The Ignorance of the Ages Price controls – will the government impose them again? Mr. New Yorker, just look around

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by Gregory Bresiger by Gregory Bresiger

u201CThe New York subways had a fare of only a nickel between 1904 and 1947. This was a remarkable achievement,u201D according to a recent radio u201Cpublic service ad.u201D

Yes, indeed, as we approach the 100th anniversary of our now mismanaged subway system, this is a remarkable achievement. But unfortunately it is also an egregious achievement. This achievement demonstrates the power of government — through price controls — to destroy successful businesses, turning them into businesses that fail and, eventually, are taken over by the government.

It is also an illustration of the distortion of history by the winners. In this case, we're speaking of the statists who celebrate public ownership of the subways, ignoring the last 60 disastrous years. They are doing their level best to minimize the contributions of the private sector, which primarily built and operated the system. They're also hoping that no one will look too closely at ridership figures, which have declined precipitously under government management of the subways.

In fact, subway ridership has declined about 40% since post World War II high, [1] which was a few years after the government took over. The drop is because more and more New Yorkers have switched to cars even though they are incredibly expensive thanks to endless tolls and badly maintained state and city roads.

Subway mythology holds that the private sector couldn't hack it in the subways. So the government had to take them over in the early 1940s. Utopia arrived, under this statist scenario subscribed to by so many subway historians, when the government took over and many good things supposedly happened. 1) Good triumphed. 2) The nickel fare was saved (sic). [2] 3) More than a half-century later, straphangers today ride happily to work. 4) There are no more profit mad entrepreneurs looking to gouge the average rider.

Still, there is a problem with the subway historians, all of whom seemed to assume that state management was both inevitable and beneficial. It was u201Cevilu201D entrepreneurs out to make a buck who were running the system during its golden period. This was a time when the system was primarily built with private money.

Even a federal transportation bureaucrat, Brain Cudahy, in his book, u201CUnder the Sidewalks of New York,u201D concedes the subways u201Cwould not have been possibleu201D without private investment. One other point subway historians don't like to harp on: The subways also made money and were admired by people around the world during the golden period. They even made money sometimes when they were hampered by price controls, overregulation and posturing pols.

Contrast this with today. In the latest reporting year, the subways, which are grouped with the public bus lines of New York, sustained a $2.1 billion operating loss, according to the MTA, the state agency that runs the subways. u201CSuch operating losses,u201D according to a footnote to the annual MTA report that is not mentioned in the upbeat, self-congratulatory chairman's report, u201Care expected to continue in the foreseeable future.u201D This is accounting mumbo-jumbo for u201Cwe're hopeless. Don't ever expect us to make money.u201D

Pols and bureaucrats around the country say that is it not possible to make money on mass transit. These lines, they say, must always be subsidized by the taxpayers, [3] many of whom wouldn't ride the subways if their lives depended on it. Then how did the private sector make money?

The radio ad also illustrates a painful fact that goes beyond debates about public ownership of mass transit systems: Economic illiteracy abounds. It is an illiteracy that will likely continue to afflict our lives [4] unless mythologies are dispelled and unless the average person recognizes the heart of the problem: The attempts of governments, local and national, to impose price controls threaten everyone who owns property or aspires to do so. That's even though thousands of years of history show that price controls fail every time and, in the process, destroy industry after industry.

Take our much admired nickel subway fare of lore, which in the past 60 years under government ownership has risen to $2 and will likely go higher. [5] Even the person with little or no knowledge of economics must ask himself in hearing the radio propaganda for municipal socialism: How can the price of anything stay the same for over 40 years? And how can a service continue for decades at the same price, given human nature?

Almost everyone always seems to want to make more money. What person, in his or her right mind and given the nature of our central bank dominated system that is biased in favor of inflation, would agree to the same wages or same price for services for 40 years?

The answer to this celebratory ad is very simple: The fare stayed at a nickel because of something called price controls. New York's ruling pols held the fare in check just as the our pols today refuse to let rents rise to market levels in rent controlled apartments even though there are many documented cases of rich or well off people living in rent controlled apartments.

And, every time we ride the subways in New York City, or the commuter railroads, which were also taken over by the government in the 1960s and 1970s, or see abandoned apartment buildings, we see the results of government price controls. An example of the latter was the Long Island Railroad, which went bankrupt. But it was not allowed to raise its fares for decades.

The history of the subway system is an example of a vicious cycle. The private sector, forced to operate under insane rules, was squeezed and eventually couldn't turn a profit. The government took over. But once the public sector comes in, despite promises of great success, there are no profits. Without healthy profits, there is never enough capital for all the repairs and line extensions. No profits mean public systems are always second rate.

The subways, over the past sixty years of public management, are run down. Many projects have been delayed for a lack of funds. The government has been working on a Second Ave. subway for 60 years! There have been periods when there wasn't enough money for routine maintenance. The system has an antiquated signaling system. It is at least thirty years behind in building a line to one of the airports (Nelson Rockefeller, who most young New Yorkers have never heard of, was a big spending governor of New York who promised to build a train to the plane in 1970. We're still waiting, Nelson!).

By the way, the final stages of a train to Kennedy Airport are, authorities say, close to completion. Still, already there have been two train crashes and one motorman died in trial runs. That's even though the train has yet to carry any passengers, who, when they finally use this ill-fated line, probably should double or triple their life insurance!

So many of these latter day subway woes can be traced to a mindless government policy — the conscious or unconscious destruction of private enterprise through price controls.

The subway system, under private operation between 1904 and 1940, was never allowed to raise its fare beyond a nickel because pols wouldn't allow it. They u201Cmade the good fight,” said one admiring biographer of a major political figure of this time, to keep the nickel fare. They railed against the greed of private operators.

So why was the private sector happy to leave in 1940?

Entrepreneurs had run their subway system profitably on a nickel fare in the first decade or so of the system. However, along came World War I. And, as with every time the government goes to war, there is never enough money to pay for it. Our government in World War I did what every government has done from the Roman Empire to Nixon's disastrous price controls of the 1970s. It is also what our government is doing right now: It inflated. It debased the currency. It quietly destroyed buying power even though inflation initially made it seem to many that they were better off. After all, the nominal value of their money was greater. Prices were supposedly held in check. The government, many people initially believed, had rode to rescue to protect them against u201Cprofiteers.u201D

So, back in the post–World War I period, the nickel fare no longer generated the real revenue it had before the war. The revenue was no longer sufficient. Profits — that curse word for many of our municipal Puritans who live in fear that someone, somewhere might be getting rich — started to drop. The level of maintenance declined. And how could new investors be found for a business in which profits were disappearing and in which every price increase required the approval of the government? And such approval had never been granted!

How did this disastrous system come about? In the 1920s, pols like state Senator Jimmy Walker, a product of the notoriously shady Tammany Hall, said the nickel fare was sacred. Walker, of course, went on to greater things as mayor. He later presided over one of New York City's most venal administrations. That was quite an accomplishment in a town that produced political potentates on the order of Boss Tweed, Donald Manes and Carmine De Sapio.

Walker was a mountebankish, moronic [6] mayor who had to resign from office. This great defender of the nickel fare ended up living in Europe for a few years until memories dimmed of his corruption-plagued administration that stole everything that wasn't nailed down, then sent the bills to the taxpayers.

The fare stayed at a nickel through the 1920s and 1930s. By the late 1930s, the last private subway operators, the Interborough Rapid Transit, were crying uncle. They were happy to sell out. They weren't ready to offer any counter arguments to those liberal/socialists who said that only the government could unify the system and make money (We'd also hear this kind of loony logic in the early 1970s. That's when Richard Nixon went ahead and nationalized a series of private railroads that had gone bankrupt after decades of overregulation and similar price controls. Some thirty years and billions of dollars of red ink later, Amtrak, of course, is a national disgrace).

Yes, government ownership and management of the subways have accomplished much. But let us not forget the greatest accomplishment (sic) of all — there are no price controls when government is levying the bills.

So, since the government doesn't restrict itself in how high it can raise taxes or its own salaries or how much inflation it can dump into an economy to pay for its grandiose projects, the subway fare has reached $2. And, with the MTA projecting huge operating deficits underground, here's the ultimate accomplishment: There is no longer any danger of any pol imposing price controls. The fare, unlike the years of private operation, will likely continue to go sky high.

Notes:

[1] In 1947, annual ridership figures were over two billion. In the last few years, the numbers have hovered around one point three billion. This is even though the city's population figures are about the same. These numbers are from the u201CReport of the New York City Transit Authority Controller's Department. Also see latest annual report of the MTA, the state agency that runs the subways.

[2] Actually, within a few years, the fare, which had never been allowed to rise under private management, rose to a dime. Then, in the 1950s, it went to 15 cents. In the 1965 election, Congressman John Lindsay ranon a platform of u201Csavingu201D the 15-cent fare. After he was elected, it went to 30 cents. Today it is $2 and, like payroll taxes, we will surely see it go up again. For more on the aftermath of the ill-fated 1965 campaign, see Lindsay's Promise: The Dream that Failed, (New York, MacMillan Company, 1970), p. 186.

[3] The fare now only pays for about 43% of the expenses of the system. The system, to survive, must depend on other taxes and subsidies from Albany and the federal government.

[4] It struck me recently when a Russian piano repairman recently came into our home and bragged that, under the old Soviet Union, u201Ceducation was free.u201D I asked, u201Cyou mean the taxpayers weren't paying for it?u201D

[5] By the way, the fare is certainly not $2. It is much higher. The taxpayers chip in more to cover the huge deficits of the system through subsidies from Albany and through the profits generated by bridge and tunnel tolls.

[6] This is not hyperbole. Jimmy Walker, when elected as mayor, u201Cboasted to a reporter that he had probably not read 15 books in his life.u201D This is from Jan Morris' Manhattan 45, p. 80, (Oxford University Press, New York, 1987).

October 29, 2003

Gregory Bresiger [send him mail], assistant managing editor of Traders Magazine, is a business writer and editor living in Kew Gardens, New York.

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