If ever there were an example of a state enterprise with a protracted history of failure, it is New York's deteriorating subways. Complete government ownership and operation of the subways--this year marks the seventy-fifth anniversary of the ouster of the last private management companies--has turned a once great system into a nightmare. Problems include delayed maintenance, political unaccountability, poor communications systems, angry transit unions threatening to shut down the city--and sometimes doing so, as in the 1966 strike that crippled the city's economy for weeks--and the problem of almost every other business operated by governments: relentless red ink. Delays constantly plague the system, as illustrated by endless stories in New York newspapers (see, e.g., Harshbarger 2015; Soria 2015).
What happened to the subways, which were once regarded as a transportation jewel? And why did the private management companies eventually depart, selling their assets to the city, which eventually transferred control of the system to a state authority?
Government price controls and political tinkering drove the owners of private management companies to destruction as they ran huge deficits in the 1930s after the first fifteen years or so of running in the black (1904-19). The government was "exploiting" private management companies with its price controls, wrote one historian who did a financial review of a private management company (Derrick 2001, p. 236). Yet, private management subway companies were once highly profitable. A subway historian called one of them, the Interborough Rapid Transit Company (IRT), "a goldmine" in its first years (Hood 2004, p. 123). Private managers were economical. They sought to make money by controlling costs and attracting as many riders as possible, something that has not been happening for generations. They built lines in the most profitable areas first and planned the less potentially profitable lines later. This process was similar to how many railroads were built in the United States in the nineteenth century: freight service came first because it was more profitable. Passenger service was secondary because its potential profitability was less.
But the subway system's initial success inevitably led to problems. Politicians--corrupt, as well as well-meaning "good government reformers," or what some would call the "goo-goos"--constantly complained that the private management companies were making too much money. That led to calls for reform against "greedy" companies.
Increased politicization of the subway system followed. Politicians and regulators imposed rules, controlled prices, and eventually killed the private management companies. The politicians and the reformers showed the private management companies the door, taking complete control of the system in 1940. Some seventy-five years later, most people, including many of today's goo-goos, agree the system has many problems. II.
The Good Old Days
The subway system was not always bad. It had a golden era in its first decades. That was when private management companies, responsible to stockholders as well as to riders--the IRT and the Brooklyn Rapid Transit (BRT), which later became the BMT--operated the first subways under the terms of the dual contract between the two companies and the city. The subway began with 28 stations on October 27, 1904 (MTA 2012). The next fifteen years or so was a period when the system expanded and worked. Remarkable as it may sound to today's embattled riders, the subways were praised by riders, some of whom rode for fun.
The system's success also helped develop the city's economy in the early twentieth century, just as private railroads helped the country prosper in the nineteenth century. The subways changed the nature of work. People no longer needed to live close to work or at work. They could move out of densely populated slums in lower Manhattan. They could live in suburban parts of the city, upper Manhattan, and the then-pastoral Bronx. The subways were also popular because the fare was low.
The nickel fare subways operated well for the first twenty years or so. People came from around the world to ride and study them. They were amazed and awed by them. (As a child growing up in the Bronx near Yankee Stadium in the 1950s, I explored every line because each seemed different. In those days, before I started using them for work, I ignored the shaking cars and the delays.)
Today, the golden era sounds unbelievable. Yet, the subways were good for the same reason most other services are good: they made money, something that is unthinkable under various forms of government services in which it is accepted that service is horrendous and will always be.
So, with apologies to transit advocates and even a few supposedly free-market supporters at the Manhattan Institute--who have told me that public ownership must continue--private lines did make money and built much of the system. Indeed, private management companies in the early days of the subways provided shareholders with dividends, built new lines, and generally provided good service.
Even critics of the private management companies--a group that includes most subway historians--agree that the private management companies made vital contributions in the first generation of subway operations. A few concede that the system could never have been built without private participation, since city government in the early twentieth century was often near its debt limit.
Then why were the private management companies ready to leave the market by the late 1930s? And how did we go from a subway system that was admired to one that was a disgrace, ridiculed even by a Communist official in the late 1950s?
Under the private management companies, the fare never rose above a nickel. That was despite repeated requests in the 1920s and 1930s for an increase. A system of price controls killed the private management companies. This policy was a form of socialism without doctrines. Progressives such as Herbert Croly advocated it in the early twentieth century.
A critic of private railroads, Croly believed that railroads should be highly regulated. They then could later be taken over by the government (Croly 1965, p. 377). Democratic congressman William Jennings Bryan, after visiting Russia in the 1890s and being told that the railroads were owned by the state, called for the same in the United States (Wilson 1970, p. 289). This philosophy of government transportation companies would triumph in New York City in 1940, where many politicians had criticized private subways for decades.
Tammany and the Goo-Goos Team Up
For years, elected officials would constantly complain when the private management companies wanted to raise the nickel fare. Examples include Jimmy Walker. He was a sleazy state senator and later mayor in the 1920s and 1930s. Walker, a product of Tammany Hall, was a mayor so venal that he resigned and left town. He fled to Europe to escape investigation of his corrupt administration. Another private management company critic was 1920s mayor John Francis Hylan, who had been fired as an IRT motorman.
The politicians and the goo-goos were not always allies on every issue, but they agreed on one thing: Subways should be run by the government. And, until that could happen, the fare should never be raised. The goo-goos were the public-interest Progressives who believed private transportation systems were bad because their goal was to make money. The goo-goos succeeded in some ways. For instance, there can be no more complaints about the "gross" profits of private management companies--there are no private management companies in the subways. There are no profits.
The subways today lose so much money that the system can barely be maintained, no less find money to make improvements or add new lines. Together, the goo-goos and the politicians made it impossible for the IRT and BMT to turn a profit. So, owing to heightened regulations, the advocates of public ownership would win. They have inherited a public system that is a mess.
This kind of transportation regulatory policy would be duplicated at the national level. Many passenger railroads were regulated out of existence (Carson 1971, pp. 90-91). Fare increases and route changes were made impossible with the predictable result: the passenger railroads, in the same Goo-Goo spirit, were ultimately taken over by the government under the Nixon administration (Bresiger 1999, pp. 35-53). Another example of this was the Long Island Railroad under private management. The railroad, which eventually went bankrupt in the 1950s, was not allowed to raise its fares for decades (Ziel and Foster 1965, p. 277).
Here is one example of regulating until a railroad is ready to cry "uncle": it took the Pennsylvania and New York Central railroads decades to win regulatory approval for a merger (Bresiger 1999, pp. 35-53). By the time the merged entity, Penn Central, was approved--and it was also stuck with taking the bankrupt New York-New Haven railroad as a condition of approval--the two roads were hopelessly weak.
Penn Central went bankrupt a few years after the merger. Its failure surprised its regulator, the Interstate Commerce Commission (ICC) (Salsbury 1982, p. 49). The ICC, like the politicians and regulators in New York City, was a critical player in the destruction of private transportation companies, just as tax and regulatory policies have destroyed numerous industries. For instance, New York City was once a major manufacturing center. However, it, as well as many other high-tax cities, has shed hundreds of thousands of jobs over the last seventy years or so. This trend was detailed in books such as Power Shift by Kirkpatrick Sale (Random House, 1975) and The Assassination of New York by Robert Fitch (Verso, 1996).
Nixon administration transportation officials who pushed for a nationalized...
Generations of transit disaster: the New York City subways.
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