APTA: 2010 and Beyond: A Vision of America's Transportation Future

Hudson Institute July 1, 2005

Executive Summary

In its new book titled 2010 and Beyond: A Vision of America's Transportation Future, the Hudson Institute calls for some revolutionary changes in the financing, technology, and management of the nation's surface transportation system.

Hudson argues that these changes are essential if the American economy isn't to become bogged down by last century inadequacies as the role of transportation becomes increasingly vital. Since these changes are likely to take a generation to work their way fully through the surface transportation system, the time to begin implementing them is now.

A salient theme of this book is that the arrival of new technology can bring about a long-needed revolution in how we plan, finance, and manage various transportation modes. Highways, freight rail lines, public transit systems, airlines, and inland waterways can be integrated into a single national transportation system in ways that provide greater safety, economic efficiency, environmental friendliness, and user-friendly mobility for people and goods to an extent that we couldn't even dream about just a few years ago. This would pave the way for transportation to become a smoothly functioning experience whose over-riding goal is to provide superior door-to-door service to the customer.

This vision is quite different from today's practice of operating the individual modes as if they were a hodge-podge of unrelated kiddy rides in a local amusement park, with the customer left to make his own choices about which rides to patronize and in what order. In fact, it is a logical extension of management guru Peter Drucker's landmark insight that the primary goal of every enterprise must be to Create Customers.

Since the demand for travel arises from other kinds of economic activity rather than existing for its own sake, we create travel customers by providing the kind of transportation services that support these other kinds of economic activity as effectively and as transparently as possible. The customer cares little about the intricacies of each transportation link or mode. He is only interested in getting from here to there as quickly, as inexpensively, and in as hassle-free a manner as possible. That is why the integrated, "One System" transportation concept advocated by Hudson is so important.

Professional football provides a good example of what all this means. To the casual Sunday afternoon TV viewer, each football team seems to consist of two entirely independent units - the Offense and the Defense. Each unit has its own group of highly specialized and entirely separate players. Each unit has it's own coach and it's own set of plays. Each unit has its own distinct goals, with the Offense focusing on moving the ball down the field to score points while the Defense concentrates on preventing the other team's Offense from doing the same. It is almost as if each unit was playing a different game in a different stadium.

But the head coach, striding restlessly up and down the sideline, knows that these differences are unimportant in the larger scheme of things. Like the legendary Russian Field Marshall Mikhail Kutuzov confronting Napoleon's armies in 1812, he knows the one big thing that matters above all else. For a head football coach, this one big thing is that the team with the most points on the scoreboard as the final seconds tick away at the end of the fourth quarter is the team that wins the game. Making his team the game winner depends on how successfully he integrates the activities of the Offense with the very different activities of the Defense. If he does this more effectively than his opposite number on the other side of the field, he achieves victory. If he doesn't, then everything else he does is meaningless.

The same realities apply in transportation. If we present the customer with a Chinese menu of travel modes and leave it up to him to choose which ones to use and how to link them together, he heaves a weary sigh and tries to cope as best he can. Possibly wondering whether he might be able to reorganize his economic activities in ways that minimize the need for transportation, even if this means using more resources to produce less output. In other words, we discourage the customer. Which is exactly the opposite of what Peter Drucker said about the importance of creating customers.

It makes much more sense to follow the practice of the world-class restaurants like Lutece in its glory days, which provided the customer with a pris fixe dinner that he could enjoy without worrying about the details. These were left to the professionals in the kitchen, who were past masters at knowing how to integrate the sequencing and timing of individual dishes and wines into a memorable dining experience.

To accomplish the same level of customer satisfaction for transportation in the United States, Hudson's book zeros in on four key policy recommendations:

TRANSPORTATION FINANCE
Transportation investments must be funded from a comprehensive set of revenue sources that are sustainable and reflective of consumer choice.
MOBILITY MANAGEMENT
The United States must establish a transportation system where all modes operate as one in a Mobility Management environment.
TECHNOLOGY DEPLOYMENT
The United States must advance the rapid deployment of technology in all aspects of its transportation system to achieve optimal safety, security, and operational benefits into the future.
FREIGHT SYSTEMS
Establish freight systems, including highways, rail, ports, river, and air, as critical interrelated components contributing to our nation's role in the global economy.

Each of these recommendations has complex overtones that are discussed in the book. A summary of these discussions follows.

TRANSPORTATION FINANCE

Today's most serious financial challenge involves the nation's roadways and public transportation systems, where existing funding methods seem to have broken down as severely as the government's amateur-hour response to Hurricane Katrina.

The American Association of State Highway and Transportation Officials (AASHTO) estimates that some $5.3 trillion will be needed during the first quarter of the 21st century to provide the nation with the kind of highway and public transit systems its needs to support a growing economy. Of this amount:

$4.2 trillion should be spent to offset normal wear and tear so that the condition of these transportation systems doesn't deteriorate any further.
$1.2 trillion is needed to overcome pervasive infrastructure deterioration from past under-funding and to provide the minimum capacity expansion needed to facilitate economic growth.

But even allowing for the new six year funding authorizations in the 2005 federal SAFETEA-LU transportation bill, the present federal motor vehicle fuel tax and the budget appropriations from state and local government are projected to meet less than two-thirds of these needs.

Hurricane Katrina shows the dangers of making excuses for failing to spend what is necessary to maintain and upgrade essential infrastructure. In the case of New Orleans, essential infrastructure consists of the levees that are supposed to protect the city from flooding during hurricanes and other periods of abnormally high water. By long tradition that reflects the thoughtful insights of Adam Smith about the lead role of national government for vital public works, these levees are the responsibility of the U.S. Army Corps of Engineers whose activities are funded by the federal budget.

But year after year, the White House and Congress found convenient excuses to significantly cut the Corps' appropriations requests for capital spending on these facilities in order to free up funds for tax reduction, the war in Iraq, and other purposes. The end result was that some 80 percent of New Orleans was flooded in the wake of Hurricane Katrina when its under-strength levees collapsed. This, in turn, left hundreds of people dead, a major American city uninhabitable for an extended period of time, the nation's grain export and petroleum industries severely disrupted, and a colossal repair bill at least one hundred times larger than what the Corps of Engineers had requested in the first place to improve the levees so that this disaster could have been avoided.

In the world of transportation, essential infrastructure includes the roadways, bridges, rail lines, airports, and inland waterways that the nation depends on to move people and goods. This Infrastructure needs to operate with maximum efficiency if it is not to become a drag on the national economy. But too many years of inadequate funding by all levels of American government has left critical portions in poor repair and lacking the capacity needed to meet today's mobility demands. This imposes unnecessary costs in terms of dollars and time on the nation's ability to grow and prosper.

Hudson believes that the only practical solution to this transportation infrastructure funding shortfall is to end the traditional practice of regarding access to highways as "free". Instead, motorists should be charged reasonable tolls for using them based on the miles they travel, the kind of vehicles they drive, the amount of pollution they generate, and the levels of traffic demand in effect when they choose to make their trips.

New technology now makes it feasible to retrofit the nation's existing highways to collect such tolls without affecting traffic flow. It avoids traditional stop-and-go toll booths, land-hungry toll plazas, and long lines of impatient motorists queuing up to pay cash tolls. In other words, technology makes it possible to deliver highway access to motorist customers through the same kind of marketplace mechanism that we have traditionally used to distribute access to a host of other goods and services whose allocation has always been governed by price.

For highway pricing to be accepted by motorists, it may be necessary to offer them on-the-spot money-back guarantees of trip time savings. A highway that charges one dollar per mile during a particular time of day, for example, must clearly link this price to a promise of a certain minimum average traffic speed (such as 55 miles per hour). If the average speed should fall below this minimum for any reason, the motorist will be charged progressively less. With the price falling to zero if an accident or some other major disruption reduces the average traffic speed to stop-and-go levels.

Such clearly marked highway performance guarantees enable each motorists to make meaningful trade-offs between the value he places on travel time savings for each trip and how much he pays to use highway lanes. This can be especially important to the drivers of trucks and other commercial vehicles whose operating costs are closely linked to the amount of time they must spend making each trip.

Performance guarantees also provide incentives for highway operators to intensify their focus on providing better service to their customers because of the direct relationship between service and toll revenues. This is a marketplace linkage that is missing on highways that are perceived as "free" by their users and operators. Service-oriented activities like maintaining roadway pavement in top condition at all times, clearing away vehicle breakdowns as quickly as possible, installing the latest technology to expedite traffic flow, and assuring motorists of up-to-the-moment information about traffic conditions can attract more customer and therefore generate more revenue.

The transition to a user-supported highway network is likely to be a lengthy one. To fund this transition, Hudson recommends an immediate and temporary increase in the federal motor vehicle fuel tax. Further, this tax should be indexed to construction costs in order to attack the backlog of highway repairs and overdue capacity increases due to many years of revenue-starved under-spending that has caused the nation's surface transport system to become increasingly dysfunctional. Revenue from the fuel tax would be lock-boxed to avoid any questions in the minds of motorists about any of it being "borrowed" by other branches of the federal government to fund non-transportation activities.

As increasing portions of the highway system become retrofitted to generate toll revenue, the fuel tax would be phased out. It would disappear entirely when the system become completely user-supported through tolls. But until then, the fuel tax would provide the funds needed to begin restoring the nation's highway and public transportation systems.

A critical point about Hudson's highway toll recommendation is its forthrightness in recognizing that finance concerns more than money per se. Above all, it concerns Pricing - the importance of having transportation customers pay for the goods and services they consume in as direct a manner as possible so they can make rational trade-off decisions between alternatives. The positive fallout from this is greater emphasis on such benefits as greater operating efficiencies and improved customer service.

Hudson's recommendation represents a marked departure from so many of the "innovative finance" funding proposals that have become popular fodder in transportation journals. For all their financial engineering brilliance in moving dollars from one period to another and managing debt in clever ways, these proposals tend to be locked into a "rearranging the Titanic's deck chairs" mind-set that, in the end, provides little in the way of Net New Revenue. Yet Net New Revenue is what matters most. And highway tolls are the most practical way to assure this. This approach does not prelude the need to apply market based pricing to other modes.

MOBILITY MANAGEMENT

Adequate funding alone is not enough to make the necessary difference in providing the nation with the kind of 21st Century transportation capability that it needs. Equally important is how intelligently these funds are put to work.

That is why Hudson's book stresses the importance of having transportation system managers to move away from their traditional focus on engineering-oriented performance measures like vehicle-miles-of-travel. They need to adopt customer-oriented measures that emphasize reduced door-to-door travel time, greater travel time reliability, and smoother interfaces between various transportation modes.

Hudson's most radical concept may well be to convert what is now a disconnected groups of separate surface transportation modes into a fully integrated "mobility system" that travel customers perceive as virtually seamless and transparent.

A key element for accomplishing this is to have the national toll-supported highway network to become a major funding source for all surface transportation modes, not just for roadways. This can include using toll revenues to support a larger network of freight railroad tracks so that more goods can be moved by rail rather than by road, which can reduce traffic congestion and shorten trip times for motorists whose travel activities can only be served on roadways.

The same approach can be applied to public transit in large metropolitan regions in order to avoid clogging highways with work trips in single-occupancy vehicles, many of which can be handled more efficiently by properly funded transit systems. More and better quality transit capacity promotes greater concentration of work locations in urban centers where greater economies of scale can reduce overall employer costs, conserve petroleum-based energy resources, and enhance air quality throughout the metropolitan region.

This use of transmodal cross-subsidies may raise eyebrows among some traditionalists who believe that "every enterprise should pay its own way". But it is entirely consistent with the contemporary "business portfolio" management concept in such multi-product corporations as the automobile and pharmaceutical companies. These enterprises have learned that various product lines can complement and reinforce each other in boosting the firm's total bottom line rather than operating in entirely separate worlds, so that the whole is truly greater than the mere sum of its parts. The narrowly defined "profit center" accounting concepts once taught in graduate business schools overlook this important reality.

With improved customer service as their primary goal, transportation managers will find better ways to enhance the payoff to the American public from investing higher levels of capital dollars in the facilities that move people and goods.

Hudson's visionary approach to creating an integrated surface transportation system poses major new financial, technology, and management challenges. But it is a necessary element in maintaining national economic competitiveness in a world where the value of saving time and money when it comes to moving people and goods grows by leaps and bounds.

TECHNOLOGY DEPLOYMENT

The ability to collect highway tolls in a hassle-free manner is only one of the benefits that new technology offers the surface transportation system. Equally important from Hudson's perspective are the many ways that technology can help expedite the flow of people and goods with greater safety as savings in travel time and cost become increasingly vital requirements for achieving economic prosperity.

For example, technology already available or being developed can work around the clock to optimize vehicle spacing, speeds, and routings so that a given number of highway lane miles can move more vehicles in less time. This means that the intelligent use of such technology can reduce the number of new highway lane miles needed to accommodate future travel demand.

The same technology can greatly reduce the incidence of motor vehicle accidents on crowded highways. This would reduce the increasing financial burden that such accidents impose on American society and minimize the travel time delays they cause. While the right kind of on-board technology in motor vehicles can virtually eliminate deaths and injuries from accidents that can't be avoided, even when they occur at high speeds.

This potential for greater crash safety is obvious to anyone who watches NASCAR automobile races on television, which regularly feature accidents of the most spectacular kind. A group of five or ten or more cars barreling along the track in close formation at speeds in excess of 150 miles per hour abruptly dissolves into total chaos. Some cars lose control and ram the tack's retaining walls with unbelievable force. Others spin out and are rammed broadside by cars following close behind. Still others are flung into the air like children's toys and go rolling end over end down the track, often bursting into flame when they finally come to rest.

But when it's all over, virtually every driver walks away without a scratch. So it's not difficult to imagine how greatly the technology pioneered by NASCAR could reduce deaths and injuries at the much lower speeds typical of those in which highway accidents occur.

From a broader perspective, Hudson foresees more effective technology helping to break down the artificial barriers between roadways, public transit systems, rail-based freight networks, and other surface transportation modes so that people and goods move expeditiously door-to-door through a properly integrated system.

FREIGHT SYSTEMS

In March 2004, aggressively intermodal United Parcel Service had to shift back to trucks its hot-package transcontinental goods movement containers from the high-speed daily train service it had worked out with the Union Pacific railroad company. This became necessary when increases in the volume of Union Pacific's low-speed commodity freight business saturated its track capacity to a point where it no longer had room for special UPS trains.

Fifty years ago, American railroad companies had more track capacity than they knew what to do with. Double-track (even four-track) main lines in many places. Parallel bypass lines only a few miles apart providing alternate routes galore between major American cities. To a point where there was never any problem accommodating more trains.

From a transportation perspective, this generously endowed rail system was a national treasure. It provided ample capacity to handle seasonal increases in goods movement demand, not to mention the reserve capacity needed to accommodate long-term growth in freight volumes as the American economy grew.

But most national treasures require national support if they are to survive. And this was lacking for the high-capacity rail network of half a century ago, because it was privately owned by hundreds of individual railroad companies and therefore deemed ineligible for national support through the federal government. Instead, the private railroad companies had to try and support the rail network entirely on their own. But the increasing costs of doing this contributed to the wave of bankruptcies that shattered the nation's railroad industry and destroyed its ability to raise the fresh capital needed to keep pace with the nation's economic growth.

Therefore, instead of the transportation capacity expansion that occurred in the federally funded national highway and air travel networks, we witnessed a progressive shrinkage in the capacity of the privately funded national rail network. Encouraged by Congressional passage of the Staggers Rail Act of 1980, total miles of rail line fell by 41 percent between 1980 and 2000 as the bean counter's goal of "not quite enough rail capacity" ran wild. Leading to a rising incidence of irrational consequences like the UPS example described above, where freight that should logically move by rail ends up in trucks that further congest traffic on American highways.

But the consequences of this shrinkage in rail capacity go beyond mere numbers. As the UPS example suggests, trends in the volume of freight shipments must be viewed in terms of the changing composition of these shipments - from low-value, high-weight commodities like coal and grain to high-value, low-weight materials and finished products. This change is consistent with the shift to a more service-based national economy.

During the past quarter century, the American economy has evolved from being labor-intensive to being capital-intensive. There is an increasing focus on goods that are high in unit value, low in unit weight, and more costly to warehouse. This has led to greater emphasis on moving goods more quickly through the supply chain by substituting Transportation for Warehousing. In effect, goods that used to spend much of their supply chain time sitting idly in inventory are now increasingly in motion, so that the total time from producer to user can be reduced. Since this total time factor (whether spent in inventory or in motion) has significant cost implications, it needs to be kept as short as possible.

This is the essence of the just-in-time supply concept that has revolutionized so much of manufacturing because of the cost-saving benefits it makes possible. Together with the out-sourcing of labor-intensive manufacturing to developing countries, the result has been longer and more complex supply chains through which goods must travel in ever-shorter periods of time. In effect, increasing numbers of manufactured goods have become as time-sensitive as fresh fruit whose market value to consumers quickly declines unless travel times are kept short.

The transportation challenges posed by the growing replacement of goods warehousing by goods movement are clear enough. We need more capacity on highways and rail lines to avoid costly time delays. Plus smoother interfaces between trucks and trains so that the growing reliance on intermodal supply chains becomes the norm rather than the exception.

The capacity issue is mainly a function of investing in infrastructure expansion. But this is easier said than done. As we have already seen, revenues from the federal fuel tax that flow into the Highway Trust Fund have not kept pace with investment needs. That is why Hudson believes that the only practical solution is to replace the fuel tax with highway tolls, with indexed increases in the fuel tax being implemented as a temporary measure until tolls can become sufficiently widespread.

Funding rail network expansion is a more complex problem since there is no dedicated federal rail funding mechanism similar to the Highway Trust Fund. Such a mechanism should be established by Congress without delay. But as mentioned earlier, the most effective long-term solution may be to make available for rail expansion a portion of the revenues generated by highway tolls, so that a balanced strategy of "transportation network expansion" (covering both highways and rail lines) can be implemented.

Smoothing the interface between trucks and trains is part of the larger issue of creating a truly intermodal transportation system for goods movement. This needs to embrace ocean shipping ports, airports, and inland waterways as well as highways and rail lines in an integrated system that concentrates on coordinated service to the freight customer rather than the operating technicalities of the individual modes. Accomplishing this will require important changes in both institutional constraints as well as the mind-sets of transportation managers, with the later being at least as important as the former.

POLICY CONSEQUENCES

Looming just behind Hudson's four key policy recommendations is the obvious need for some kind of effective national strategic transportation planning to link together the consequences of these recommendations and make them mutually collaborative.

As its response to Hurricane Katrina demonstrates, the federal government has little understanding these days of the importance of sound planning at the national level. When it comes to transportation, it has even gone in the opposite direction - by insisting that all planning for federally funded transportation projects be done at the state and local level where jurisdictional rivalries often interfere with greater integration of the various modes.

But it wasn't always this way. When it came to fighting World War Two, the federal government unhesitatingly chose national strategic planning as its primary management tool to produce and allocate the vast quantities of fighting men, guns and ammunition, tanks, planes, and ships that overwhelmed Germany and Japan. Which Americans understandably regard as one of their nation's greatest triumphs.

The senior managers of corporate America who participated in the success of the government's strategic planning effort during World War Two were quick to apply its principles in their companies during the post-War era, where it laid the groundwork for the decades of rising national prosperity that followed.

Meanwhile, many of the fighting men who witnessed the success of strategic planning first-hand on the front lines of Europe and the Pacific returned home to attend college at the federal government's expense on the GI Bill. Where they studied the quantitative disciplines in operations research, systems analysis, accounting, and engineering that enabled them to apply planning concepts even more effectively when they went on to productive careers climbing the management ladders of the Fortune 500.

These lessons from what may be the proudest era in American history indicate how large a responsibility the federal government must bear in setting strategic agendas that affect the nation as a whole, as transportation surely does. Simple logic dictates that the government must meet this responsibility today just as it did during World War Two if the United States is to prosper in the 21st Century.

But simple logic seems to have become overwhelmed by the growing chaos and lack of accountability that characterize the bloated ant hill that passes for government in today's United States. At the federal level, the White House, the Congress, the Federal Reserve System, and the Supreme Court have degenerated into four uncoordinated "national governments" that make a mockery of the Separation of Powers concept. This is further complicated by 50 state governments that compete with each other by offering new tax benefits and outright subsidies in order to attract professional sports teams and other business enterprises seeking handouts. Plus literally thousands of overlapping local governments, public authorities, commissions, and special districts that seem never to have heard about something called Economies of Scale.

No wonder that the American Public has so little confidence in government. And is periodically driven to screaming outrage when the whole system breaks down spectacularly, as it did in the wake of Hurricane Katrina. With the various governments involved huffing and puffing to avoid all accountability and blame "the other guy" (since there are so many).

The Americans who remember World War Two when government was a triumphant and inspiring force in our national life are dying off all too rapidly. Who remains to testify how effective government can be a meaningful reality rather than simply an abstract ideal?

Maybe at least part of the answer lies in books like Hudson's that describe pragmatic solutions to problems that may seem intractable but can, in fact, be overcome by concerted and responsible action. With a new sense of national responsibility and a certain amount of luck, this could actually work.

Not everyone may agree with Hudson's recommendations, especially those who subscribe to the conspiratorial view of history. But they provide the ideas and detail needed to begin a serious debate on the issues involved. If approached in a constructive manner, such a debate can lay the groundwork for discussions about the content of the next round of legislation to follow SAFETEA-LU. These discussions are expected to begin two years from now in order to avoid the embarrassing stalemate in Congress that occurred when TEA-21 expired in September 2003. So we need to get ready.

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