for nearly half of all transit ridership, mainly because the country’s very largest systems were publicly owned. By 1980, more than 500 systems were publicly owned, accounting for 95 percent of ridership nationally.

In sum, the bad news is that when the government advances, the private sector retreats. But the good news we have seen around the world in recent decades is that when the government gets out of the way, the private sector steps in to provide better services at lower costs.