June 9, 2003

Transportation Futures Synthesis

By Edwin S. Rubenstein

President, ESR Research Inc.

The U.S has the largest transportation system in the world. Astronomical references are often used to put the enormity of the system into perspective. Thus a recent DOT study reported that the nations 4 million miles of roads would go the moon and back 8 times; its rail lines would circle the globe 7 times; and that the 2.2 trillion miles traveled by cars and trucks in 2000 is nearly one-tenth the distance to the nearest star outside our solar system.

At one time transportation was the primary means of gathering information and communicating with people in different parts of the country. Today most travel is undertaken as a means to an economic end. We drive to work because we need the income. Businesses order supplies from other states and countries because that is where they are available at least cost. Except for pleasure trips a very small share of total travel demand - transportation is an intermediate good. Choice of mode is based on economic considerations such as cost, as well as speed, reliability, and convenience.

Transportation and economic efficiency are more closely linked than ever today. In prior years manufacturers held massive inventories in warehouses and transported goods in large consolidated batches. Today just in time manufacturing systems require smaller, more frequent, and precisely timed shipments. Free trade agreements linking North American and global markets have resulted in sharp growth in cross-border and waterborne freight shipments. These changes have raised expectations as to the speed and reliability of transportation throughout the U.S. economy.

The increased demands placed on the transportation system are well documented. Goods valued at more than 70% of total GDP are transported over the nations highways, railroads, airlines, and port facilities. Since 1960 total ton-miles of freight carried by all modes have nearly doubled, while ton-miles hauled by trucks have increased by a factor of four. Passenger car travel has grown nearly three-fold over the past four decades, to 1.6 trillion vehicle miles in 2000.

Transportation also influences land use patterns. The Federal Highway System facilitated urban sprawl, allowing workers to live in ever more distant suburbs while working downtown. In most metro areas radial highway capacity did not keep pace with suburban commuter traffic. The suburbanization of office space and jobs over past few decades is in part a response to increased congestion on radial highways leading into city centers. These suburban office complexes are automobile friendly, spread far apart with vast expanses of parking lots in between. Ironically, the suburbanization of economic activity has resulted in an increase in commuter times and distances, albeit shifting the activity from radial movement (suburb to downtown) to tangential movement between suburbs.

Infrastructure Demand and Supply

Despite the increased demands placed on it, the carrying capacity of the nations transportation infrastructure has changed very little in recent years. This is especially true for highways, which have borne the brunt of increased freight and passenger traffic[GAH1] . Since 1980 interstate highway lane miles have risen by 16%, while vehicle miles traveled on this roads increased 123%. Not surprisingly the economic costs of highway congestion nationwide which include the value of time and fuel wasted while sitting in traffic - are enormous and rising rapidly. To this must be added the adverse impact of congestion on highway safety, air quality, noise, and producer costs.

But highway capacity is often difficult to measure, especially over long periods of time. A commonly used capacity measure - lane miles - does not reflect changes in roadway quality, durability, or safety. Moreover, driving habits affect the capacity measure. Drivers in 2000 were moving at faster speeds with less space between vehicles than their counterparts fifteen years earlier. Effective highway capacity may therefore be expanding faster than the sluggish growth in lane miles would indicate[GAH2] .

This ambiguity raises questions as to the need for additional highway infrastructure. The economic test for infrastructure investment involves computing all the benefits and costs of projects and then their rate of return. If the rate of return exceeds the costs of the funds the interest rate the investment is worthwhile. Research shows that highway infrastructure meets the cost/benefit test by a comfortable margin. At the national level, every $1 invested in highway expansion generates approximately 30 cents of cost savings annually over the life of the road improvements, implying a payback time of only four years to recoup the costs of new highway projects. This suggests that the economic benefits of investing $1 in new public highway construction are equal to, if not greater than, the benefits of investing $1 in the private sector. (See Nadiri.)

A mismatch between demand and supply is also evident for non-highway modes. Railroads operate far fewer miles of intercity track today than fifty years ago, but carry more ton-miles of freight. In air transportation, the number of aircraft operated by private air carriers has increased by more than 30% since 1990, while the number of airports serving commercial planes has actually shrunk. The increased utilization of existing transportation facilities, coupled with limited prospects for future expansion, raises the specter of deterioration. So far we have avoided this. Surveys show that the condition of our roads, bridges, and airport runways has generally improved over the past decade even as performance, as measured by congestion and average travel times, has worsened.

Modal Choices: Highways v. Rail v. Intermodal

Since World War II highways have supplanted railroads as the principal inter-city transportation system for both passenger and rail traffic. Today more than 80 percent of all passenger miles are associated with private automobiles. Rail transportation carries only a small percentage of total passenger trips today, with most of those occurring in commuter rather than inter-city rail lines.

Trucks carry the lions share of fright traffic when measured in dollar value. Larger, more fuel efficient trucks combined with a more extensive highway system have increased the competitiveness of trucks vis a vis rail for most products and distances. (The distance at which rail-truck service is competitive with truck only is now typically around 850 miles.) Trucks share of total freight traffic will increase as E-commerce and leaner inventories put a premium on speed, flexibility, and reliability. Trucks also benefit from a de-facto subsidy, paying far less fuel tax relative to the wear and tear they put on highways than automobiles.

For freight transportation, however, rail and air are still significant modes. Freight railroads carry approximately 40% of the nations ton-miles of freight. Economic deregulation of airlines and railroads have changed the structure of those industries and because of enhanced competition within each industry brought improved service and lower fares. Airlines and railroads have experienced major consolidation through mergers and strategic alliances. Since 1980 railroads carry 50% more freight while reducing their track by 35%, their locomotives by 32%, and their employees by 60%. These efficiencies have been passed on to shippers through rate reductions.

Government involvement in transportation finance also influences the choice of mode. In the United States freight railroads are private companies operating on their own roadbed and track. As a result, they incur large fixed costs, e.g. interest and taxes on the roadbed, which must be covered regardless of their business activity. (Even AMTRAK, the monopoly provider of intercity passenger rail service in the U.S., cant cover the costs of its infrastructure without massive government subsidies.) By contrast, motorists and trucks travel on infrastructure financed by government, largely through taxes collected on motor fuel. Truck companies can ignore completely the costs to the public of building and maintaining highways and concentrate solely on the cost of operating the truck. Thus the apparent cost advantage of trucks over rail may not accurately reflect the total costs to society of the two modes.

Intermodal freight shipments are growing faster than freight moved by a single mode. The era of intermodal transportation began in earnest mid-1980s when ocean carriers, railroads, and truckers teamed up to launch container service. The container revolution allows a single unit to be transferred seamlessly by truck, rail, water, or air with substantial reduction in transit time, expense, and damage, and theft. Free trade initiatives have triggered much of the rise in intermodal freight traffic, but the reverse is also true: the efficiencies made possible by intermodalism have fostered growth in international trade. (See Dempsey for a discussion of the history and benefits of containerization.)

Intermodal transport is also an integral part of the internet revolution. E-commerce and Just In Time systems train customers and businesses to order at the last minute and expect overnight delivery. In such a world fulfillment and delivery as important as product cost and quality. Overnight air-truck delivery of a single item to a single customer is reasonable given these expectations. At the same time, parties engaged in intermodal transport are using electronic interfaces to enhance connectivity and to improve the flow of information between systems. They are making increased use of innovative ITS techniques including internet based freight car ordering, car tracing, pricing, and billing.

Transportation Productivity: Doing More With Less

Despite the vast increase in passenger and freight traffic, transportation spending has declined as a percent of GDP. Freight costs have shown the most dramatic change, falling from 9% of GDP in 1960 to about 6% today. There are many reasons for this: Trucks are larger and more fuel-efficient; railroads operate with fewer workers and less equipment; Fuel costs have stabilized. Intermodal connectivity among rail, truck, and waterborne modes has increased[GAH3] . Overarching everything is the shift from a manufacturing-based economy to one based on services and information.

Two public policy decisions play a large role in the increase in transportation productivity. First was the decision to build a national interstate highway system. In the twenty years following passage of the 1956 Highway Act, interstate route mileage exceeded the growth of both trucks and passenger vehicles. When highway growth slowed in the 1970s a second policy decision economic deregulation of trucking, airlines, and railroads enhanced the ability of private transportation companies to utilize existing infrastructure.

Unfortunately, the positive impacts of both infrastructure expansion and deregulation have long since peaked. The highway model embodied in Eisenhower-era interstate legislation effectively ended in the 1970s. Interstate highway mileage (measured in lane miles) has increased only 16% since 1980, while vehicle miles traveled on those roads increased 123%. Not surprisingly, the performance of the Interstate Highway System has deteriorated. The Texas Transportation Institute estimates that travel under severe or extremely congested conditions doubled from 1982 to 1997 costing $72 billion in wasted fuel and time.

Highways are increasingly viewed not merely in traditional economic terms (as capital investment) but in terms of how they impact air and water quality, noise, land use patterns, and other external effects. Because of such concerns it is practically impossible to envisage a program to greatly expand the U.S. highway system today even if economic and budget conditions were favorable.

Nor is it likely, in the wake of the post 9/11 reductions in air passenger traffic, that airport capacity will soon be expanded. There is a renewed interest in railroads because of their advantages in terms of safety, fuel efficiency, pollution, and other environmental impacts. But the cost cutting engendered by rail deregulation has by some reports weakened the ability of many rail carriers to deliver reliable freight service[GAH4] .

What Will Drive Transportation in the U.S.?

What will replace the historical strategic drivers of transportation capacity in the United States? There are several likely candidates:

- Intermodalism. The U.S. transportation system will increasingly focus on intermodal connectivity rather than constructing additional highways, rail lines, and airports. The classic intermodal combination of truck-rail already (in 1997) moves 54 million tons of goods, diverting 2.2 million large trucks from highways for major parts of their trips. On the passenger side, increased highway congestion in urban areas and the discontinuation of shorter air routes will increase the demand for commuter rail and inter-city high-speed rail service.

- Technology. Transportation and telecommunications networks will meld, producing a fully automated highway system. Such a system will gather information on road conditions and automatically pass that information on to vehicles and other infrastructure. ITS technologies will include collision warning and avoidance device, guidance devices, electronic brakes, electronically controlled steering, and other sensors to supplement and perhaps replace human driving judgment.

- Homeland security. Just as the National Defense Highway System was the transportation systems response to the Cold War, a National Interstate Security and Logistics System may be needed now, as has been suggested in another Hudson Institute paper. This system would use GPS technology to track all components of the supply-chain: containers, chassis, rail cars, trailers, trucks, etc. Trucks and freight trains may be required to file trip plans much like aircraft file flight plans, with any deviation from plan triggering a security response. While Homeland Security is the immediate goal, the technology could support anther revolution in supply-chain logistics

- Variable-pricing policies. Demand-side strategies like time of day and distance pricing will be enabled by the new technology embedded in infrastructure and vehicles. Traditionally transportation pricing has been used to discourage travel at certain times and places. Another approach, suggested in a Hudson Institute study, would link price with a guaranteed level of service speed will always be 40mph or greater in the premium toll lanes, for example. Variable pricing regimes will help reduce dependency on motor fuel taxes.

- Financial innovations. Inflation and increased fuel economy have reduced the elasticity of motor fuel taxes relative to economic growth and highway usage. New, non-fuel tax revenues are needed to fund highway infrastructure. The trend to non-traditional finance is already well established, with states allowed to use toll road investments, private funds, publicly donated right-of-ways, and the value of ITS technology installed along highways towards its share of federal-state matching funds. New legislation allows state DOTs to help public or private entities borrow federal funds to help construct toll roads. The two forces debt leverage and public-private partnerships have yet to be fully exploited in transportation finance.

A Most-likely Transportation Scenario

The U.S. has ample resources to expand its transportation system. However, if infrastructure continues to lag traffic growth and congestion worsens, as seems likely, there will be no massive breakdown. Freight markets will self correct, shifting to less traveled, longer routes at off-peak times. Workplaces and residences will move from more-congested to less-congested parts of metropolitan areas, and from more-congested to less-congested parts of the United States. Such adjustment has been the most important means of accommodating growth throughout U.S. history. Some industries will move their operations abroad if congestion erodes their comparative advantage.

Perhaps the most plausible scenario is that the nation will accommodate growing transportation demand by marginal increases in the amount spent on traditional transportation infrastructure; large increases in ITS technology; limited implementation of variable price regimes; continued moving away from the most congested locations; and by accepting increased congestion at choke points. This muddle through scenario might be tolerable, but it will leave us far from the economic optimum.

References:

Dempsey, Paul Stephen, The Law of Intermodal Transportation: What It Was, What It Is, What It Should Be, University of Denver.

http://www.ie.msstate.edu/ncit/NCIT_WEB_UPDATE/Final%20Report.INTERMODAL-ARTICLE29AUG00version2.htm

Eno Transportation Foundation, (Wilson, Rosalyn A., editor), Transportation in America 2000, with Historical Compendium 1939-1999, 18th edition, 2001. http://www.enotrans.com/Publications/Publications_List/publications_list.html

Eno Transportation Foundation, Report on the Fourth Forum on Intermodal Freight Transport in Europe and the United States, April 5-6, 2001. http://ops.fhwa.dot.gov/freight/pp/GenoaReport.doc

Gramlich, Edward M., Infrastructure Investment: A Review Essay, Journal of Economic Literature, Vol. XXXII, September 1994.

http://ideas.uqam.ca/ideas/data/Articles/aeajeclitv:32:y:1994:i:3:p:1176-96.html

Mudge, Richard, Dude, Innovative Finance: Does It Have A Future, or Whats the Deal, Man?, Hudson Institute, Working Draft, March 2003.

Nadiri, M. Ishaq, and Mamuneas, Theofanis P., Contribution of Highway Capital to Output and Productivity Growth in the U.S. Economy and Industries, Federal Highway Administration, Office of Policy Development, Washington, DC, August 1998. http://www.fhwa.dot.gov/policy/gro98cvr.htm

Transportation Research Board, Freight Capacity for the 21^st Century, (Special Report 271), Washington, DC, September 2002. http://books.nap.edu/html/SR271/SR271.pdf

U.S. DOT, Bureau of Transportation Statistics, Transportation in the United States: A Review, 1997. http://ntl.bts.gov/data/titustxt.pdf

U.S. DOT, Bureau of Transportation Statistics, Transportation Statistics Annual Report 2000, 2001. http://www.bts.gov/publications/tsar/2000/