Valley Metro - Phoenix Metro Bus Transportation

Issue Brief

How Public Transit Harms the Economy

Proponents of expanded tax expenditures on public transit argue that spending money in this way is an “investment” that will revitalize a community. In 1991, the American Public Transit Association (APTA) issued a report (Transportation Spending and Economic Growth: The Effects of Transit and Highway Expenditures) claiming that every dollar spent on transit would generate $3.29 in long term benefits. In 1997, the “Campaign for Efficient Passenger Transportation” (a coalition of pro-transit organizations) published a report entitled Dollars and Sense: The Economic Case for Public Transportation in America. The Dollars and Sense report says that public transit “pays a handsome return on investment to the taxpayer, to the business community, to the transit user, and even to the motorist who never uses transit.”

In 1999, a report from The National Business Coalition for Rapid Transit asserted that every billion dollars invested in public transit capital projects generates 30,000 jobs. A study by Cambridge Systematics claimed that 314 jobs are created for each $10 million invested in transit capital funding.

Misconstrued Cause-and-Effect

The touted benefits from transit expenditures sound impressive. However, these analyses are based on correlations of transit expenditures and historical growth of the economy. Correlations do not prove cause-and-effect. They merely demonstrate that two things are happening simultaneously. The simultaneous growth of transit spending and the U.S. economy could be more accurately explained by inverting transit boosters’ presumed cause-and-effect. It is ludicrous to hypothesize that spending on trains and buses that have carried a dwindling share of urban travelers has played a significant role in the post-World War II growth of the U.S. economy. Growth of income, sales, and property values during this timeframe provided targets for the imposition of taxes with which to subsidize money-losing ventures in public transit. Far from being a source of economic prosperity, public transit has survived as a parasite, living off the wealth generated by more productive segments of the society.

Opportunity Cost

Opportunity cost is a term used by economists to account for the alternative uses of resources. Money spent on public transit can be shown to employ workers in the construction of rail lines, the driving of buses, etc. This first round of spending furthers subsequent rounds as these directly employed workers spend their wages at supermarkets, department stores, etc. This “ripple effect” is not unique to public sector outlays (though many government “analyses” and boasts appear to assume that it is). All economic activity generates “ripple effects.” Before we can conclude that the “ripple effects” of public transit expenditures are a plus for the economy, we need to consider them in comparison with the effects of alternative uses for the money spent on transit.

Over the last 40 years we find that public transit spending can be credited with assets and returns that currently support about one million jobs. This sounds pretty good until it is compared with the outcomes that might have been achieved if the funds poured into money-losing public transit had been used in some other ways. Since public transit has consistently had a negative return on investment, the assets acquired with the funds put into it have been largely consumed. As a result, the $480 billion in taxpayer money invested in public transit has a current estimated residual value of only $22 billion. If the $480 billion in taxes that has been spent on public transit had been “spent” on a “break-even” investment, the assets would have been conserved and the economy could theoretically have supported 21 million more jobs than it currently does. If the $480 billion in taxes that has been spent on public transit had been “spent” on an investment yielding only a 5% return, the assets would have grown and the economy could theoretically have supported 33 million more jobs than it currently does.

Conclusion

Analyses like these are exceedingly “rough” estimates. Everything except the “test variable,” in this case, the way $480 billion could have been invested was “held constant.” In the real world everything cannot be “held constant.” The important point is the relative magnitudes of the impacts of each alternative. Given the sorry financial performance of public transit over this 40-year period, it seems clear that in terms of economic growth, we would have been considerably better off if a number of plausible alternatives to spending the $480 billion in taxes on public transit had been implemented instead. Therefore, when opportunity cost is taken into account, there can be no question that putting money into public transit lowers the economic growth rate, consumes capital, exterminates job opportunities, and worsens the finances of federal and local governments.

Just as the past investment in public transit has acted as a drag on the economy, so, too, will future investment. Those who expect an economic stimulus from building light rail in Phoenix are sadly mistaken. The consultants who lobby for and design the system, the contractors who build it, the real estate speculators who just happen to own strategically placed parcels of land, and the foreign manufacturers of rail equipment will profit handsomely. Almost all the rest of us will be stuck with an endless stream of deficits and debt that will make us poorer.

To view a copy of this table see this word document.

This document was published by the Laissez Faire Institute, (480) 225-9832; e-mail jsemmens@cox.net. Permission to reprint this document, or any part thereof, is hereby granted. For more information see http://www.NoRailForScottsdale.com & http://www.goldwaterinstitute.org/Common/Files/Multimedia/399.pdf.