Down the Tube

The first elected Mayor of England's capital city, Ken Livingstone, has seen his transportation policy descend into chaos in recent weeks. Londoners regularly rate the ease of getting to and from work as their major concern, and to a large extent Livingstone's re-election chances hinge on him conquering <?xml:namespace prefix = st1 ns = “urn:schemas-microsoft-com:office:smarttags” />London's problems in this area. Livingstone was in charge of London's transportation policy once before, in the early '80s, when his socialist “Fare's Fair” policy slashed prices on public transport and plunged the industry into financial troubles (which helped lead to the abolition of the Greater London Council of which he was head). This time, he has experimented with market forces. Yet because of a failure to allow the market to work, he has damaged London's economy again.<?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />


The centerpiece of Livingstone's transportation policy is the congestion charge, a charge of £5 (around $8) levied on every car that enters the central area of London every day, with a penalty fee on top if payment is not received by the end of the day in question. This charge was aimed at reducing traffic congestion in central London by reducing traffic by about 15 percent. A private sector firm, Capita, would administer the scheme and any extra revenues earned above their fee would be used to finance public transport improvements. That's the theory, at least.


In practice, the scheme has not worked out quite that way. When working out how much a certain number of people would be willing to pay for a privilege, economists construct something called a “demand curve.” When they did it for this exercise, they estimated that a reduction in traffic of 15 percent would require that £5 fee. Unfortunately, they got their sums wrong. The reduction in traffic has been far greater than anticipated. This has several consequences. First, it has meant a shortfall in Capita's revenues. Livingstone has been forced to address this problem by granting them £32 million of London taxpayers' money to allow them to make their required profit. This money, of course, represented a shortfall in the mayor's budget. As a result, he has been forced to postpone a planned extension to the Docklands Light Railway. Far from the congestion fee benefiting London's public transport network, it has harmed it.


The market answer to this problem would not have been to shovel taxpayers' money into Capita's pockets, but to redraw the demand curve. If more than 15 percent of traffic is dissuaded from entering London at the £5 level, then a reduction in that fee would result in an increase in traffic to the 15 percent level, producing extra revenue that could presumably at least partially offset Capita's shortfall.


Livingstone, however, has made it clear that this is not what he is about. He told the Daily Telegraph newspaper that, “The aim of congestion charging was always to cut traffic and congestion, not to make money.” It is clear, therefore, that Livingstone was not interested in a market mechanism and finding an appropriate equilibrium between revenue and congestion. Instead, the congestion fee is revealed as what a lot of us thought it was to begin with–an environmental tax.


Yet it is not a traditional form of tax. Ken Livingstone has seen free to buy what he sees as environmental benefits by diverting large sums from Londoners' pocketbooks (the average person paying the charge will probably end up paying well over $1,500 a year) into the coffers of Capita. The economic term for Capita's role is “rent-seeker”–a person or company that seeks to secure guaranteed income streams by using regulation to appropriate the income of other persons or companies (in recent American history, the most notable rent-seeker was Enron). It appears that Londoners are not happy about this. Over 100,000 people are currently refusing to pay penalty notices.


Moreover, those environmental benefits have come at a price for London's businesses. Because of the lower numbers of people entering the city, many central London businesses are reporting falling sales. No one has yet estimated the full value of the economic damage inflicted on London businesses, but it is likely to be substantial.


Nor has the congestion charge saved London's public transport by providing significant extra revenue. In fact, Livingstone has just announced rises in public transport fares of up to 25 percent while at the same time starting to replace the old “travelcard,” which offered unlimited travel during its period of validity, with new, electronic stored value tickets. These measures have not proved popular.


Livingstone has proved once again that supposedly market-driven initiatives espoused by socialists (as Livingstone is proud to proclaim himself) are often nothing of the sort. His excuse to the people of London for putting up their tube fares was to blame the central government for not providing more funds (in other words, for not requiring taxpayers around the country to subsidize their travel). London would be better served to elect someone who both understands how markets work in providing efficient travel and is willing to let them do so.