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The little train that couldn’t turn a profit

The little train that couldn’t turn a profit

Mickey Hepner
The Edmond Sun

EDMOND October 16, 2009 09:38 pm

This last week Amtrak announced that this last year was their second best year on record, with more than 27.1 million passengers. Yet even in one of the company’s best years, taxpayers will still need to kick in $1.4 billion in subsidies.

Of course, this is nothing new — Amtrak has lost money every year since its inception. In fact, it was because of the declining profits from passenger rail service that private rail companies first began eliminating passenger rail service, thereby prompting Congress to create Amtrak in the first place. The fact that passenger train service is so consistently unprofitable clearly tells us that Amtrak’s service is not valued enough by consumers.

We must remember that providing passenger rail service requires the use of labor, machinery, and materials that can be used to make any number of different services. From society’s perspective, we should want those resources to go to produce the most valuable product they can. So, how can we tell what product that is?

ECON 101 tells us that the profit system is generally our best guide. Positive profits, by definition, mean revenues exceed costs. Yet revenues are an indicator of the value buyers place on a product — the more valuable to buyers, the higher the revenues. Furthermore, costs are an indicator of the value of the resources used to provide the product — the higher the cost, the more valuable the resources. Thus, positive profits indicate that the benefits gained by consumers from a product exceed the costs incurred by the loss of resources.

When a product earns negative profits though, as Amtrak has done for nearly four decades, the resources are more valuable to society than the product. In other words, Amtrak’s negative profits tell us that society really does not want the train service after all.

But train enthusiasts (apologists?) respond with the classic kindergarten defense — that “everyone else is doing it.” They argue that every passenger train service in the world requires subsidies, so Amtrak subsidies are no big deal. They argue that other forms of transportation receive subsidies, so Amtrak subsidies are justified. But every child learns at an early age that “everyone else is doing it” is not a valid excuse for continuing bad behavior.

There is only one economic justification for subsidizing any business enterprise, and that is if the business generates some benefits for society that extend beyond the direct consumers of the product. By this test, Amtrak subsidies across most of the nation fail to measure up.

Yes, the Heartland Flyer provides benefits to those who ride the train, but to justify a subsidy, the benefits must accrue to non-riders too. Last year 73,564 people rode the rails along Oklahoma’s lone Amtrak route, generating just under $1.6 million in revenue for the company. But the train service also generates substantial costs, requiring the state of Oklahoma to budget nearly $4 million in subsidies last year to keep the train operational. Some argue that we should subsidize railroads because of the historical importance of the railroad industry. Yet, this is a reason to subsidize railroad museums, not railroad companies. There is no compelling reason to justify Amtrak subsidies in Oklahoma or most of the country.

There is one place in the United States where passenger train service could be economically viable, and may even warrant some subsidies — the Northeast Corridor. Last year this region accounted for more than 50 percent of all Amtrak revenues, and it is easy to see why. The high population density in this region of the country means that railway travel is an attractive alternative to congested highways and airways. It is in this region alone where a vibrant inter-city rail system is necessary to promote commerce and culture. In the rest of the country though, including Oklahoma, passenger train service is just not vital for our economic and cultural growth.

Rail advocates often wish that passenger rail service in the U.S. would look more like services in Europe and Japan. Ironically though, the best way to do that is for Amtrak to cease operations in most of the country and focus its service only on the northeast corridor — the region of the country that is most like Europe and Japan. Doing anything else is simply no way to run a railroad.
MICKEY HEPNER is an associate professor of economics at the University of Central Oklahoma.

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1 comment (Add your own)

1. Matt wrote:
The title assigned to this piece by the Edmond Sun creates the impression that the Heartland Flyer was intended as a for-profit venture. Check the Daily Oklahoman and Tulsa World archives from 1999. ODOT officials were clear when the passenger rail option returned to the I 35 south corridor. It was initiated as a much-requested PUBLIC SERVICE.

And it has far exceeded the expectations the state did have in terms of ridership.

Senator Don Nickles recognized that our hard earned tax dollars were going to Amtrak and the state's citizens should receive a benefit from that. Without his effort, rail service wouldn't have come to pass. Today Oklahoma families have the choice of an affordable, safe, and comfortable travel mode.

Sat, October 24, 2009 @ 7:01 AM

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