This Is Why Transit Is Expensive

Why are new subway lines so expensive? It’s pretty simple, actually, if you examine the interaction of how buyers bid prices up and sellers bid prices down.


Buyers

Transit Users

Users don’t pay anything close to market prices, so there isn’t any way to calculate how much they value transit. All we know is that the value they place on a ride is at least as high as the (subsidized) fare.

Put another way:

Q: “Do you think the fare should be ten dollars?”

A: “I don’t care if the fare is one hundred dollars, as long as I’m not the one paying it.”

(Ha ha, but those numbers are pretty close to what really happens on paratransit services. Maybe some users feel guilty and offer to pay more than their subsidized fare, but I don’t know if such donations would even be accepted.)

Transit Agencies

Government transit agencies make no profit, have no share value, and distribute no dividends. They are monopolies. They are permanent. Agencies and their employees are neither rewarded for good outcomes nor penalized for bad outcomes. In fact, they can’t even define “good outcome” and “bad outcome” except through press releases where bad outcomes simply don’t exist.

Are high costs a bad outcome? You might think so when running your own business or remodeling your house. But in a government no-reward no-penalty environment, the incentives to reduce costs are replaced with incentives to comply with bureaucracy, minimize work, and fulfill personal indulgence.

Put another way:

Q: “Do you think this project is too expensive?”

A: “I’m on break.”


By the way, what looks better on a resume:

“I was responsible for leading a one MILLION dollar project”

“I was responsible for leading a one BILLION dollar project”


Politicians

Politicians don’t pay for anything. Instead, you pay politicians, and they reward other people. There are lots of “you” paying a little towards transit and a few of “them” getting financial rewards from transit. “They” remember which politicians rewarded them. And you didn’t even notice any of this because your payment is so small. That is, concentrated benefits and dispersed costs.

Ask yourself how low costs help politicians achieve concentrated benefits.


Politicians love ribbon cuttings at high-profile projects. No one gets re-elected by diligently ensuring that all the grime is scraped from subway stations. But if you could just assemble the photographers at the ribbon-cutting of a new subway station, that would be worth a LOT of money to politicians. Whose money? Not their money. How much money? Who cares.

Put another way:

Q: “Do you think this project is too expensive?”

A: “You can’t put a price on gifts to future generations. But you can vote for me.”


Summary: There are three groups of buyers. This is the most they are willing to pay:

Transit Users: “Transit is extremely valuable to us, as long as the fare is low and someone else pays for the remainder, whatever that amount is.”

Transit Agencies: “Transit is worth whatever is in our budget.”

Politicians: “Transit is worth whatever. Sure you can take my picture now.”


Sellers

In the case of transit, you would think that the following should happen:

  1. Sellers (i.e., contractors) know that the buyers are insensitive to costs.
  2. Free money!
  3. Stampede to bid on projects.
  4. Uh-oh: The stampede results in competition that drives the price down to rock-bottom thin-profit levels.
  5. Buyer indifference didn’t matter after all! The price is low and the buyers get good deals despite themselves.

Except, this isn’t quite what happens.

So, clearly, we’re missing something. And that “something” is costs that are almost as high as the “We don’t care what we pay” prices. But how can that be? For example, using today’s prices, it would cost about one trillion dollars to rebuild the entire NYC subway system — and yet no one seems to be getting extremely rich from these price levels. How could that have happened?

It’s most likely a variation of Parkinson’s Law, where costs of a government project will expand to whatever price the government will pay, and — here’s the kicker — without any relation to improving the final product.

So: How do government transit agencies drive up the costs? Well…

  • Union rules
  • “Prevailing wage” schedules
  • Minimum wage laws
  • Preferences to companies owned by women, minorities, and the “disadvantaged”
  • Monumental architecture
  • ADA requirements for said monumental architecture
  • Under-the-table requirements for lobbying, campaign contributions, bribes — as well as forcing buyers to balance that with incomprehensible “ethics” codes
  • An ocean of vague, incoherent regulations — and purposeless procedures and requirements — spread across agencies, local governments, state governments and the federal government
  • Arbitrary and capricious whims of government bureaucrats who have minimal incentive to comply with anything, contractual or not
  • Legal bills for interpreting and/or running afoul of any of the above

At some point, some sellers might say, “Why bother with all this? We can make money elsewhere without all these headaches.” Remaining sellers will not be dissuaded — but because they still need to produce profits, the downward pressure to lower bids ends at a pretty high price floor.


Imagine that you are buying a house.

Would you turn over 15% or 20% of the sale price to a real-estate agent?

Would you pay a premium if the house was sold by a woman or a minority?

Would you insist on a large swimming pool even though no one in your family swims?

Would you tell the seller to install dozens of escalators ?

Would you insist that the seller takes you out to expensive restaurants and provides you with free tickets to ball games?

Would you confront the seller with hundreds of pages of legalese?

Would you be uncivil to the seller?

You tell the seller, “Don’t worry about the added expenses or any other burden you think I’m imposing on you. I’ll make sure you’ll get a nice profit on the sale. I can get whatever money I need as long as I put it into this house.”

Thirty years later, the house is finally built. The neighbors, having paid $300,000 for their homes, wonder how you managed to spend $3 Million on yours, especially when it looks so ugly and shoddy. Somehow overbuilt AND underbuilt simultaneously.

The neighbors see a big party at your house on moving day. You must have a lot of friends! Within a few weeks, though, weeds grow in the lawn and mold grows on the walls. They finally ask you what happened. You acknowledge that it’s a mess. And then you tell them there just isn’t ever enough money, but it could all be solved if they would only just“fund” you…