The Failures of a “Government Enterprise” A periodic series on government trying to run businesses at

The Anniversary No One Celebrates in New York: Generations of Transit Disaster—-the New York City Subways, Part 3. The End of Private Management Companies

Decades of price controls combined with the Great Depression were hard on the New York City subway system as we have seen in the first two segments of this series. And, by the late 1930s, the once great system was in trouble, with private management companies filing for bankruptcy protection. The problem was the city, over 36 years, never allowed the private management companies to raise the fare above a nickel.

What was the effect of this?

Imagine you start a job at a good salary, but your boss says you can never get a raise. Imagine you own a business that is more and more regulated. And the regulator tells you, that despite decades of requests, your prices can never be increased. This is what happened to the subways. A backdoor method of socialism in the 1920s and 1930s wrecked the system without anyone mentioning the word socialism.

“The City of New York has set a pattern for the nationalizing of the railroads of the country,” wrote libertarian Frank Chodorov in reviewing the events of 1940. “A regulatory body, with power to fix rates and compel unprofitable operation, squeezes the business into bankruptcy, so that the owners are quite willing to sell their property to the taxpayers, and bureaucracy improves its position.”

So, by 1940, the BMT and IRT were happily gone. They had sold to the city because the price controls imposed by the city—as detailed in the first two parts of this series—had made their businesses impossible. (By the way, this pattern of destruction by regulation would also happen to America’s passenger railroads in the 1950s and 60s. That led to the creation of the national railroad system, Amtrak, which today is a money losing mess).

The New York City subway system was now totally under public control. That was something public interest groups, socialists and many Tammany Hall pols had been pushing for since the system began in 1904. Now the supposed golden period of the New York City subways, a unified system under government control, was about to happen. As we will see, the golden era of government operation never happened.

That’s because the fare continued to be a tricky issue and has been ever since. That’s even though politicians in 1940 celebrated this new era (Mayor Fiorello La Guardian drove the first train under the new system). But the biggest problem of the subways is what was their raison d’etre? What were they supposed to be? A utility run for the good of a people or a profit making enterprise? But, without profits, how could the system provide consistently good service, expand and innovate? Here’s the problem in a system that discourages and ultimately outlaws profits.

Profits pay for quality service as well as attract and gratify investors. The capital generated by profits can lead to a quality system. Initially, in the subways, some elements of the private sector were allowed by the pols. They realized the city, which then and now was often at the limit of its borrowing, could never find enough money to build the system. But, once built, the utility model triumphed, private management was banished and a golden era for the subways was predicted.

Fool’s Gold

It took a while for New York pols, regulators, riders and media to realize that the subways were not on the verge of a new epoca de oro. There would no more complaints of excessive profits. The latter is a difficult concept given that a capital intensive system such as the New York City subways—–with today some 421 stations and 232 miles of routes—needs huge amounts of capital just to maintain what it has. Today it is not able to effectively maintain its present system, no less expand.

Some historians of the city, such as Robert Caro, said that after 1940 it took a while for the government system to start failing. But, within a decade of the takeover, the system was collapsing. Those problems of decades ago plague riders—-especially those who took long trips from the outer boroughs—to this day. How and why did it happen? The red ink, which had begun in the last years of the private management companies, grew under public ownership.

The system ran an operating deficit of $1.2 million in 1950. However, two years later the operating deficit jumped to $25 million. About a decade after unification, the deficits continued and system breakdowns became more frequent.

“So superbly had it (the subways) had been designed, that it took decades to break down,” wrote Caro in his landmark biography of Robert Moses (“Power Broker,” p932). Moses was New York’s most controversial builder and its most powerful unelected bureaucrat for decades. He was a government bureaucrat more powerful than many of the elected officials he served.

Caro, for instance, tells the story of how FDR—-who had detested Moses when he was governor of New York—-tried to destroy Moses in the 1930s when he was president. FDR, a master politician, lost for one of the few times in his political career.

A System Deteriorates

Moses played a big part in the deterioration of the system. Moses, by the way, didn’t like subways and helped to run them down by convincing lawmakers to starve the system. Instead, he persuaded them to spend lots of money on government highways, which are today overcrowded and often breaking down. By the 1950s, the subways were on their way to becoming the disaster that they are today. Caro, reviewing the incredible problems of the subways some 15 years after the private management companies were ousted, documented the decline.

“New York had once been enormously proud of its subways,” (Caro, p932) but by the mid-1950s they no longer were. “It was in 1956,” Caro adds, “that there was instituted on the New York City subway system, because of a lack of funds, a policy of deferred maintenance—a phrase which, translated into practice, meant that the brakes and signals and switches were inspected less frequently, that electrical relays, which should have been replaced every five years, were replaced every thirty years, that the vast system was out of light bulbs to replace burnt out signals, alcohol to keep switches from freezing and other basic supplies.”

Caro’s analysis triggers a question: Suppose a highly regulated private business tried a program of “deferred maintenance?” What would happen to a private firm so exposed? And why is no federal authority cracking down on the authority in charge of the subways? I asked that last question of a federal transit official. I will discuss her answer later in this series.

The industrial policies of Robert Moses and his political allies in the 1940s and 1950s were to use public money for new highways, tunnels and bridges, but generally spend little on the subways. However, the subways couldn’t take care of themselves because they consistently ran in the red. Yet politicians, both republican and democrat, loved Moses the builder. He could finish road and bridge projects just before elections.

So Moses at one time held some half dozen state and city posts. Ironically, in the one time he ran for public office—a race for governor against Herbert Lehman—-the voters overwhelmingly rejected him in part for Moses’ anti-Semitic comments.

Moses’ most important job was as chairman of the Triborough Bridge and Tunnel Authority. As greater numbers of New Yorkers bought cars after World War II, the authority generated so much money that there was talk in the 1950s of ending all tolls on city bridges and tunnels. That’s something that seems comical now after countless toll increases. Moses kept these toll revenues away from subway development. And the system started to fall apart in the 1950s as the memory of private management companies faded.

After a few years of a politicized subway system, with no private participation and no possibility of ever running in the black again, the system was obviously in a period of decline. But let us remember what New Yorkers were told in 1940 and why the promises of government subways, with the advantage of history, turned out to be ridiculously unrealistic.

Flawed Ideas

The idea of public ownership and operation of the entire system was based on flawed assumptions. What do I mean by “entire?” The city government, at the urging of Mayor John Hylan, had built its own competing subway system in the 1930s called the Independent. The lines began operations partly as a New Deal project. They immediately started losing a lot of money.

Nevertheless, the Goo-Goos continued to insist that the unification of 1940 would solve all the problems of the subways. Government ownership would lead to endless benefits, they said. These promises, none of which ever worked out, included:

*There would be economies of scale that would come from combining the IRT, BMT and the Independent into one public system.

*Ousting “greedy” subway owners would be the best thing for the rider. They claimed that the private management companies would only provide poor service but the government would make the best of the system.

*Economies of scale would facilitate the extension of lines, such as the infamous Second Avenue Subway and a new line from Jamaica to the city line in Eastern Queens. A completely public system that would make money.

(This unsuccessful transportation socialism was similar to what happened with the birth of Amtrak in the 1970s. One Amtrak official, after the government took over a group of regulated to death bankrupt passenger railroads, famously predicted: “Now you’re going to see the greatest business turnaround in history.” (Joseph Vranich, “End of the Line,” p12). Forty years later, Amtrak has lost incredible amounts of taxpayer dollars as have the subways. Yet both New York and federal pols want the taxpayers to dig deeper to keep their systems afloat. Indeed, they want more. They want a new PennStation in New York that could cost billions of dollars).

*Government subways, since they were not run for profit, would have better relations with labor than private sector companies. There would be peace in the subways. Subway unions of the IRT and BMT would no longer be union members but would become civil servants.

The latter was based on the risible claims of Mayor Fiorello La Guardia—he was mayor from 1933 to 1945—that subway workers from the private management companies would come under open civil service regulations and the closed shop would not be in force. (The Napoleon of New York: Mayor Fiorello La Guardia, Jeffers, p275)

That, along with all the other promises of wonderful subways after 1940 when the government took over, would be exposed as frauds. More on the failures of the post World War II subways in our next report.

(Editor’s note: This is an abbreviated version of a scholarly essay entitled “Generations of Transit Disaster: The New York City Subways” that is appearing in the fall issue of “The Journal of Private Enterprise.”)

About The Author

Gregory Bresiger

Gregory Bresiger is an independent business journalist from Queens, New York. His Personal Finance articles have appeared in publications such as The New York Post & Financial Advisor Magazine. He is the author of the eBooks “Personal Finance For People Who Hate Personal Finance” and “MoneySense”.