Tag Archives: Josh Barro

WMATA’s failures are institutional, not personal

Chris Barnes who writes the DC blog FixWMATA  is supporting a petition to replace the Board of Directors of the Washington Metropolitan Area Transit Authority. Frustration with the transit agency is growing among Washington-area residents as ongoing system repairs have made the system’s weekend service increasingly unusable. The situation has led to the birth of multiple blogs documenting WMATA’s failures. As an intern in DC from the Czech Republic recently summed up the situation, “Metro is both terrible and expensive.”

While the need for reforms at WMATA is clear, replacing the Board of Directors is unlikely to lead to significant improvements in the system. Rather, WMATA’s problems are institutional, and new actors facing the same incentives as the current WMATA Board are unlikely to produce better results. Some of the institutions preventing a Metro of reasonable quality and cost include:

1) Union work rules. Stephen Smith, my co-blogger at Market Urbanism, has done an excellent job of explaining how union work rules make transit needlessly expensive. One of the biggest culprits is requiring shifts to be at least eight hours and preventing the hiring of part-time workers. WMATA rationally runs trains and buses more often during morning and evening rush hours, but it is not permitted to staff these time periods at levels above mid-day staffing because of the eight-hour shift requirement. Combined with the above-market wages and benefits that WMATA employees make, these bloated employee costs prevent WMATA from achieving a higher farebox recovery rate and having more resources to dedicate to needed capital improvements.

2) Intergovernmental transfers. Over half of WMATA’s current capital improvement budget comes from the federal government, meaning that while the benefits of the system are narrowly bestowed on riders, a large share of the capital improvement costs are spread across U.S. taxpayers. This large dispersal of costs permits much more expensive transit than would be tolerated if all funding came from the localities that benefit from the system. Furthermore, with funds coming from the District, Maryland, Virginia, and the federal government, the flypaper effect comes into play. This means that a $100 million infusion from the federal government to WMATA will not reduce the cost born by local taxpayers by $100 million; rather, total spending on the project will increase with grants from higher level of government. Absent incentives to spend this money well, WMATA demonstrates that high levels of federal funding will not necessarily result efficiently carried out capital improvements.

At Pedestrian Observations, Alon Levy provides a comparison of transit construction costs across countries, and finds that U.S. construction costs are exorbitant. The reasons for these cost disparities are many and not well-understood. One reason for high costs in the U.S., though, may be that the prevalence of  federal funding comes with the strings of costly federal regulations.

3) Accountability. While all U.S. transit systems suffer inefficiencies from intergovernmental transfers and union work rules, DC’s Metro has a unique governance structure that seems to produce particularly bad and costly service. WMATA has the blessing and the curse of being multijurisdictional. On the one hand, the Washington region is not plagued with the agency turf wars that New York City transit sees. Several of the system’s rail lines run through Virginia, DC, and Maryland, providing many infrastructure efficiencies and service improvements over requiring transfers between jurisdictions.

Despite these opportunities to provide improved service at a lower cost, WMATA’s lack of jurisdictional control seems to do more harm than good. No politician can take full credit for running WMATA efficiently, so none prioritize the agency’s performance. It’s a tragedy of the political commons.

Josh Barro has recommended directly electing the Board of Directors of WMATA to create elected officials with an incentive to improve service. This institutional change would be more likely to improve outcomes than replacing the current Board with new members who would face the same incentives. Clearly, WMATA’s Board of Directors is failing in its job to oversee quality and cost-effective transit for the region; however, replacing the board members without changing the institutions that they work under will not likely improve outcomes. Intergovernmental transfers and union work rules limit transit efficiency across the country, but WMATA’s interjurisdictional status exacerbates inefficiencies and waste.

Public Sector Pension Accounting: is time on their side?

The debate over Dean Baker’s paper which concludes that public pensions aren’t in crisis continues. Josh Barro provides a very thorough reply at Public Sector Inc. Baker’s central claim is that governments can take on investment risk because they have all the time in the world to ride out market fluctuations. The “government is infinitely-lived” defense of current public sector pension practice may sound comforting on the surface.

But it violates several economic theories, including The Arrow-Lind theorem, which discusses whether public investments should be discounted differently than private investments. As their seminal 1970 article, “Uncertainty and the Evaluation of Public Investment Decisions,” mentions there are different views. One view holds that risk should be treated the same in these two sectors, otherwise the public sector will overinvest. Another view held by Paul Samuelson and W. Vickery is that government can better cope with uncertainty, and in fact should ignore uncertainty and “behave as if it is indifferent to risk.” Arrow and Lind show that government can only ignore investment risk if the investments are small relative to the economy (there are alot of taxpayers over which to spread the risk) and the investments are uncorrelated with the economy.

As Josh notes public sector pension obligations don’t meet this description. Pension obligations are large relative to state economies and poor investment returns are linked to economic downturns, which contribute to weak tax revenues. The bill to pay out benefits does come due even when the market doesn’t deliver the returns government-as-investor was banking on to pay it.

Public Sector Inc.

The Manhattan Institute has a new website: Public Sector Inc. featuring the latest research, news, interviews, and articles on public sector unionism and in particular on the crisis in state and local pensions. Edited by Manhattan Institute fellow, Josh Barro, the site includes my article on the discount rate and how it has affected the management of pensions as well as a podcast with E.J. McMahon on the same topic.

Reform of public sector unionism is sure to be a major policy issue facing the states in the coming decade. Josh notes at PSI’s blog that Governor Tim Pawlenty in Minnesota has written in today’s Wall Street Journal about what states need to do to fix the fiscal disaster that public sector unionism has delivered to state governments – and that includes getting the accounting of public sector liabilities, right.