Thursday, December 25, 2008

Musings on Transport Subsidies

During a dialogue session with Macpherson residents on Sunday, Transport Minister Raymond Lim, in response to questions on the rising cost of public transport, revealed that it would take a further 1.5 percentage point hike in GST if bus and train rides were to be made completely free.

On certain levels, the argument is attractive. As a libertarian and a minarchist, one of my beliefs is that governments should be as small and limited as possible. The argument for minarchism is similar to that raised by the Transport Minister- that ultimately, governmental interference (for example, in the form of subsidies) is circular, taking with one hand and giving with the other. More importantly, the objection is that such interference is pointless and inefficent.

Though the arguments for minarchism are actually deeper, the theory does appear to stick to the issue of public transport. It is a simple solution to demand transport subsidies from the Government, but ultimately, is not the Government funded by the taxpayer? In effect, transport subsidies are tantamount to the public transport user being subsidized by the private transport user, which may or may not be desirable, depending on your views on wealth redistribution.

There is, however, one mistake in the prior reasoning. That mistake is to assume that the game is zero-sum, and that subsidies take X from a person and distributes X to another. and that there is no change in overall utility. For certain goods, especially public goods, this may not be true. In some cases, total utility can be increased by redistribution. One notable example is that of economic stimulus packages, which, by taking tax money and redistributing it to the citizens, might initially appear to be foolish, but is actually somewhat a prudent measure, since it encourages economic growth in the hope that the tax money lost could be more than recouped by the growth in the tax base.

Having raised the idea that subsidies might not be zero-sum, let us try to explore how this can be so. To speed up affairs, let us ask whether a sum X spent in transport subsidies can possibly generate a greater sum Y in additional economic growth. To answer the question, we need to study the effects of the additional mobility granted by the corresponding reduction in public transport costs.

Firstly, I could postulate that the gain in mobility may generate a weak rise in consumer spending, since we are less deterred from going out, though I admit that any rise in spending would most likely be minimal. A second effect is that retail competitiveness would increase, as consumers are less likely to be locked in to vendors from the neighborhood. This might lead to smaller shops (pop-and-mom outfits) being negatively affected, since the advantage of locale would be eroded.

A more important effect is that of jobs. Traditionally, distance (from the home to the workplace) is one barrier to the choice of jobs available to a worker. While there may be many job opportunities, many jobs are not possible or at least less attractive due to the commuting distance, and also commuting cost. Corresponding reductions in the cost of commuting may see a rise in employment rates, or of worker quality.

It might be possible that subsidies for public transport may generate more utility than their cost, though very careful studies must be made to quantify arguments for it, as I admit that the arguments I put forward in this post are at this stage entirely hypothetical. In particular, the issue of how the subsidies are to be funded should also be taken into account, as certain forms of funding are likely to destroy or erode gains made from the subsidies. For example, additional consumption taxes are likely to dampen or even reverse growth in consumer spending. Hence, more research would be desirable to shed more light onto this matter.

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