Creating artificial demand

July 30, 2009

I spoke with a friend of mine last night on the issue of infrastructure-building in cities as a means of creating economic stimulus and reducing environmental impact. Our debate turned to proposals to build both light rail and heavy rail systems in Ohio’s cities, especially in Cincinnati.

The support for these proposals is based on these principles:

  1. People want and need mass transit, because it will be cheaper than driving cars.
  2. Cities want and need mass transit to alleviate congestion problems and to create jobs.
  3. These mass transit systems, once created, will be sustainable, profitable and successful.

I will not get into the specifics of #1 and #2, since a number of other studies have already addressed these misconceptions. One in particular dispels the myths of the environmental and economic benefits of these systems, and even points to the role that government-subsidized rail systems played in causing the economic collapse in Japan (the so-called “Lost Decade,” from which Japan has yet to fully recover).

But all the research I have ever read suggests that #3, the sustainability and profitability of mass transit, is unlikely. Most mass transit programs in major cities have to be subsidized by the government because the general public does not use them enough to be profitable.

Why would the government use tax dollars to build something that the average person doesn’t want and wouldn’t use anyways? Why, to “stimulate the economy” and “create jobs,” of course. This is the principle of creating artificial demand.

The basis behind this concept is simple: if people thought light rail would be good for Cincinnatti–that they would use it on a regular basis, that it would be cheaper than driving, that it would be good for the environment and for the economy–someone with an entrepreneurial spirit would have recognized this demand, and would have built it already.

But it hasn’t been built by the private sector in Cincinnati. And it’s not because it’s too expensive to build. There are people out there in America that can afford to singlehandedly fund a project to build a light rail system…and even if they didn’t have the upfront capital, there are people who would be willing to take a risk if they thought it would be profitable. But it’s not profitable.

That’s why mass transit systems in major cities are consistently subsidized by the government. These systems are too expensive, and not used enough by the public, to be profitable. The reason nobody has built a light rail in Cincinnati, or Columbus, is because there is no way to do so–yet, at least–without losing massive amounts of money.

If private individuals don’t think they can make money by building their own mass transportation systems, why would it be okay for city governments to do so? Why should city governments spending money on projects that will just end up being a massive drain on taxpayers, that most people will decide not to use, that will see no net benefit to the environment (and may even have a bigger negative impact than cars do), and that will only temporarily create jobs while they are being built?

It’s because government is in the business of creating artificial demand as a temporary solution to economic woes or environmental concerns. If people decide that there is enough of a need for mass transit, they will ask for it to be built, or someone in the private sector will recognize this demand as a potential profit-making venture. This has not happened yet. It could, at some point in the future, but it is not the case at the current time in many cities.

The lack of natural demand means that in order to build mass transit systems, governments have to create it without asking taxpayers if they really want it. This is the basis of WeDemandAVote, a coalition of Cincinnati taxpayers and government transparency/accountability advocates who can’t figure out why the city is trying to force a taxpayer-funded trolley system on them without asking voters if this is something they really want in the first place. This is wrong.

What happens then, when governments create artificial demand is:

  1. Governments spend huge amounts of public money on building and running a mass transit system. These include initial costs, plus the almost inevitable budget overruns that occur from delays and from creating and maintaining systems as complicated as these usually are.
  2. In order to offset those costs, the government has to charge higher fees for passengers, making them less desirable to consumers, or:
  3. Citizens didn’t want it or need it in the first place, so many choose not to use the system once it is in place.
  4. Because the mass transit system is too expensive and not enough people use it, the city is stuck with paying these costs using public funds, and it becomes an economic drain.

What seemed like a quick-fix, simple solution to economic, environmental and transportation problems turns out to have no net effect on those issues, or even makes them worse.

Let the private sector determine when there is a need, a demand, for mass transit–or any service that the government provides. When there is natural demand for a service, people will use that service and be willing to pay a price for it that is reasonable for both the producer and the consumer. The system will be profitable. The people who use it will pay for it, and the people who don’t use it will not have to pay a dime.  This is the only course of action that is fair to taxpayers and consumers, and the only course of action which does not result in governments losing money and ultimately forcing taxpayers to pay for it.

In an economy such as this, governments are in the business of creating artificial demand. A private-sector, free-market solution to transportation problems is the only free and just way of doing things.

For more information on this kind of economic thinking, I encourage you to visit The Dronen Report, a blog on free-market economics and theory.


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