Sunday, February 21, 2010

Could Metro enter a Growth Trap?

The Washington Post today has a look at the decline in Metro’s quality. The story comes just weeks before Metro begins a temporary increase of all fares by 10 cents. The increase is scheduled to last from March until the end of June. If anyone wants to bet that those increases stay “temporary,” I’d be happy to bet against them.

The fare hike is designed to help cover a $189 shortfall in the Metro budget. Rather than looking too much at costs the WaPo story takes a keener interest in Metro’s capital. The story points out that half of Metro’s cars are at least 20 years old (a full quarter are at least 30 years old).

Without giving too much background the WaPo provides the chart below to show new purchases of Metro cars.

Sadly, the chart doesn’t explain how many of these cars are replacements of older models and how many are just additions to the system (from the factoid about old cars it looks like most of them are additions.).

Leaving aside the politics, economic theory makes this situation look rather bleak. The growth model pioneered by Robert Solow, was designed to track national growth rates but a paired down version can be helpful for Metro.

Solow’s model looks at growth in an economy, we’ll use it here to consider the quality of Metro. Solow included labor and capital productivity growth, we’ll leave those aside (a Metro car can only carry a fixed number of people—a figure that may actually have decreased as Americans have gotten bigger). Instead, we need to note the role of capital accumulation and depreciation. Solow assumes that over time our capital stock ages (cars get old, tracks need repair, etc). The risk that Solow noted and that the WaPo implies is that there are two places an economy is likely to land.

Solow predicted that economies would converge to a point where capital accumulation just equals capital deprecation and population growth. Essentially Metro shouldn’t replace everything all the time but there is a needed lower limit.

The dark side of Solow’s model and what the WaPo hints at is there is a second “growth trap” solution to the model. In this instance, capital accumulation has been below the minimum for so long that without a giant one-time boost, the system settles to a new location where no capital is ever acquired.

We often apply the “growth trap” to highly indebted, poorly managed countries.

Metro’s financial backlog has been mentioned above. It’s manager, John Catoe is retiring in April in response to the fracas over the redline accident that killed people last year and the WaPo reports that finding a new manager could take the rest of 2010. All of that makes Metro look ripe too fall into a dangerous trap.