The recent derailment of an Amtrak train in the Northeast was tragic in human terms and will no doubt result in future enhancements to improve passenger safety. But the incident has rekindled the debate over taxpayer subsidized rail transport in an era of numerous free-market alternatives and a $17 trillion national debt.
The driving of the golden spike in 1865 ignited an unprecedented commercial and industrial expansion in America, facilitating transshipment of produce and manufactured goods between distant points on the map. Similarly, the first half of the 20th century witnessed the golden age of passenger rail transport, ushering in a new era of mobility over previously unthinkable distances.
Hundreds of passenger trains traversed millions of miles laden with travelers increasingly accustomed to peregrinating in style and comfort. Iconic routes with evocative names like the Hiawatha, 20th Century Limited, City of New Orleans and the Super Chief acclimated Americans to affordable long-distance travel.
But by mid-century, times were changing and other modes of travel began to challenge the iron horse. America's love affair with the automobile began in earnest following World War II, presenting a formidable challenge to the great passenger lines. Meanwhile, commercial aviation was becoming ubiquitous, safe and cost competitive. Taken together, they spelled the end of railroads as a widely viable mode of long-distance transport.
At its zenith in 1945, 98 billion passenger miles were traveled by train. By 2000, that number was down to 15 billion and declining. Operators began reducing routes, but government regulators often overruled efforts to eliminate unprofitable services and by the 1960s railroad companies were bleeding cash. The bankruptcy of the Penn Central in 1970 marked the end of an era.
Rather than allowing the marketplace to direct the inevitable adjustment toward more efficient technologies favored by consumers, Congress and President Richard Nixon intervened to nationalize passenger transportation. The resulting National Railroad Passenger Corp., known as Amtrak, has never had a profitable year in its 44-year history and has cost taxpayers nearly $45 billion in subsidies ($75 billion in 2015 dollars). Given the projected growth in air travel, increasing fuel efficiency of vehicles, and relatively abundant U.S. oil supplies, the picture is bleak for Amtrak.
An important function of government is to provide what economists call public goods not effectively produced by the private markets. One example is defense spending, which clearly benefits all citizens but cannot efficiently be financed via the free market. Passenger trains (and freight trains for that matter) are clear examples of private goods, which are readily provided for profit if sufficient demand exists. In the 1930s and 1940s consumers demanded and got their trains. Today, not so much.
Passenger trains (excluding commuter lines) now account for less than 0.2 percent of all miles traveled and operate at less than 50 percent of capacity, at an average cost roughly triple the cost of air travel per mile. Amtrak's largest expense, wages and benefits, exceeds $100,000 per employee on average.
The marketplace offers a solution. Most of the 22,000 miles served by Amtrak are in relatively remote and unprofitable routes that could be easily eliminated but for political opposition from home-state representatives. Conversely, the Northeast Corridor train that recently derailed is heavily traveled and nearly self-supporting thanks to strong demand for transit between Boston, New York and Philadelphia. Private rail service in this area is clearly viable and potentially profitable, especially given the significant inefficiencies evident in the government-run service that private enterprise would correct.
As Congress contemplates action in response to the recent derailment, putting Amtrak out of its misery may be the best option for taxpayers as well as riders.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.