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Tuesday, May 31, 2005

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Government "Economics"

by James Z. Smith

I was struck by a recent article in a regional newspaper here in southern California regarding a hike in bus fares by the local public transit authority. The NCTD, like just about everybody else on the planet, faces a financial future with uncertainty and constricted revenues as well as rising costs. Ridership is relatively flat, but with unexpectedly rising employee pension costs as well as rising fuel costs, the NCTD board decides to break the law of Supply and Demand, and raise fares in an attempt to close the budget gap.

This seemly minor matter in a small coastal city in suburban southern California hardly seems like it ought to even be noticed, but it is a perfect example of "economics, government style". In the private sector, a business whose product cost is rising either accepts lower profit margins, or offers incentives or product improvements to make its product more attractive to consumers, or to justify a price increase to maintain profit margins. For example, if an auto dealership wants to improve sales, they will offer pricing inventives to bring in consumers. Sometimes they have pony rides and balloons, or free pizza or give away radios or free maintainence. But the LAST thing they would ever do is tell their customers, that" since our costs are rising, we have to increase our prices to you." They make their product—in this case a car—more attractive to consumers to increase sales to cover rising costs.

In the case of this transit company, however, they do the opposite. Their explanation of rising costs is employee costs, especially employee benefits. They also note that fuel costs are higher, as they are for everybody, but instead of trying to INCREASE ridership with incentives, maybe LOWER fares, etc., they choose to RAISE fares! Assuming they don't add new employees or routes, but increase ridership on existing routes, revenue will increase. A prudent business would work to make their product—in this case mass transit— more attractive to consumers.

If the bulk of the increased costs is indeed employee costs, then by increasing ridership they could recover that cost. By raising fares, however, they continue to drive away all but those who have no other choice but to ride public transit.

It is hard to imagine that anyone with even the most basic economics understanding could think that raising fares is a good way of raising revenue. But this is the way government, and more particularly, most government employees typically address issues of economics. They so often lack even the most basic understanding of economics, and yet all of our tax dollars are "managed" by these same people every day.

This is a perfect example of why social welfare programs so very rarely ever work. The people who run them have no idea how free-market economics work, and should give us all pause as we consider whether the government is the best caretaker of our retirement funds, or whether we as individuals should be allowed to manage our own retirement nestegg if we so choose.

James Z. Smith blogs at The Lost-Tooth Society.

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posted by BNN Archive at 6:39 PM