"The only way in which a human being can make some approach to knowing the whole of a subject is by hearing what can be said about it by persons of every variety of opinion and studying all modes in which it can be looked at by every character of mind. No wise man ever acquired his wisdom in any mode but this." -John Stuart Mill

Monday, March 8, 2010

Chris Christie Takes on NJ Transit

The reliably blue New Jersey has not had a Republican governor in roughly eight years. The fact that it now does has been widely interpreted as a signal that the public is finally clamoring for elected officials who will be willing to solve long-term fiscal problems at any cost – even that of their own political futures. Based on the work of his first month in office, it would seem that Chris Christie has already begun to espouse such an approach.

Within weeks of being sworn in, Christie announced a freeze on $1.6 billion in unspent funds in an effort to address his state’s massive budgetary shortfall. One of the most notable consequences of the freeze is a 10% reduction in the $300 million public subsidy given annually to the state’s semi-autonomous transportation authority, NJ Transit. In response to this announcement, the agency announced on Friday that it intends to enact systemwide service reductions and to increase fares by an average of roughly 25% beginning this spring.

Christie has called NJ Transit a “political patronage pit” that can afford to eliminate waste without asking riders to reach deeper into their pockets. He has suggested that instead of taking such drastic steps, the transit authority keep costs down by more aggressively resisting the demands of its unionized workers for generous benefits. Christie’s approval rating currently stands at around 52%, so the jury is still out on whether taking on NJ Transit is good politics. The more interesting question is whether it is good policy. Does the governor’s boldness constitute an important first step toward reestablishing the soundness of New Jersey’s finances, or will it simply lead to even more problems in the future?

It is important to note that the fact that NJ Transit has to be subsidized to the tune of several hundred million dollars annually is not in and of itself an indication that the agency is inherently inefficient or poorly administered. That transportation systems are so often publicly funded and operated is a direct consequence of the fact that markets generally fail to establish such systems on their own. A rail network, for example, entails relatively large fixed costs that few firms may be willing to incur, especially when faced with the reality that the demand for train rides might very well be insufficient to guarantee that the venture is profitable.

The issue is therefore not what NJ Transit ought to do to eliminate its operating deficit, but what it must do to minimize it. Wholesale privatization is likely not a viable option; various aspects of NJ Transit service are already administered privately, making it hard to see how $300 million in annual losses could be due to waste and “political patronage” alone. The challenge is instead for the agency to determine how closely its proposals adhere to a zero elasticity pricing standard.

As described in a study by the National Center for Transit Research at USF, the pricing of government services ought to begin on the assumption that their demand is perfectly inelastic, i.e. that the same quantity will be demanded at any price. According to this model, rates should initially be set at a level that best addresses given budgetary exigencies, and can be adjusted thereafter as deviations from the zero-elasticity ideal are observed in actual usage patterns. The crucial insight is that the zero-elasticity assumption is precisely that: an ideal, albeit an ideal that offers a reasonable starting point for a successful pricing scheme. It should not be interpreted by governments as a justification for raising rates to solve fiscal crises without having to worry about the subsequent impact on demand; imprudent attempts to reduce the amount of subsidy that public transit systems require may actually lead to larger subsidies becoming necessary in the future.

The central question that must be answered is therefore an empirical one: what exactly is the price elasticity of demand for public transportation in New Jersey, and will the planned rate increases have the intended effect of reducing NJ Transit’s structural deficits? The cited study presents a range of estimates for the PED of public transit, with the lowest guess having been obtained from a 1992 metasurvey of 50 other studies that concludes that the average value is around -0.43, which would imply that NJ Transit’s 25% fare hike will at best lead to an 11% decrease in ridership. The NJ Transit website notes that ridership has already decreased by about 4% over the past year “as a result of the economy and low fuel prices.”

This brings us to the final consideration: does the PED for public transport vary significantly over time? The study concludes that it does, and that in some cases the shift from short run inelasticity to long run elasticity can occur as soon as a year after the fare increases. It estimates that own-price PED can become as large as -1.59 as commuters switch to other modes of transportation.

Garden State commuters will understandably be upset with the large fare increases that will result from Christie’s subsidy cut, but only time will tell whether they will seriously consider finding alternative ways of getting to work as a result. In the short run, it’s very likely that they will grudgingly accept the new prices, and the governor will get a political boost from his efforts to make the system more efficient. But what happens several years from now is far from certain. If the rates remain too high for too long, NJ Transit could very well find itself even further in the red than it is today.

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