The Huntington News Network recently ran David Kinchen’s review of my book, The Politically Incorrect Guide to Capitalism. Kinchen was generally favorable, saying near the end: "All in all, The Politically Incorrect Guide to Capitalism is an excellent book for everybody, especially if the last economics course we took was decades ago in college and was dismissive of Ricardo, Smith, von Mises and Friedman — if they even mentioned them at all."
However, the one major exception was Kinchen’s reaction to my critique of the government-coddled Amtrak. Now on the one hand it’s quite churlish of me to sulk over this one criticism. On the other hand, it will be a good lesson in how a market economy works — and the flaws with government intervention — if I explain why Kinchen missed my point. (And if some readers decide to buy my book when the smoke clears, why, I won’t object.)
Here is the relevant excerpt from my book:
From the beginning, Amtrak was plagued by Congress’s conflicting goals: to both maintain intercity passenger rail service…and to become financially self-sufficient. Amtrak — surprise, surprise — has fulfilled neither of these objectives. Bowing to economic realities, Amtrak’s service has been repeatedly scaled back over the years. For example, Amtrak offers no rail service to the cities of Phoenix, Las Vegas, Nashville, Dayton, Tulsa, or Colorado Springs, even though these all have populations of over 500,000. Along with this lack of geographic availability, Amtrak fares aren’t exactly for the poor: …the round-trip fare from Penn Station in New York City to Union Station in Washington, D.C. runs from $134 to $346, depending on class. (The comparable fare for Peter Pan bus lines is $69, though of course the trip is longer.)
…Amtrak can’t defend its service cutbacks and high rates by appealing to economic efficiency, since it has lost money every single year of its history. In 2005 Amtrak received a whopping $1.2 billion from the federal government to help make ends meet. It loses money in every conceivable way — on ticket sales and even on its food and beverage concessions. On one of its worst lines, the Sunset Limited connecting Los Angeles and Orlando, Amtrak lost $433 per passenger. Your tax dollars would have been saved if the line had been scrapped and Amtrak’s customers given plane tickets instead. (The Politically Incorrect Guide to Capitalism, pp. 129—130)
Now I thought this was pretty standard fare for a book on free market economics. The only "work" I did here was to go find the numbers to document just how bad a particular government-subsidized enterprise was. But Kinchen strongly objected to my analysis. Here’s his defense of Amtrak’s subsidies:
What about Amtrak and why does Murphy hate it so much? On pages 128—30, he says that Amtrak benefits from generous federal subsidies, while providing no service to major cities like Nashville (where he lives), Phoenix and Las Vegas. He makes the outrageous statement that few people use the intercity trains like my beloved Cardinal line and that Amtrak [is] an example of pork that should be abolished. Yes, abolish Amtrak, however limited its service is, and we’ll be worse than a Third World country, at the mercy of airlines that delivered the most miserable service in their history this past summer, according to official statistics and news reports.
Dr. Murphy, sir, I know you can’t board a train in Nashville as I can in Podunk, er, Hinton (Pop. 2,800), but the nation as a whole — especially those of us living in areas far from major airports — benefits from Amtrak service. Furthermore, the train was packed in both directions with smart consumers who don’t want to do the airport strip-tease or spend all their traveling money on gasoline and parking fees once they get to the big city.
Founded in 1971, after the failure of capitalism in the form of private ownership of rail service, Amtrak is well worthy of the relatively meager federal subsidy it receives. Nobody loses his or her luggage on Amtrak, because there is no checked baggage! The train attendant on my recent trip warned us about keeping an eye on our belongings. And what about the EAS (Essential Air Service) subsidies for small airports like the ones in Beckley, Bluefield and Lewisburg, which Dr. Murphy doesn’t mention. Yes, Dr. Murphy, we subsidize airports, too.
First, some quick clarifications before I get to the heart of the matter. Of course I oppose subsidies for airlines and every other form of transportation. Indeed, that’s precisely why air service is so annoying. A recent Wall Street Journal piece confirmed that the reason your plane can be stuck on the runway — even though the weather is beautiful in your origination and destination cities — is that the FAA has allocated the flight route to planes from other areas experiencing storms. In other words, just as the government charges too little to use its roads and highways — leading to traffic jams — so too does the government charge too little for use of the airspace, leading to traffic jams in the sky. (Kinchen’s suggestion that I am ignoring government’s intervention in air travel is particularly strange, since my major example of private safety regulation is a quite radical case for abolishing the FAA and letting insurance companies inspect commercial jets.)
A second clarification: I did not live in Nashville when I wrote the offending sentence. Far from being miffed at being excluded from the government goodies, I was listing the biggest cities that Amtrak didn’t serve at all. My point was that it’s hard to justify Amtrak’s economic inefficiency on the grounds that it is "serving the public," when it entirely skips many cities with over half a million residents!
But now let’s get to the real lesson. In a market economy, a firm will stay in business only if its revenues cover its costs. To a true socialist, this criterion of the "bottom line" is an entirely arbitrary one corresponding to nothing "real." But the good economist recognizes that this is the market’s way of channeling scarce resources into the most desired ends.
The crucial point is that the "costs" of production are really just prices of particular inputs. The steel, electricity, labor, and other resources used up by Amtrak could have gone into the production of other useful commodities or services. In a market economy, the way these resources are divvied up among their competing uses is to let their owners sell them to the highest bidders. If Amtrak can’t turn a profit because "costs are too high," that simply means that other entrepreneurs are willing to bid more on those same resources than Amtrak can afford to pay. And that means that the customers of those other firms are willing to spend more on those respective products than they are willing to spend on the services of Amtrak.
Kinchen rests his case on the fact that Amtrak’s customers enjoy its service. That is certainly true; nobody’s forcing them to ride the train. That’s not the issue, however. The true economic question is whether the resources used in providing this service could have been devoted to other products or services that people would have valued even more than riding Amtrak. And because plenty of other firms are able to get more revenues from their customers, with which they can outbid Amtrak for these resources, that is prima facie evidence that Amtrak is wasting these inputs.
This is a crucial point, so let me approach it from a different angle. Clearly the people who ride Amtrak benefit from the subsidies: They are able to get their service at a lower price. And clearly the people who don’t ride Amtrak but pay taxes lose from the whole scheme: They pay taxes for something that they never use. So how does Kinchen conclude that "the nation as a whole" benefits from the subsidies? He must think that the riders benefit from the subsidies more than the (non-riding) taxpayers lose. But that’s hard to fathom. If the government takes $50 out of my paycheck to hand over to someone else to help him pay for a train ticket, it sure seems that I’m out $50 and the other person at best is up $50. But then when you factor in the red tape and other distortions, the other person’s gain is much less than my loss. Society as a whole is poorer when government redistributes wealth.
In a short piece like this I naturally can’t get into all the technical economic arguments. For example, a Harvard Ph.D. would argue that (say) the government can make society better off if it takes money from our paychecks to spend on vaccinations or literacy. I deal with claims like these in my book, but for the Amtrak case it’s not necessary. There is no "spillover" benefit to society at large from having Amtrak. If the benefits of Amtrak exceed its costs, then it wouldn’t need government handouts to stay afloat. And to cut off those subsidies wouldn’t necessarily spell the demise of Amtrak, either. Firms are a lot more efficient when they face the prospect of bankruptcy.