Ask not what you can do for tagged money . . .

Subject to my usual caveats, Kevin’s next post on tagged money is below the fold.

An efficient private/public transport market

Over the last three weeks this series of posts have shown the utility of “tagging money” with information as a tool to help implement policy. My interest is in building efficient information systems – and an economic system is an information system. To explain the utility of tagged money I have had to delve into policy and economics to provide examples of what can be done. One of the difficulties with this approach is that the examples of policy and whether it is the “best” one or not sometimes get in the way of the argument about the utility of tagged money. The other difficulty is how to prove the assertions made about practicability of the approach until the ideas are trialled.

There are however, plenty of examples of tagging money in systems like EBay, compulsory superannuation, prepaid telephone cards, etc to know tagged money systems can be successful. In these examples, as well as the ones proposed, tagged money is implemented through special money accounts where the rules about the use of the money is kept on each person’s tagged money account. Tagged money is a concept not an implementation detail.

he possibities for tagged money in public transport are many and it can be easily implemented with appropriate electronic ticketting system based around accounts like as ETag.

The problem with public transport

Like many issues in society we have a conflict between what is good for the individual and what is the best for the community. It is clearly more efficient for society, in terms of transport costs, for many people to use public transport for some journeys. The energy and capital costs to move 1,000,000 by car or by train everyday of the week from point A to point B will always favour the train. Unfortunately life is not that simple because people already have a car that they purchased perhaps for other reasons – such as going from point C to point D on the weekends with the family. It makes sense to the individual to use the car for trips from A to B especially as it is likely to save a lot of time. This is a single instance, of many similar cases, of why it makes sense for people to use their own transport and not public transport.

Public transport is by and large subsidised to keep fares low so that it can compete with the marginal cost of driving a car. Somehow we need to be able to get investment and passengers into public transport systems with competitive tension between different forms of transport including cars. Another objective is to get better use from the existing investment in private cars and public roads.

An outline of a possible system
Let the government create tagged money that can only be used on “public transport” where “public transport” is defined as transport that transports a person who does not own the transport. Expenditure on public transport can be either for public transport infrastructure (buying a bus, investing in light rail) or for fares on public transport.

Let the government give everyone in society some of this money but like the MediSave money it is only transferrable between family members. How much of this money people get depends on the ratio of cars per person in the household. This is done simply by asking for it to be put on the TTag (transport tag account). People do not have to accept this money but if they do then they agree to the rules of the system and they do not have to spend it – but it earns no interest if they do not spend it. If they disobey the rules then they do not receive any more money for some period of time.

Let car pooling be designated a form of public transport but it has the interesting “quirk” that both passengers and the owner of the car get paid. That is, the passenger gets paid by the government in public transport money but the passenger also pay the owner of the car some tagged money.

Let mini buses that “roam the streets” be able to accept public transport money and of course let buses, light rail, trains, taxis all accept public transport money. Public transport can also accept untagged money by people putting in untagged money into their accounts and being able to take it out if they do not spend it.

A system like this could be introduced and cost less to run than the interest earned on the tagged money in the TTag accounts.

As bonus it would also handle all electronic transport ticketing and give places like Sydney an integrated transport ticketing system that also includes private buses, pooled cars and taxis.

What would happen? Car pooling would increase. Mini buses would become economic for neighbourhood transport. Governments could fund light rail, trains, freeways from selling bonds that are paid for with tagged money.

In other words we would introduce a market place for public transport where the sellers are private cars, minibuses, ferries, infrastructure etc.

A system such as this would be difficult to implement without the concept of tagged money. You can argue whether it is the best policy option but it will distribute resources efficiently because we allocate the money through a true market.

The system would also provide an extraordinary data source that would enable both public planners and private entrepreneurs a wealth of data on which to base the provision of services. It could be introduced incrementally with a bus ticketing system, extend to car pooling, then to minbuses, etc.

Questions
I have only given the bare bones of the system. There will be many implementation and detail questions – such as how car pooling systems will work, how do you stop people pooling people cheating the system, how do you handle the case of the poor who use a lot of transport, and how to handle people with special needs. These can all be handled in a variety of ways. The particular method will vary but we know we will be able to handle almost any problem because we will have the information on which to base decisions. I look forward to hearing what you think are intractible problems.

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Kevin Cox
Kevin Cox
13 years ago

The Caveats expressed by Nicholas with respect to “tagged money” are below. After his quote I address them by pointing out that his issues are with a different proposal in his own mind – not with tagged money.

“If you want to subsidise energy saving, subsidise it – tying the savings to more expenditure on energy saving equipment is inefficient both because it will lower the subsidy rate to those who dont want or need any such equipment (theyre just prepared to put more clothes on when its cold) and because you cant say in advance what is energy saving equipment. (Are jumpers energy saving equipment? Is hot water heating for your pool energy saving equipment? Probably but not if you wouldnt have put in a pool without it, or if you would have swum in the cold.) Not to mention the transactions costs. But that makes three objections and no-one expects the Spanish Inquisition.”

The key idea of tagged money is to direct expenditure through a free and efficient market place in areas you want money spent. It is NOT to subsidise energy savings. The Rewards part is a socially equitable way of distributing money to spend and is not the key idea. Nicholas has missed the whole point of the way the Rewards are allocated. There is NO NEED to specify how people save Energy. No matter how you do it you get rewarded. This is why things like Carbon Credits are so difficult to enforce – it is too hard to do. Rewards does not require this. What matters is how you spend the Rewards – not why you get them. This is the part that Nicholas does not seem to understand and is why the approach is enforceable, practical and cheap. You CAN enforce expenditure to the areas you want by controlling suppliers. Suppliers have to say in a contract why their goods and services will reduce the production of say green house gases and they have to give an estimate of the amount of reduction expected. If a supplier does not meet these commitments or is clearly rorting the system they are thrown out of the market. If the buyer was a knowing participant then they are removed from the market. This is why the system will work. It has mechanisms to self regulate. Finally the transaction costs are low and will be less than the existing way we distribute money and this is shown with existing tagged money systems.

Nicholas’ main objections are objections against something that is not proposed. He has raised objections to his idea of how the system works not to the system outlined. This is understandable because in the first iterations of the idea I used to emphasise Rewards not how the money was spent – probably because I liked the idea of social equity and behavioural changes more than the spending of money. Tagged money is only incidentally about why you receive money. It is mainly about how you spend it.

Again I challenge people to say what is economically inefficient in this proposal for a market in public transport and/or why it is not practical.

NPOV
NPOV
13 years ago

By your definition, single passenger taxis would count as public transport too, right?

FWIW, in most big Europe cities, most people own cars also, but prefer to use public transport because it’s just a faster, easiest and less costly way to get around. So it’s obviously possible to combat the problem of sunk costs.
I wonder if it would make sense to lower the cost of buying/registring a car (e.g. reducing the taxes/fees involved) but significantly jacking up the cost of driving them – increasing petrol taxes, ensuring that all insurance – including CTP – is based on amount driven etc.) That might also help speed up turn-over, which is probably necessary to ensure average fuel efficiency increases quickly enough to match a carbon-constrained economy. Of course, it’s been argued that the sunk energy costs in building cars is significant, so increasing the turnover rate might not actually save energy overall – but if most of that energy comes from nuclear power plants in Japan or South Korea does it matter?

conrad
conrad
13 years ago

Kevin,

why not just charge people the real cost of the roads, including the money lost in the space that is currently used for free parking. In cities/countries that even partially do this (generally just by not putting free public parking everywhere or by congestion charging), there is far more public transport usage. You should check out France vs Germany. Everyone takes trains everywhere in France because you have to pay for the roads, and the opposite is true in Germany where you don’t, excluding cities where cars are too much of a pain. There’s a huge disocciation in some places. Also, I don’t see why you need to use tagged money for infrastructure investment. If you need less, for example, what will you do with the surplus? On a similar note, if you are using bonds to fund stuff, then I’m assuming that you are going to be needing more, which basically makes the amount you are collecting as arbitrary, and hence just a government cost, rather than somehow specific to transport.

Kevin Cox
Kevin Cox
13 years ago

One of the nice things about using tagged money is that we do not have to worry about the details of the method of transport. If people have money that they can only spend it on public transport then they will spend it. The market will take care of where they spend it and they will choose the “best way” for them.

What will happen when we put the system into operation? My guess is that the average number of people per car will increase dramatically for commutes. This is “all profit” from the point of view of the community as it is gives better utilisation of existing resources. I think we will get “roving” mini buses in the suburbs and we will get better utilisation of buses and trains – but that is supposition. What I do know is that the total amount of money the community spends on transport will drop. Better still we will know exactly how much we have saved and where it is saved and be able to tweak the system to get even more savings.

Kevin Cox
Kevin Cox
13 years ago

Conrad,

The problem with trying to charge “the real cost” is that it is impossible to get prices to reflect “the real cost”. Even in so called competitive markets price only approximately reflects real costs. As someone who sets prices we take little notice on our costs and look instead at what we can charge. When you try to add in the externalities you get into the emissions permits quagmire.

Tagged money makes it easy to introduce a charge for parking and for roads. I would put a charge on every mile a car travelled (and we have the technology to do this quite simply and inexpensively).

If you need less then we reduce the amount of money we tag! Tagged money is a method of exchange for a purpose. Money need not have a life of its own and when it does we get into trouble. The amount of money we need is the amount for transactions and to represent the assets we produce.

The problem with many parts of the economy is that money created for a particular purpose “leaks” to other uses. The housing market is the classic case – but let us not get into that argument because it really threatens much of economic thinking which believes all money is equal. Money is not all equal and its value depends on how it is spent.

NPOV
NPOV
13 years ago

Kevin, but why should it even be restricted to public transport? What if I choose to use telecommuting instead (which, as it happens, is exactly what I do).
Or bicycling?

I don’t see any overriding need to single out public transport as a means to encourage people to drive less. Indeed, even “driving less” isn’t the end goal, which is presumably a) to improve the health & safety of our society, b) reduce long-term environmental damage and c) reduce traffic congestion. The first two can be achieved even by driving far more than we today, providing personal transport technology becomes significantly safer and less polluting. Indeed, that’s exactly what has happened over the last 50 years. The big problem that we haven’t really solved is reducing traffic congestion. Even that can in principle be solved with better technology – personal vehicles that drive themselves, automatically co-ordinating with other vehicles to minimize congestion, and of course ultimately, that fly. But I also agree we can’t afford to wait that long.

Kevin Cox
Kevin Cox
13 years ago

NPOV,

You are right. We can extend the definition of “public transport” to include bikes. Tagged money could be spent on bikes and on building bike paths or on walking trails.

You see how easy it is direct expenditure in particular directions. All we have to do is to say “this is defined as public transport” and then investment will come and we let the market decide where the money is spent.

NPOV
NPOV
13 years ago

Well it’s one thing to say “investment will come” but ultimately public transport and bicycling infrastructure require significant government involvement. Is there a successful large-scale mass transit system in the world that was built purely out of market incentives?

Kevin Cox
Kevin Cox
13 years ago

NPOV,

Good question.

I can reply by saying “has there been anywhere in the world who have tried tagged money”:)

My real answer is –

Government is involved with tagged money because they are ones who supply the money and they decide what is public transport. The difference is that we use a market to allocate the money not some “planner” who decides what is good for us. Using tagged money but requiring it to be spent in a market place of alternatives for the purpose we tagged the money means that we will get the most efficient allocation of money for transport.

As a entrepreneur I can assure you that if I have a lot of buyers with money to spend on some service I will be out there like a flash offering you the chance to spend your money on bicycle paths. Governments have traditionally done these things because untagged money is never going to be spent by an individual on bicycle paths. The investment will come if we have potential spenders.

This is the big difference in tagged money. Instead of “the government providing” we give the money to the people and the people decide what they want.

NPOV
NPOV
13 years ago

Ok, but you can’t escape the fact that public transport and bicycling infrastructure have to be largely built on public land. So governments still have to be heavily involved in approving what gets built.

Kevin Cox
Kevin Cox
13 years ago

NPOV,

I agree entirely. Governments are clearly involved. We are suggesting a more efficient way of spending some community money by creating a market so that we can all be involved rather than some politician deciding everything.

conrad
conrad
13 years ago

Kevin,

I don’t think you need to get the exact cost right — there just needs a decent cost. If you ever get time, try driving down the border of Germany and France. On one side you get a massive traffic jam (because its free), and on the other side the roads are quite respectable. I’m not sure to what extent that even the French guys are charging the real cost (its not unbearably expensive), since the way the private companies run the roads is a mess I believe (its government land etc.), but even a moderate cost is enough to cause people’s preferances to shift to the TGV. Most French people I know travel this way — and if you really need a car at the other end, you hire one. Similar effects can be found in big cities where there is too much free (or essentially free) public parking. So I think the problem we have now is everything is “free”, and even moderate charges would work. If they happen to be a bit under the real cost, then that’s no big deal — anything is currently better than nothing.
Also, I’m still not convinced that tagging money allows better allocation of resources than untagged money. It seems to me that you are trying micromanage extremely complex systems (as NPOV’s comments imply), and that basically fails everywhere.

Niall
13 years ago

Car Pooling is a dud. The passengers are always at the whim of the driver, for example, if the driver has a few chores to do on the way to or from work. I don’t believe it fits well with the Australian independence culture either. I like to come & go as I please, even if it’s via public transport, which in itself has restrictions. That’s why we’re such a car-besotted nation. There’s nothing better than self-sufficiency.

NPOV
NPOV
13 years ago

What’s self-sufficient about owning a car? They’re constantly needing maintenance, repairs, etc. etc. I’d happily not own a car if the area we lived in made it possible. For the times where cars really did make sense (long drives through rural areas), I’d happily rent one. It would certainly be cheaper than owning one. And the only reason we don’t live in an area where going without a car is possible is because it’s too bloody expensive – i.e. there is high demand for higher-density car-free living in our cities, and not enough areas that supply it.

(Of course, that’s my side of the story. The wife’s, admittedly, would be rather different).

Kevin Cox
Kevin Cox
13 years ago

conrad, NPOV and others,

Tagged money is exactly the opposite of telling people what to do. It gives people a choice. You can decide whether you want to support pushbikes or pay for roads or pay for parking or use car pooling or whatever. The point of the whole exercise is that it enables you all to be catered with – if there are enough of you to support the service. It is exactly the opposite of micro managing. I think this concept is hard for people to grasp but it is exactly the same objective of people who want to privatise everything. We want to give people a choice. It is a different way of spending community money.

Our contribution is to provide the technology to do it – nothing more. How the tool is used is up to the imagination of the community. I believe it will radically change the efficiency and effectiveness of our community endeavours. It is interesting that I am called a communist by the free enterprise people and called a control freak by the libertarians and called a free market nut by the people who think they know the answers to problems. I do not know how to reduce global emissions but I do know how to give the people the resources to solve the problem.

NPOV
NPOV
13 years ago

Well I don’t think anyone called you a free market nut, Kevin, but I think there are grounds for skepticism that tagged money alone would dramatically improve the public transport options available in our cities. Public transport depends on a whole manner of factors to be an attractive option – higher population density being one of them. Most of our cities have no significant areas with particularly high population densities. Given there is already a fairly substantial market incentive for increasing residential density (with property prices escalating rapidly as you approach higher density areas), I suspect this is one area where the solution mainly lies in reviewing government regulation (building height, zoning etc.), although the NIMBY factor is strong too.

Kevin Cox
Kevin Cox
13 years ago

NPOV,

My strongest critics come from people who believe that governments can do a better job of spending money than its citizens. I am repeatedly told that people cannot be trusted to spend money wisely on things like water or greenhouse gas emissions and that it is better to let the experts decide. That is, they believe I have taken the idea of free markets too far and in areas that are unnecessary. They say that there is a market because there are many suppliers – they neglect the fact that to have a properly functional market you need many buyers as well as many suppliers.

NPOV
NPOV
13 years ago

Hmm, well I’d suggest any government that isn’t made up of people that are better at spending money that the average man on the street isn’t going to last long. Further, if governments aren’t better at spending money in the fields take they responsibilities for than their citizens, they why even bother having government?
Having said that, there is the indisputable Hayekian argument that when governments provide services at heavily (or fully) subsidised prices to citizens, you lose the function of price signals at determining where supply shortfalls and gluts exist. But if you wanted to run a mass transit system entirely on free market principles, every single train, tram or bus could be owned by different operators, charging whatever prices they liked. In principle this would allow operators to increase supply on particular routes (or add new ones) when prices rose on those routes, and phase out routes that were not profitable etc.
In practice it’s hard to imagine such a system actually working for any number of reasons, but I’d be intrigued to see it tried.

Kevin Cox
Kevin Cox
13 years ago

NPOV,

Thank you for this. You have expressed the belief that most people have about tagged money and markets. It is also a misrepresentation of what is proposed and a misunderstanding of the reasons why free markets are a good idea.

In our proposal governments (or other large organisations) would still run a single citywide mass transit system. We are not suggesting duplicate lines, or every train owned by different people – but we do not rule these out.

No one is suggesting the man in the street decides HOW to spend the money to provide the service. The man in the street chooses from the services provided by others.

For something like a transport system we do not know how it would evolve. We start off with a ticketing system for buses and we give the money to the people who in the first instance spend it on the buses. We then let it be known that the tagged money can be spent on other “public transport”. The government does not try to think of new ways. They leave it up to entrepreneurs to make suggestions on new forms of public transport.

For example someone might come up with a suggestion for car pooling as outlined. As it is the government giving the money to the passengers the government would have to approve but they do not have to suggest or design or run the system.

Someone else would come up with an idea of local minibuses running in a particular area. (There was a proposal by a local company in Canberra to introduce a CSIRO transport on demand scheduling system to integrate local taxis, minibuses and the major buses but it was ignored as being too hard by the government and not even tried).

Perhaps someone will come up with the idea of running school buses with buses owned by the school and paid for with fares from tagged money?

People will make suggestions on what to do. I have made a few but I do not know if any of them will work. We can only tell by someone trying them.

This is what is what I mean by a free market. You let new innovative ways to come out of the woodwork and try their luck. Many will fail – but that is the point of markets. Markets are valuable because they permit failure. Governments are understandably risk averse because that can be political suicide so they will not try things that have a chance of failure.

Tagged money is important because it provides buyers in areas where buyers would not exist. There is no market for car pooling as an alternative to buses because there is little incentive for people to bother pooling because of the inconvenience it gives as pointed out by Niall.

There is no incentive to set up a mini bus local system because it is too hard to figure out how to subsidise the mini buses to compete with the big buses.

The whole idea of a free market is to provide the opportunity for innovation to succeed and fail. There is no point in having a market if it does not permit innovation. This is another reason why things like emission permits trading will not deliver the optimum outcome. Who wants innovation in ways of trading emissions permits? What we want is innovation in ways to reduce greenhouse emissions so make a free market in ways to do that – not in ways to trade emissions permits.

The attempts that people have made to “manufacture” markets through regulation in areas like telecommunications and power delivery have in my mind been failures. The so called deregulation of the power industry separating generation from retail delivery is suboptimal because it has only set up a system where people compete in better ways to sell electricity NOT in providing alternative ways of producing power or delivering it. The telecommunications industry is an even worse example of how not to do things but they are topics for another time.

The reason why tagged money will work is that enables innovation to flourish because it allows money to be spent on innovative ideas. Medisave will not only produce efficiencies in the existing system it will permit alternative health delivery services. For example I believe we could deliver a lot of health services through better home monitoring of the elderly. This is tried in bits and pieces but it is not wide spread because it has to go through a bureaucratic process to get funded and it is too difficult to work out how much to spend on it.

Please let me know if I have made sense because your comment represents the overwhelming belief of most people when confronted with the idea. Think about free markets as a mechanism for fostering innovation not as a mechanism for exploitation. Regulation is a mechanism for exploitation and destroying innovation and we have enough of that already.

NPOV
NPOV
13 years ago

Um, I don’t believe my comment was negative about markets in any obvious way. I’ve certainly never thought of markets as a “mechanism for exploitation”. Exploitation will happen under any system, and was/is surely far worse under authoritarian command economies. But obviously an important purpose of regulation is to keep it to a minimum.

You claim that “No one is suggesting the man in the street decides HOW to spend the money to provide the service”, but isn’t that exactly the point?
If a man in the street decides there is money to made by running a mini-bus service to serve a particular niche market, he would spend the money necessary to establish such a service, no?