Stephen Smith and the Principal-Agent Problem in Public Transit

by Reihan Salam

Stephen Smith argues that ugly transit is often a sign of better and more cost-effective transit:

Spain would never spend $3.8 billion on a single starchitect-studded station, but its own Santiago Calatrava was happy to build one if New York was footing the bill. Calatrava’s original design called for an enormous bird-like World Trade Center PATH station whose walls would open up in a sort of flapping motion, but it was scaled back for security and cost reasons. The wings were clipped and evolution was set back a few hundred million years – the bird will now be a ”slender stegosaurus.” Even the originally projected $2.2 billion cost would have been more than Paris spent on its entire new 9 km-long Métro Line 14.

And then just one block away from the WTC boondoggle, we find the $1.4 billion Fulton Street “Transit Center” (a.k.a., subway station). Back in 2002 there was talk of selling off air rights above the station, the largest undeveloped parcel in Lower Manhattan, but that never happened. Like Calatrava’s PATH station, Fulton Street is essentially a reconstruction, and will not enhance rail capacity.

If American cities are ever going to grow beyond their currently stunted sizes, they’re going to need new transit infrastructure. But no amount of government subsidies will ever be enough to build more than a line here and there until we get our astronomical costs under control. To be sure, aesthetic projects are not the biggest driver of America’s breathtakingly high transit costs, but they are indicative of our warped priorities when it comes to mass transit.

There is a straightforward model for understanding what’s going on here: the problem is the principal-agent problem writ large. Transit in the New York city region, and in many others, is in the hands of public bureaucracies that are often accountable to several overlapping layers of government, and they have complex, opaque structures that voters tend not to understand. As in corporations with weak boards under arm’s-length financing arrangements, this creates powerful incentives for a kind of looting: the heads of the agencies in question will use what ought to be considered public resources to help secure a legacy for themselves. Legacy projects that are highly visible thus attract more resources than is appropriate. Indiana Gov. Mitch Daniels described this phenomenon to Andrew Ferguson of the Weekly Standard in the somewhat different context of school construction costs in his state: it is quite fun for public officials to dream up expensive new facilities, and so they tend to overinvest in new facilities relative to, say, improving the quality of instruction. 

These complex, publicly-owned transit agencies were the product of progressive era reforms that sought to insulate professionals from democratic politics and market pressures to devise transit systems that worked to the benefit of all citizens. Alas, it didn’t work out that why, while private models seem to have enjoyed more success (let’s be careful about context, etc.). Here is Smith on the subject,from a post published last year:

Around the turn of the century, when America’s great mass rail-based transit systems were being built, they were often built by developers who had large stakes in land around their stations. The transit systems could even be loss-leaders that subsidized their developers’ real estate positions, and joint ownership allowed for the sort of coordination necessary to build what’s today known as “transit-oriented development.”

Progressives and planners in the US soon put an end to this practice by subsidizing roads and placing onerous restrictions on transit operators that eventually let to nationalization, as did governments throughout the world. Some Asian governments, however, have begun to backtrack. Japan’s rail privatization in the late ’80s made transit operators some of the country’s largest real estate developers (.pdf), and Hong Kong’s private transit companies have similar large property investments around their stations. (For an in depth discussion of the Hong Kong model, see this pdf.) Singapore, where the state owns and operates both the transit systems and the vast majority of residential units, could even be considered an example of joint private ownership, if one considers the one-party city-state to be akin to a private entity.

Hong Kong’s mass transit system, incidentally, is quite profitable.

Also: Smith is at the top of the list of writers I would hire if I were in a position to do so. You’ll never go wrong by checking out his exceptionally smart blog