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FREDERICK SALVUCCI:
The last time

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we talked a little bit
about Baumol's disease

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and why it affects
products that are not

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seeing technological
change that saves cost.

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And not seeing
import substitution

00:00:46.460 --> 00:00:49.070
that might reduce cost.

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So they tend to grow at faster
than the rate of inflation.

00:00:53.160 --> 00:00:58.590
And transit is one
of those activities.

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And what happens is,
the public sector

00:01:01.740 --> 00:01:06.180
ends up either taking
the responsibility

00:01:06.180 --> 00:01:09.830
to provide those services,
or subsidizes private parties

00:01:09.830 --> 00:01:11.590
to provide those services.

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Other services
will die or there's

00:01:14.900 --> 00:01:16.280
some combination of the two.

00:01:16.280 --> 00:01:19.010
The services get
cut back, and then

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some set of services that
are viewed as too important

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to allow to disappear the
government subsidizes for.

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what do you do about it?

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Yes?

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AUDIENCE: Just curious, what
are some other things that you

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consider subject
to this problem,

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outside of public
transportation [INAUDIBLE]

00:01:43.590 --> 00:01:47.090
like emergency
medical, like fire.

00:01:47.090 --> 00:01:51.410
FREDERICK SALVUCCI: Well
certainly fire protection

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services, police, teaching,
education generally,

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the health care.

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So what's the cost
problem in health care?

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No technological change
going on in health care?

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AUDIENCE: Nothing cost reducing.

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FREDERICK SALVUCCI:
Nothing cost reducing.

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A sneaky phrase that I put in
was cost reducing technology.

00:02:27.880 --> 00:02:30.190
In health care, there's
a lot of technology,

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but it generally
increases costs.

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Once there's a better
way to deal with cancer,

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we all want it for our
parents, our kids, ourselves.

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So technology and health
care tends to drive costs up.

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For maybe a good thing.

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It means we're
getting more quality,

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but from a cost point
of view, it's cost.

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Yes.

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The cynics think
that's a bad thing

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because you cost more money.

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Better you should die quickly
of some disease than hang around

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and need more health care.

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So it gets at some
philosophical questions.

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But it's just from a
practical point of view.

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Baumol's disease is
a serious problem

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that affects public services.

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And it particularly affects
public transit, which

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is what we're interested here.

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So I don't think we talked
about this last time.

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So what did Baumol say happens
with an activity that's

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afflicted by Baumol's
class disease?

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AUDIENCE: To hire the people
who perform that activity,

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they need to--

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their salary needs to be
adjusted to inflation.

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But you're essentially
paying them more and more

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for producing the same amount.

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That's where-- that goes
the musician example.

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Because if you want
to hear live music,

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paying musicians 100, 200
years goes the same thing.

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You have to pay them.

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You had to pay back
then, you pay today.

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But today they pay rent
or whatever it is today.

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FREDERICK SALVUCCI:
So what's the--

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what's Baumol's
argument about how

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you could continue to have
four string quartets performed

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If you choose to?

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You're going to subsidize them.

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But what's the economic
rationale that he makes?

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His argument is,
assuming there's

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productivity improvement
in the economy overall,

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the overall gross domestic
product is going up.

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So you actually could
afford to subsidize

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these activities, music, if
you had health care, whatever.

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And you'd still have a
surplus because there's

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been enough growth.

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Since it's the-- since it's the
technological change that is

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a factor in the
increased wages, then--

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and here the theory is that in
the parts of the economy that

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are experiencing introduction
of cost saving technologies,

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labor will be able to
get pay increases higher

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than the rate of
inflation, because they're

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in a position to leverage
that growing productivity.

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Are you with me on that?

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So now, the worker
and industry A

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that has productivity
improvements

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gets pay increases beyond
the rate of inflation.

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But if I'm trying
to hire bus drivers,

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the bus driver
wants the same pay

00:06:14.240 --> 00:06:16.910
because he's living in the
same metropolitan area,

00:06:16.910 --> 00:06:18.680
paying the same rent.

00:06:18.680 --> 00:06:21.230
So the bus driver wants to
get the same pay increases

00:06:21.230 --> 00:06:25.670
that the worker in the more
highly productive sector

00:06:25.670 --> 00:06:27.320
is getting.

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So embedded within the
productivity improvement

00:06:32.660 --> 00:06:35.090
is a wage increase.

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Now there's a presumption
there that labor

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does get a proportionate
share of the productivity

00:06:40.790 --> 00:06:42.620
improvement.

00:06:42.620 --> 00:06:44.330
Recently that has
not been happening.

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For a long time that
appeared to be the case when

00:06:46.820 --> 00:06:48.590
Baumol was writing.

00:06:48.590 --> 00:06:54.230
So you end up with the
technologically advancing

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sector needing to
pay higher wages.

00:06:58.160 --> 00:07:02.720
The more stagnant
sectors needing

00:07:02.720 --> 00:07:05.840
to pay comparable
salaries to attract labor,

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because they're working
in the same market.

00:07:09.320 --> 00:07:13.160
And therefore, larger and
larger subsidies in those

00:07:13.160 --> 00:07:15.142
sectors where productivity
is not improving.

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AUDIENCE: So a
couple of questions.

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One, I guess this
assumes full employment.

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If there wasn't full
employment, then you

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would pay bus drivers less
than the more technologically

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advanced employees.

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FREDERICK SALVUCCI: Well it
assumes full employment would

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be one way to think about it.

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But if there's not
full employment,

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but the workers are organized,
and in transit they're

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very organized.

00:07:40.710 --> 00:07:43.480
And they're able to command--

00:07:43.480 --> 00:07:46.067
they're able to bargain
for higher wages

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because they can make
the comparison to what

00:07:47.900 --> 00:07:51.810
other workers make with
similar educational background.

00:07:51.810 --> 00:07:54.380
And even though there are
unemployed people there,

00:07:54.380 --> 00:07:58.640
because the union is able
to control the workplace

00:07:58.640 --> 00:08:03.020
to some degree,
even full employment

00:08:03.020 --> 00:08:08.270
isn't a necessary
condition for this problem

00:08:08.270 --> 00:08:12.340
to occur and to grow.

00:08:12.340 --> 00:08:15.140
AUDIENCE: Being organized is the
necessary condition [INAUDIBLE]

00:08:15.140 --> 00:08:15.410
FREDERICK SALVUCCI: Yes.

00:08:15.410 --> 00:08:17.480
I would argue being
organized is more

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important than full employment.

00:08:19.070 --> 00:08:21.760
AUDIENCE: And is that
because, the way I think about

00:08:21.760 --> 00:08:25.406
is that because transport is
such an essential service?

00:08:25.406 --> 00:08:26.780
For example, when
I was in London

00:08:26.780 --> 00:08:30.240
the tube shut down like
15 times for strikes.

00:08:30.240 --> 00:08:33.337
And the government is really
resistant to increasing wages,

00:08:33.337 --> 00:08:34.420
giving into their demands.

00:08:34.420 --> 00:08:37.159
But eventually they
have to because you're

00:08:37.159 --> 00:08:39.024
losing a billions
dollars in the economy

00:08:39.024 --> 00:08:40.565
or something like
that every time you

00:08:40.565 --> 00:08:41.990
shut down the Tube for a day.

00:08:41.990 --> 00:08:43.460
FREDERICK SALVUCCI: Yes.

00:08:43.460 --> 00:08:51.440
So-- Yes, so it's the
practical consequences.

00:08:51.440 --> 00:08:54.620
Labor has a lot of leverage.

00:08:54.620 --> 00:08:59.120
And if you think about the
areas we're talking about,

00:08:59.120 --> 00:09:03.770
they tend to be areas that
have a high labor content.

00:09:03.770 --> 00:09:05.630
Or they wouldn't
be so vulnerable.

00:09:05.630 --> 00:09:08.420
By the very-- it's
a circular logic.

00:09:08.420 --> 00:09:10.220
They are vulnerable
to Baumol's disease

00:09:10.220 --> 00:09:13.430
because they employ
a lot of local labor.

00:09:13.430 --> 00:09:16.490
And the productivity
is not increasing

00:09:16.490 --> 00:09:18.890
with technology change.

00:09:18.890 --> 00:09:21.430
Therefore, they've
got a growing problem.

00:09:21.430 --> 00:09:24.380
And the problem is compounded
because the workers being

00:09:24.380 --> 00:09:30.290
numerous, and organized, are
able to get those higher pays.

00:09:30.290 --> 00:09:32.600
So you're in a bit of a bind.

00:09:32.600 --> 00:09:34.340
So what do you--

00:09:34.340 --> 00:09:38.490
you can simply pay more.

00:09:38.490 --> 00:09:44.000
But the other consequence
of having the government

00:09:44.000 --> 00:09:49.850
into the subsidy business
is that other agendas then

00:09:49.850 --> 00:09:51.560
accumulate.

00:09:51.560 --> 00:09:53.960
If Mussolini is in
charge, then you

00:09:53.960 --> 00:09:58.040
have to join the Fascist Party
or you're not allowed to sing.

00:09:58.040 --> 00:10:05.010
If Obama is in charge or
some other elected official

00:10:05.010 --> 00:10:07.440
that you like better
than Mussolini,

00:10:07.440 --> 00:10:11.910
you're still going to get some
political exactions attached

00:10:11.910 --> 00:10:13.350
to subsidy.

00:10:13.350 --> 00:10:15.900
Because get-- the process
of getting subsidy

00:10:15.900 --> 00:10:20.880
through a legislative process
gives people leverage.

00:10:20.880 --> 00:10:23.640
And there's a
particular problem.

00:10:23.640 --> 00:10:26.820
Why might the problem
be worse for transit

00:10:26.820 --> 00:10:29.970
than it is, say for education?

00:10:29.970 --> 00:10:32.280
Assume for the sake of
argument, education and transit

00:10:32.280 --> 00:10:35.700
are similarly dominated
by local labor,

00:10:35.700 --> 00:10:40.110
and similarly if afflicted
with Baumol's disease.

00:10:40.110 --> 00:10:43.890
Why might the leverage
issue be different

00:10:43.890 --> 00:10:45.855
in the legislative bodies?

00:10:53.262 --> 00:10:54.720
AUDIENCE: In many
ways the teachers

00:10:54.720 --> 00:10:59.410
are like [INAUDIBLE]
employees maybe more

00:10:59.410 --> 00:11:05.550
than the bus driver
[INAUDIBLE] Is it

00:11:05.550 --> 00:11:08.392
because education is
compulsory [INAUDIBLE]

00:11:08.392 --> 00:11:09.500
probably why [INAUDIBLE]

00:11:09.500 --> 00:11:11.250
FREDERICK SALVUCCI:
Well not so much that.

00:11:11.250 --> 00:11:14.130
It's much more Universal.

00:11:14.130 --> 00:11:17.430
Kids in Springfield
need to go to school.

00:11:17.430 --> 00:11:21.670
Kids all over Massachusetts
need to go to school.

00:11:21.670 --> 00:11:25.210
North Adams and Pittsfield
don't require the same amount

00:11:25.210 --> 00:11:28.649
of transit that the bus
metropolitan area does

00:11:28.649 --> 00:11:30.190
because we're a
congested area, we've

00:11:30.190 --> 00:11:32.260
got a certain kind of economy.

00:11:32.260 --> 00:11:34.990
So there's a much higher
proportion, much higher

00:11:34.990 --> 00:11:37.750
dependency on public
transportation

00:11:37.750 --> 00:11:39.950
in a place like London,
or a place like Boston,

00:11:39.950 --> 00:11:44.480
than there isn't a
place like North Adams.

00:11:44.480 --> 00:11:48.350
So when you're going to
the legislature saying,

00:11:48.350 --> 00:11:51.420
I need money to
subsidize the MBTA,

00:11:51.420 --> 00:11:53.330
the legislator from
a district that

00:11:53.330 --> 00:11:56.000
doesn't get much
service says well,

00:11:56.000 --> 00:11:57.770
what are you going to give me?

00:11:57.770 --> 00:12:02.420
So why should I vote for this
subsidy so people in Boston

00:12:02.420 --> 00:12:06.972
can ride more convenient
transit at lower cost?

00:12:06.972 --> 00:12:08.180
You've got give me something.

00:12:08.180 --> 00:12:12.770
So the political process
imposes conditions

00:12:12.770 --> 00:12:25.190
on the process of subsidy that
exacts a premium on top of what

00:12:25.190 --> 00:12:27.810
Baumol would have predicted.

00:12:27.810 --> 00:12:32.140
Baumol's analysis
was that it's all

00:12:32.140 --> 00:12:34.060
about competition for labor.

00:12:34.060 --> 00:12:36.340
And you're going to be
forced to pay the prevailing

00:12:36.340 --> 00:12:40.690
wage in that metropolitan area
in order to attract labor,

00:12:40.690 --> 00:12:43.300
because there are competing
opportunities for workers

00:12:43.300 --> 00:12:43.870
to work.

00:12:43.870 --> 00:12:45.970
Let's assume it's
full employment,

00:12:45.970 --> 00:12:48.040
possibly it's because
of the leverage

00:12:48.040 --> 00:12:52.370
in the workplace of the union.

00:12:52.370 --> 00:12:54.850
But you're going to have to
pay that metropolitan area

00:12:54.850 --> 00:12:55.980
competitive wage.

00:12:55.980 --> 00:12:59.920
But what Baumol
isn't calculating

00:12:59.920 --> 00:13:02.410
is that the very process
of getting subsidy out

00:13:02.410 --> 00:13:07.030
of the political process
imposes these extra costs.

00:13:07.030 --> 00:13:11.320
So this is all me
rambling theory.

00:13:11.320 --> 00:13:12.840
So a couple of years--

00:13:12.840 --> 00:13:14.340
AUDIENCE: Pure-hearted
politicians.

00:13:14.340 --> 00:13:15.340
FREDERICK SALVUCCI: Yes.

00:13:15.340 --> 00:13:17.200
Even with good politicians
that are really

00:13:17.200 --> 00:13:19.989
trying to do the right thing,
they want to support transit.

00:13:19.989 --> 00:13:22.530
They have to convince voters in
other parts of the state that

00:13:22.530 --> 00:13:25.280
don't have much transit
to put money into it.

00:13:25.280 --> 00:13:28.300
They've got to do
something different.

00:13:28.300 --> 00:13:34.120
I mean, in Massachusetts for a
long time what Western Mass was

00:13:34.120 --> 00:13:36.970
getting out of the
state government

00:13:36.970 --> 00:13:39.100
was the University of
Massachusetts payroll.

00:13:39.100 --> 00:13:42.760
Because UMass was located
out Amherst, there were jobs.

00:13:42.760 --> 00:13:45.720
It was a very important
part of the economy

00:13:45.720 --> 00:13:47.920
that's not very robust.

00:13:47.920 --> 00:13:51.970
There were heavy subsidies
to higher public education.

00:13:51.970 --> 00:13:54.700
Eastern Mass, in
an earlier period,

00:13:54.700 --> 00:13:57.790
was much more dominated
by private universities.

00:13:57.790 --> 00:13:59.170
Now there's a UMass Boston.

00:13:59.170 --> 00:14:00.640
But in an early
period was really

00:14:00.640 --> 00:14:02.470
all concentrated out there.

00:14:02.470 --> 00:14:06.970
So the rough trade was, OK
you got the T, I got UMass.

00:14:06.970 --> 00:14:13.990
But there is some price attached
by the political process

00:14:13.990 --> 00:14:15.370
to providing subsidy.

00:14:15.370 --> 00:14:21.430
Because in the more unevenly
spread the service is,

00:14:21.430 --> 00:14:23.680
the higher that
price is going to be.

00:14:23.680 --> 00:14:28.290
That's me making up theory
and asking you to believe it.

00:14:28.290 --> 00:14:30.970
So a couple of
years ago, a couple

00:14:30.970 --> 00:14:33.910
of times in the
past few decades,

00:14:33.910 --> 00:14:39.220
I've been lucky enough to have
a lot of very smart students

00:14:39.220 --> 00:14:41.440
doing their masters degrees.

00:14:41.440 --> 00:14:45.100
So I've inflicted Baumol's
disease on a couple of them.

00:14:45.100 --> 00:14:51.190
So [INAUDIBLE],, I'm going to
mangle his name, [INAUDIBLE]..

00:14:51.190 --> 00:14:55.430
Have you guys read
his work at all?

00:14:55.430 --> 00:14:58.380
He is a brilliant
guy from Jordan.

00:14:58.380 --> 00:14:59.460
Very interesting fellow.

00:14:59.460 --> 00:15:03.690
He did a really nice
piece on Baumol's disease,

00:15:03.690 --> 00:15:05.970
and somewhat theoretical piece.

00:15:05.970 --> 00:15:09.060
And showed, yes, it looks
like transit really has it.

00:15:09.060 --> 00:15:10.660
Then a couple of
years ago, there

00:15:10.660 --> 00:15:13.900
was another student
named Javier.

00:15:13.900 --> 00:15:15.660
I think some of you knew Javier.

00:15:15.660 --> 00:15:19.680
So he got-- he did
an analysis where

00:15:19.680 --> 00:15:24.420
he looked at a large dataset.

00:15:24.420 --> 00:15:28.900
I think he looked at something
like 700 transit agencies.

00:15:28.900 --> 00:15:32.690
And he was just looking at bus
services in the United States.

00:15:32.690 --> 00:15:38.760
And he found that the MBTA has
Baumol's disease, number one.

00:15:38.760 --> 00:15:42.190
Number two, every bus
provider in the United States

00:15:42.190 --> 00:15:43.360
has Baumol's disease.

00:15:43.360 --> 00:15:46.180
It's not unique to the T.
We think the T is worse,

00:15:46.180 --> 00:15:47.285
it's actually not.

00:15:47.285 --> 00:15:49.390
It's a problem everywhere.

00:15:49.390 --> 00:15:57.260
Number three, there is
a premium above what

00:15:57.260 --> 00:15:58.910
Baumol would have predicted.

00:15:58.910 --> 00:16:03.290
Baumol would have predicted
this metropolitan area

00:16:03.290 --> 00:16:05.000
comparable wage.

00:16:05.000 --> 00:16:09.630
But in fact transit wages
are raising perversely, not

00:16:09.630 --> 00:16:11.760
only higher than
inflation, but higher

00:16:11.760 --> 00:16:14.160
than the salaries of
comparably skilled workers

00:16:14.160 --> 00:16:17.100
in the same metropolitan area.

00:16:17.100 --> 00:16:23.210
And the only explanation
I could figure out

00:16:23.210 --> 00:16:26.300
is the leverage of the
legislative process.

00:16:26.300 --> 00:16:28.820
We've got two kinds of leverage,
the leverage of the workers

00:16:28.820 --> 00:16:31.260
in the union
bargaining position.

00:16:31.260 --> 00:16:34.850
But then you got the
leverage of other legislators

00:16:34.850 --> 00:16:40.310
who insist on some
additional price to be paid.

00:16:40.310 --> 00:16:47.470
But you've got labor
also commanding power

00:16:47.470 --> 00:16:49.940
in the legislative process.

00:16:49.940 --> 00:16:53.950
So now, if I'm
running the T and I

00:16:53.950 --> 00:16:57.700
need to go to the
legislature to get money,

00:16:57.700 --> 00:17:01.720
the theory is that I'm
the boss and there's

00:17:01.720 --> 00:17:05.740
this sort of structure and
these workers work for me.

00:17:05.740 --> 00:17:07.420
The fact is, the
workers have way

00:17:07.420 --> 00:17:11.290
more power than I do in
talking to the legislature,

00:17:11.290 --> 00:17:14.609
because the union
has a lot of voters.

00:17:14.609 --> 00:17:17.670
And they're disciplined, and
they can deliver that vote.

00:17:17.670 --> 00:17:19.420
And they can deliver
workers, and they can

00:17:19.420 --> 00:17:21.890
deliver campaign contribution.

00:17:21.890 --> 00:17:23.770
And I'm trying to
peddle public policy,

00:17:23.770 --> 00:17:26.650
and transit is good for
you, and you should do this.

00:17:26.650 --> 00:17:30.310
So I really need
labor as an ally

00:17:30.310 --> 00:17:34.360
in getting the support of the
legislature for the subsidy.

00:17:34.360 --> 00:17:38.920
And, perversely, labor figures
that out and demands even more.

00:17:38.920 --> 00:17:43.240
So sounds weird,
but Javier's data

00:17:43.240 --> 00:17:44.920
shows this is
absolutely the case.

00:17:44.920 --> 00:17:47.110
That there is a premium
above and beyond

00:17:47.110 --> 00:17:50.230
what Baumol would
have predicted.

00:17:50.230 --> 00:17:51.730
And it's all over
the United States.

00:17:51.730 --> 00:17:54.010
Then he took another look.

00:17:54.010 --> 00:17:59.410
And we made up a couple of
tests of what might an indicator

00:17:59.410 --> 00:18:04.210
be of the relative
political strength of labor

00:18:04.210 --> 00:18:08.270
in a state or a
local jurisdiction.

00:18:08.270 --> 00:18:14.570
So do any of you know what
the right to work laws are?

00:18:14.570 --> 00:18:18.745
So what's a right to work law?

00:18:18.745 --> 00:18:21.320
AUDIENCE: It's a
law that [INAUDIBLE]

00:18:21.320 --> 00:18:24.951
they're laws that
basically prevent

00:18:24.951 --> 00:18:30.308
a union from requiring
employees in a given industry

00:18:30.308 --> 00:18:31.600
to join a union.

00:18:31.600 --> 00:18:32.600
FREDERICK SALVUCCI: Yes.

00:18:32.600 --> 00:18:34.970
So the right wingers
who don't like

00:18:34.970 --> 00:18:40.970
unions, that's all right
wingers don't like unions.

00:18:40.970 --> 00:18:43.016
They're very clever
at making up names

00:18:43.016 --> 00:18:44.390
so it's called
the right to work,

00:18:44.390 --> 00:18:47.540
because that sounds
kind of nice.

00:18:47.540 --> 00:18:51.770
But it's also from
if you're pro union,

00:18:51.770 --> 00:18:56.390
it means that the union
has to convince workers

00:18:56.390 --> 00:18:57.320
to join the union.

00:18:57.320 --> 00:18:58.280
They collect dues.

00:18:58.280 --> 00:19:02.420
They have to-- it costs
money to organize and develop

00:19:02.420 --> 00:19:05.270
an agenda, and lobby, et cetera

00:19:05.270 --> 00:19:07.940
And if not everyone in the
group has to join the union,

00:19:07.940 --> 00:19:11.430
then you've got a free rider
problem where people can say,

00:19:11.430 --> 00:19:16.490
oh, I'm a libertarian, I don't
believe in unions' bullshit.

00:19:16.490 --> 00:19:18.800
Well, they want you give
back half of your pay.

00:19:18.800 --> 00:19:22.070
You're enjoying the benefits
of having union representation,

00:19:22.070 --> 00:19:24.170
but you just don't
want to pay your share.

00:19:24.170 --> 00:19:27.300
I'm giving the unions
point of view obviously.

00:19:27.300 --> 00:19:30.170
So are the what--

00:19:30.170 --> 00:19:32.320
AUDIENCE: I said
or you're Ayn Rand.

00:19:32.320 --> 00:19:33.950
FREDERICK SALVUCCI: Oh, OK.

00:19:33.950 --> 00:19:35.930
So anyway, you get--

00:19:40.300 --> 00:19:48.310
so you get this situation
where we hypothesized that--

00:19:50.920 --> 00:19:55.810
right to work laws passed
in a lot of states,

00:19:55.810 --> 00:19:58.120
and didn't pass in
a lot of states.

00:19:58.120 --> 00:20:01.670
And they did not pass
and states surprisingly,

00:20:01.670 --> 00:20:02.770
that have strong unions.

00:20:02.770 --> 00:20:06.100
And they did pass in
the South and in places

00:20:06.100 --> 00:20:08.650
where they weren't, where there
wasn't much political power

00:20:08.650 --> 00:20:09.420
on union side.

00:20:09.420 --> 00:20:13.750
So we said, well, maybe that's
a proxy for the political power

00:20:13.750 --> 00:20:15.340
of unions.

00:20:15.340 --> 00:20:20.590
So have Javier took the right to
work states, separated them out

00:20:20.590 --> 00:20:27.650
from the states where union
membership is a requirement.

00:20:27.650 --> 00:20:32.030
And lo and behold, yes
there's a bigger premium

00:20:32.030 --> 00:20:38.330
on top of Baumol in the states
that are more union culture.

00:20:38.330 --> 00:20:40.790
And the states that are
more anti-union in culture,

00:20:40.790 --> 00:20:42.410
there's less of a
premium being paid.

00:20:42.410 --> 00:20:46.910
So it looks from the
data like this guess

00:20:46.910 --> 00:20:50.390
as to what's going on is at
least consistent with what

00:20:50.390 --> 00:20:51.680
the data says.

00:20:51.680 --> 00:20:55.590
Javier you added a couple
of nice papers on it.

00:20:55.590 --> 00:20:59.760
So then the next question
is, so what do you,

00:20:59.760 --> 00:21:01.600
what do you do about this?

00:21:01.600 --> 00:21:04.470
AUDIENCE: So is
there anything else

00:21:04.470 --> 00:21:08.240
that's like the government
when they give jobs

00:21:08.240 --> 00:21:10.590
wants to give good paying jobs?

00:21:10.590 --> 00:21:13.120
Is like a part of it.

00:21:13.120 --> 00:21:16.350
Not just how to get votes from
the bus drivers themselves,

00:21:16.350 --> 00:21:18.554
but from other people.

00:21:18.554 --> 00:21:19.970
But the government's
always trying

00:21:19.970 --> 00:21:23.180
to-- like this whole election
was won on creating jobs.

00:21:23.180 --> 00:21:25.147
I know these are
government jobs.

00:21:25.147 --> 00:21:25.980
[INTERPOSING VOICES]

00:21:25.980 --> 00:21:34.330
FREDERICK SALVUCCI:
Well for politicians

00:21:34.330 --> 00:21:36.510
who get their
votes from workers,

00:21:36.510 --> 00:21:40.570
there's more of a desire
to be a good employer.

00:21:40.570 --> 00:21:45.850
But it's actually inconvenient
to have a subset of workers

00:21:45.850 --> 00:21:51.490
who are largely financed through
subsidy, making higher wages,

00:21:51.490 --> 00:21:54.880
and with better health
care and pension benefits

00:21:54.880 --> 00:21:58.480
than other workers who
are paying the taxes.

00:21:58.480 --> 00:22:02.280
So it actually creates a
division within the workers,

00:22:02.280 --> 00:22:05.620
that why the hell is this
guy getting more than me.

00:22:05.620 --> 00:22:07.070
And I'm paying his salary.

00:22:07.070 --> 00:22:10.510
And so it's not
particularly convenient,

00:22:10.510 --> 00:22:14.020
even for a somewhat
left-wing politician

00:22:14.020 --> 00:22:19.262
to want to pay higher
pays, other than the fact

00:22:19.262 --> 00:22:21.220
that especially if they're
from a district that

00:22:21.220 --> 00:22:23.440
has a lot of bus
drivers, then they

00:22:23.440 --> 00:22:25.130
want to take care of
that constituency.

00:22:25.130 --> 00:22:29.590
So there's the kind of
client-based politics

00:22:29.590 --> 00:22:33.320
that drives some politicians
in that direction.

00:22:33.320 --> 00:22:36.640
But a sort of general
left leaning attitude

00:22:36.640 --> 00:22:40.450
wouldn't particularly argue
to pay transit workers higher

00:22:40.450 --> 00:22:42.327
than teachers.

00:22:42.327 --> 00:22:44.410
But transit workers make
more money than teachers.

00:22:44.410 --> 00:22:48.760
So I mean it's a
pretty weird situation.

00:22:48.760 --> 00:22:50.950
And you keep peeling
away the onion

00:22:50.950 --> 00:22:53.410
saying what's really
going on here.

00:22:53.410 --> 00:22:56.380
And it looks like A, Baumol's
disease is a real problem.

00:22:56.380 --> 00:22:59.730
And B, there is this premium
on top of Baumol's disease

00:22:59.730 --> 00:23:02.110
that comes out of the nature
of the political process,

00:23:02.110 --> 00:23:04.900
and the extra bargaining
that labor has.

00:23:04.900 --> 00:23:09.250
So labor has bargaining of the
normal kind that a union always

00:23:09.250 --> 00:23:12.790
has with an employer,
because they

00:23:12.790 --> 00:23:14.710
control the supply of labor.

00:23:14.710 --> 00:23:17.050
But then it has this
political dimension.

00:23:17.050 --> 00:23:22.210
So once the enterprise becomes
dependent on political support

00:23:22.210 --> 00:23:26.010
for subsidy, labor now
has to bite of the apple.

00:23:26.010 --> 00:23:30.740
And I think it makes
sense as a theory.

00:23:30.740 --> 00:23:33.430
Looks like the data supported
it from Javier's research.

00:23:33.430 --> 00:23:34.556
Yes?

00:23:34.556 --> 00:23:36.946
AUDIENCE: So transport
[INAUDIBLE] teachers

00:23:36.946 --> 00:23:42.890
[INAUDIBLE] at least to what
Scott said about the fact

00:23:42.890 --> 00:23:46.900
that transit the
TFL goes on strike,

00:23:46.900 --> 00:23:50.060
then the London economy
loses a billion a day.

00:23:50.060 --> 00:23:54.290
When transit agencies, when
their labor goes on strike,

00:23:54.290 --> 00:23:56.530
the economic pain
that they create

00:23:56.530 --> 00:23:59.620
is immediate versus teachers.

00:23:59.620 --> 00:24:02.970
If our kids aren't being
educated, then the impact

00:24:02.970 --> 00:24:06.060
we'll be seeing only 10
to 20 years down the line.

00:24:06.060 --> 00:24:08.620
So with transit
the economic pain

00:24:08.620 --> 00:24:10.070
is they have more [INAUDIBLE].

00:24:10.070 --> 00:24:14.990
It's not, its leverage and
its immediate economic impact.

00:24:14.990 --> 00:24:17.200
That's why the unions
exist [INAUDIBLE]..

00:24:17.200 --> 00:24:19.260
So that's why
transit [INAUDIBLE]

00:24:19.260 --> 00:24:21.060
if transit workers
go on strike, but you

00:24:21.060 --> 00:24:23.643
don't go on strike in the summer
when people can walk to work.

00:24:23.643 --> 00:24:26.560
And let's face it, [INAUDIBLE]
go on strike in the winter when

00:24:26.560 --> 00:24:27.640
the weather [INAUDIBLE].

00:24:27.640 --> 00:24:29.880
The same reason that garbage
men go on strike in the summer,

00:24:29.880 --> 00:24:30.700
is because if they go
on strike in the winter,

00:24:30.700 --> 00:24:33.033
the garbage piles up, and
freezes, and no one smells it.

00:24:33.033 --> 00:24:35.579
But if they go on
strike in the summer,

00:24:35.579 --> 00:24:36.745
they use that kind of logic.

00:24:36.745 --> 00:24:38.036
It's the same kind of leverage.

00:24:38.036 --> 00:24:41.910
It has more of an
immediate effect.

00:24:41.910 --> 00:24:44.230
FREDERICK SALVUCCI:
So [INAUDIBLE]

00:24:44.230 --> 00:24:49.210
was also advising out here on
his thesis and on the papers

00:24:49.210 --> 00:24:51.820
that he wrote on this.

00:24:51.820 --> 00:24:55.795
So [INAUDIBLE] said well,
let's take a look at whether--

00:24:58.700 --> 00:25:05.870
I mean one way to try to
counter Baumol disease would

00:25:05.870 --> 00:25:07.310
be to become more productive.

00:25:07.310 --> 00:25:10.280
After all, this disease
comes because of a lack

00:25:10.280 --> 00:25:12.080
of productivity growth.

00:25:12.080 --> 00:25:14.490
Shouldn't we look at
improving productivity first?

00:25:14.490 --> 00:25:22.850
Is transit performing at the
efficiency frontier in the way

00:25:22.850 --> 00:25:25.830
they're employing
their resources.

00:25:25.830 --> 00:25:29.970
So a bunch of more
analysis is done.

00:25:29.970 --> 00:25:33.620
And, of course, transit
isn't operating anywhere

00:25:33.620 --> 00:25:34.850
near its efficiency.

00:25:38.290 --> 00:25:39.260
So it's a question.

00:25:39.260 --> 00:25:41.360
It's important to look at it.

00:25:41.360 --> 00:25:46.217
And as managers, if you end up
as managers in transit systems,

00:25:46.217 --> 00:25:48.050
you certainly have to
pay a lot of attention

00:25:48.050 --> 00:25:52.420
to looking for ways to
produce better quality

00:25:52.420 --> 00:25:57.280
public transportation
at lower cost.

00:25:57.280 --> 00:26:01.180
I believe that it's more
fruitful to look to get better

00:26:01.180 --> 00:26:04.470
quality for similar cost.

00:26:04.470 --> 00:26:07.180
The current management
to the T thinks

00:26:07.180 --> 00:26:11.560
that it's a victory to give
you the same crappy service,

00:26:11.560 --> 00:26:13.590
but spend less money doing it.

00:26:13.590 --> 00:26:17.950
I don't think that's
all that good.

00:26:17.950 --> 00:26:20.030
The objective is
not to reduce costs.

00:26:20.030 --> 00:26:23.660
The objective is to improve
what you're offering people,

00:26:23.660 --> 00:26:24.160
I think.

00:26:24.160 --> 00:26:29.300
If you want your product
to be prized, and still

00:26:29.300 --> 00:26:31.460
around in 10 years,
as opposed to just

00:26:31.460 --> 00:26:33.590
being a temporary Band-Aid.

00:26:33.590 --> 00:26:36.000
But there are different
philosophies of management.

00:26:36.000 --> 00:26:38.570
But in either case,
whether you're

00:26:38.570 --> 00:26:41.390
looking at a cost
reduction type strategy,

00:26:41.390 --> 00:26:44.690
or whether you're looking
at a value maximization,

00:26:44.690 --> 00:26:47.600
productivity and efficiency are
important things to look to.

00:26:47.600 --> 00:26:51.440
So that's such one kind
of thing you should

00:26:51.440 --> 00:26:52.910
be involved in all the time.

00:26:55.840 --> 00:27:04.800
And you could also
think about what

00:27:04.800 --> 00:27:11.700
are the external factors that
might lead transit to become

00:27:11.700 --> 00:27:15.335
more valuable over time.

00:27:19.250 --> 00:27:22.510
Even if you're not being
particularly more efficient

00:27:22.510 --> 00:27:25.090
in the way you're delivering it.

00:27:25.090 --> 00:27:30.100
So if the metropolitan
area is growing,

00:27:30.100 --> 00:27:37.050
and if transit is also
growing, then the cost

00:27:37.050 --> 00:27:42.210
per rider or the subsidy
provider should go down.

00:27:42.210 --> 00:27:47.500
Because you've got less empty
seats, that's the nice version.

00:27:47.500 --> 00:27:50.850
You've got more crowded buses,
the not so nice version.

00:27:50.850 --> 00:27:56.280
But you can get
more service, if you

00:27:56.280 --> 00:27:59.190
don't look too hard at the
quality of that service,

00:27:59.190 --> 00:28:02.830
at lower cost as the system
gets more and more customers.

00:28:02.830 --> 00:28:07.350
So growth in passengers
is certainly benign.

00:28:07.350 --> 00:28:09.780
Now too much of a good
thing is a bad thing.

00:28:09.780 --> 00:28:13.470
You get the kind of crowding
you're studying in Chicago.

00:28:13.470 --> 00:28:15.949
That doesn't seem quite
efficient when people can't of

00:28:15.949 --> 00:28:18.240
get on, and are being left
behind, and everything else.

00:28:18.240 --> 00:28:21.420
But from the point of view
of the green eyeshade guys,

00:28:21.420 --> 00:28:23.670
that are just looking at
the numbers, the more people

00:28:23.670 --> 00:28:29.310
you cram onto the vehicles
that's dampening down

00:28:29.310 --> 00:28:30.370
the subsidy a bit.

00:28:30.370 --> 00:28:36.510
So even with no particular
management, effort, or skill,

00:28:36.510 --> 00:28:38.430
if the region happens
to be growing,

00:28:38.430 --> 00:28:42.450
and if transit ridership
happens to be growing,

00:28:42.450 --> 00:28:46.350
then the value of the
transit is growing.

00:28:46.350 --> 00:28:53.770
And that can offset the
Baumol's problem to some degree.

00:28:53.770 --> 00:28:59.180
And if you think of what
the competing mode is.

00:28:59.180 --> 00:29:02.990
If the area is growing
and the jobs are growing,

00:29:02.990 --> 00:29:06.050
and the congestion on
the roadways are growing,

00:29:06.050 --> 00:29:09.710
conditions that certainly
apply here and in Chicago.

00:29:09.710 --> 00:29:12.980
Then the societal
value of the transit

00:29:12.980 --> 00:29:17.600
is higher, both for
the riders because

00:29:17.600 --> 00:29:22.120
their alternative choice
is to be in the congestion.

00:29:22.120 --> 00:29:24.260
And for the drivers
who don't use transit

00:29:24.260 --> 00:29:26.540
who are in the
congested conditions who

00:29:26.540 --> 00:29:29.090
are happy to have some
people out of their way.

00:29:29.090 --> 00:29:33.110
So through no virtue
of the transit manager,

00:29:33.110 --> 00:29:36.410
if the regions are growing
and ridership is growing,

00:29:36.410 --> 00:29:40.640
that can help offset
the Baumol's disease.

00:29:40.640 --> 00:29:43.480
Both in the practical sense
of getting more revenue,

00:29:43.480 --> 00:29:47.780
and in the theoretical sense
that the value of the transit

00:29:47.780 --> 00:29:50.750
collective product
is actually going up,

00:29:50.750 --> 00:29:54.030
through no virtue of your own.

00:29:54.030 --> 00:29:56.793
AUDIENCE: So [INAUDIBLE] they're
growing about 100,000 people

00:29:56.793 --> 00:29:59.360
a year.

00:29:59.360 --> 00:30:02.205
I'm just wondering whether when
that's happening, when they're

00:30:02.205 --> 00:30:05.095
not opening any new tube lines
essentially, there's one,

00:30:05.095 --> 00:30:06.790
well one big line
coming in soon.

00:30:06.790 --> 00:30:08.309
But they're not any
new lines lines.

00:30:08.309 --> 00:30:10.100
Everything's getting
more and more crowded.

00:30:10.100 --> 00:30:11.788
It's actually hard to get on.

00:30:14.420 --> 00:30:17.921
Almost there's a way to-- and
it's not politically very good

00:30:17.921 --> 00:30:21.536
way to raise taxes, especially
during peak [INAUDIBLE]

00:30:21.536 --> 00:30:24.910
things like that, to actually
allow people to get on.

00:30:24.910 --> 00:30:27.850
And then you almost have
reverse Baumol's disease

00:30:27.850 --> 00:30:30.810
because the value
has gotten so high.

00:30:30.810 --> 00:30:36.241
And the alternatives are
[INAUDIBLE] in the tube ride.

00:30:36.241 --> 00:30:37.240
FREDERICK SALVUCCI: Yes.

00:30:37.240 --> 00:30:42.970
So it would have to be pretty
extreme to actually totally

00:30:42.970 --> 00:30:44.650
offset the Baumol problem.

00:30:44.650 --> 00:30:46.460
But it's certainly an offset.

00:30:46.460 --> 00:30:51.681
And that's-- none of you
guys are going to rat me out,

00:30:51.681 --> 00:30:52.180
are you?

00:30:52.180 --> 00:30:55.250
This thing is being
taped isn't it?

00:30:55.250 --> 00:30:57.533
AUDIENCE: Maybe an eighth of us.

00:30:57.533 --> 00:30:58.465
[INAUDIBLE]

00:30:58.465 --> 00:31:00.840
FREDERICK SALVUCCI: Well,
we've got our visitors from TFL

00:31:00.840 --> 00:31:01.700
coming tomorrow.

00:31:01.700 --> 00:31:02.949
And they they're great people.

00:31:02.949 --> 00:31:05.010
And it's a very
competent organization.

00:31:05.010 --> 00:31:06.510
And they're very
proud of themselves

00:31:06.510 --> 00:31:07.860
for running a good service.

00:31:07.860 --> 00:31:12.600
And they, in fact,
for a long time

00:31:12.600 --> 00:31:15.420
were able to persuade
two different mayors.

00:31:15.420 --> 00:31:19.180
One, the labor mayor
red Ken Livingstone

00:31:19.180 --> 00:31:23.520
the Trotskyite, and then
the right wing conservative

00:31:23.520 --> 00:31:26.910
mayor Boris.

00:31:26.910 --> 00:31:31.080
And they were able to convince
the Trotskyite, as well

00:31:31.080 --> 00:31:35.100
as the conservative
that it was OK to try

00:31:35.100 --> 00:31:41.760
to increase transit fares by
the rate of inflation plus 1%.

00:31:41.760 --> 00:31:45.750
That's a pretty steep,
especially for a labor

00:31:45.750 --> 00:31:47.250
kind of mayor.

00:31:47.250 --> 00:31:49.350
The current mayor
is a socialist,

00:31:49.350 --> 00:31:52.110
and he's not into
seeing that continue.

00:31:52.110 --> 00:31:53.610
And I don't blame him.

00:31:53.610 --> 00:31:58.941
But TFL was really happy
that they had this strategy.

00:31:58.941 --> 00:32:00.690
And of course they
argued that well, we're

00:32:00.690 --> 00:32:01.930
providing better service.

00:32:01.930 --> 00:32:03.804
So people should pay
for that better service.

00:32:03.804 --> 00:32:07.020
And to some degree that's true.

00:32:07.020 --> 00:32:11.030
And their numbers were
looking very good.

00:32:11.030 --> 00:32:15.770
But it turned out that
the population of London

00:32:15.770 --> 00:32:19.190
had grown in the previous five
years, more than anyone knew.

00:32:19.190 --> 00:32:24.350
So there was a secret assist
to the numbers coming out

00:32:24.350 --> 00:32:26.930
of the fact that the
population had just grown,

00:32:26.930 --> 00:32:28.550
along with a growing economy.

00:32:28.550 --> 00:32:31.430
And not to take anything away
from a very competent bunch

00:32:31.430 --> 00:32:34.610
of people running TFL, they
were in the right place

00:32:34.610 --> 00:32:35.500
at the right time.

00:32:35.500 --> 00:32:39.820
You bunt on third base and
think you hit a triple.

00:32:39.820 --> 00:32:41.720
Here we are.

00:32:41.720 --> 00:32:44.510
You're in London with
this terrific system,

00:32:44.510 --> 00:32:47.060
and the economy is growing,
and it's kind of going up.

00:32:47.060 --> 00:32:50.050
Now it's a little unfair
because they are very competent,

00:32:50.050 --> 00:32:52.650
and they're doing a good job,
and they work hard at it.

00:32:52.650 --> 00:32:55.531
But a lot of it is just luck
of being in the right place

00:32:55.531 --> 00:32:56.280
at the right time.

00:32:56.280 --> 00:33:02.180
So there's an external
extra benefit to transit

00:33:02.180 --> 00:33:06.530
that can help offset Baumol's
disease in those cities that

00:33:06.530 --> 00:33:07.122
are growing.

00:33:07.122 --> 00:33:09.080
So what do you do in a
city that's not growing?

00:33:09.080 --> 00:33:10.400
What do you do in North Adams?

00:33:10.400 --> 00:33:13.670
What do you do when General
Electric pulls out a Pittsfield

00:33:13.670 --> 00:33:16.060
yanking 5,000 jobs with them?

00:33:16.060 --> 00:33:18.920
You know you don't have that
luck in those situations.

00:33:18.920 --> 00:33:24.080
So it's nice to be
lucky, but you can't bank

00:33:24.080 --> 00:33:25.490
on that in a systematic way.

00:33:25.490 --> 00:33:28.402
And you need to be able to
sort of look at the situation

00:33:28.402 --> 00:33:29.360
and think that through.

00:33:33.760 --> 00:33:39.060
So another place you
might get funding support,

00:33:39.060 --> 00:33:42.410
and this is very hard to do,
and they successfully did this

00:33:42.410 --> 00:33:44.042
to some degree in London.

00:33:44.042 --> 00:33:48.380
Is to try to secure
funding support, at least

00:33:48.380 --> 00:33:53.570
political support, from
those growth constituencies.

00:33:53.570 --> 00:34:00.850
So the easy thing to do, not
easy, all of this is tough.

00:34:00.850 --> 00:34:04.750
But the relatively
feasible thing to do

00:34:04.750 --> 00:34:07.570
is to identify the
beneficiaries of what

00:34:07.570 --> 00:34:10.510
you're doing, above
and beyond those people

00:34:10.510 --> 00:34:12.929
riding on the system.

00:34:12.929 --> 00:34:15.076
So you look at what's going on.

00:34:15.076 --> 00:34:17.659
And you say, hey, there's a much
real estate developers making

00:34:17.659 --> 00:34:18.980
a lot of money.

00:34:18.980 --> 00:34:23.420
And they couldn't develop those
densities except for transit.

00:34:23.420 --> 00:34:29.630
So let me go to them and try to
get them to politically support

00:34:29.630 --> 00:34:32.810
taxes that someone else
will pay so that there

00:34:32.810 --> 00:34:34.699
can be better transit.

00:34:34.699 --> 00:34:37.639
That's the easier lift, right?

00:34:37.639 --> 00:34:40.070
Let's increase the sales tax.

00:34:40.070 --> 00:34:42.889
Real estate developers don't
pay particularly more sales tax

00:34:42.889 --> 00:34:45.559
than other people do.

00:34:45.559 --> 00:34:47.850
Everybody tries to do things
with other people's money.

00:34:47.850 --> 00:34:50.540
So I can make a
campaign contribution,

00:34:50.540 --> 00:34:53.300
raise the sales tax, have
a better transit system,

00:34:53.300 --> 00:34:55.530
my real estate value
goes up, I make money.

00:34:55.530 --> 00:34:58.010
That's one proposition.

00:34:58.010 --> 00:34:59.480
That doesn't happen
automatically.

00:34:59.480 --> 00:35:02.710
It's hard to do,
but it's doable.

00:35:02.710 --> 00:35:09.340
A more significant,
more significant

00:35:09.340 --> 00:35:14.850
achievement was what transport
for London pulled off

00:35:14.850 --> 00:35:17.230
on the funding of Crossrail.

00:35:17.230 --> 00:35:20.770
Because they went to the
financial services community

00:35:20.770 --> 00:35:25.720
that really wanted
Crossrail because they see--

00:35:25.720 --> 00:35:28.030
they've learned a little
bit from the experience

00:35:28.030 --> 00:35:30.790
that when Docklands
light rail got built,

00:35:30.790 --> 00:35:34.090
all of a sudden these Docklands
that were kind of abandoned

00:35:34.090 --> 00:35:39.490
start to be successful, and too
successful, and hard to get to.

00:35:39.490 --> 00:35:44.110
And then they do the Jubilee
line, and another growth spurt,

00:35:44.110 --> 00:35:45.070
and wow.

00:35:45.070 --> 00:35:47.142
The economy's
growing, this is good.

00:35:47.142 --> 00:35:48.100
Now let's do Crossrail.

00:35:48.100 --> 00:35:50.230
We're going to really
get a massive amount

00:35:50.230 --> 00:35:54.730
of additional crosstown
capacity, very

00:35:54.730 --> 00:35:56.020
large investment.

00:35:56.020 --> 00:35:57.340
It's two big digs.

00:35:57.340 --> 00:36:00.960
It's like we use the Big Dig
as a unit of measurement,

00:36:00.960 --> 00:36:04.554
that's about $25 billion, I
think it's $25 billion pounds.

00:36:04.554 --> 00:36:05.470
Does that sound right?

00:36:05.470 --> 00:36:07.662
AUDIENCE: I just
know it's a lot.

00:36:07.662 --> 00:36:09.370
FREDERICK SALVUCCI:
It's a big, big deal.

00:36:13.454 --> 00:36:15.120
So how are you going
to fund that thing?

00:36:15.120 --> 00:36:16.590
Well, let's go to the
national governments

00:36:16.590 --> 00:36:17.610
and say hey, give us some money.

00:36:17.610 --> 00:36:18.540
This is virtuous.

00:36:18.540 --> 00:36:19.950
Here's our benefit
cost analysis.

00:36:19.950 --> 00:36:21.660
Look how wonderful it is.

00:36:21.660 --> 00:36:25.440
And the national government
say, get out of here.

00:36:25.440 --> 00:36:28.820
We've got a political problem,
too much going to London.

00:36:28.820 --> 00:36:32.640
Lots of parts of the UK
that aren't so successful.

00:36:32.640 --> 00:36:35.690
They're not very sympathetic,
so forget about it.

00:36:38.870 --> 00:36:40.970
What they end up at
the end of the story

00:36:40.970 --> 00:36:43.700
without going through
the various attempts,

00:36:43.700 --> 00:36:46.130
is they convinced--

00:36:46.130 --> 00:36:49.260
they put together a package
that has three components.

00:36:49.260 --> 00:36:55.100
One, they pledged to defray a
third of the costs of Crossrail

00:36:55.100 --> 00:36:59.540
by continually increasing
transit revenues.

00:36:59.540 --> 00:37:01.820
That can be through
more riders, or it

00:37:01.820 --> 00:37:03.830
can be the same riders
at higher fares,

00:37:03.830 --> 00:37:05.700
or a combination of the two.

00:37:05.700 --> 00:37:07.422
But a third of the
capital cost is

00:37:07.422 --> 00:37:09.380
going to come out of the
riders because they're

00:37:09.380 --> 00:37:12.530
going to be beneficiaries
of less crowded conditions,

00:37:12.530 --> 00:37:15.500
and more convenient service.

00:37:15.500 --> 00:37:19.400
A third of it will get
from the government.

00:37:19.400 --> 00:37:22.100
And a third of it
we're going to put

00:37:22.100 --> 00:37:28.400
a surcharge on the real
estate tax of large companies

00:37:28.400 --> 00:37:32.330
in London, on the
commercial real estate.

00:37:32.330 --> 00:37:34.970
Not the little corner
store, but anything

00:37:34.970 --> 00:37:38.090
bigger than some minimum.

00:37:38.090 --> 00:37:39.470
Now that's a hard ask.

00:37:39.470 --> 00:37:42.260
Because now you're saying
to someone, admit it,

00:37:42.260 --> 00:37:44.060
you're a beneficiary,
and you should

00:37:44.060 --> 00:37:47.570
be willing to actually put some
of your money on the table.

00:37:47.570 --> 00:37:49.640
And they're never going
to agree with you because

00:37:49.640 --> 00:37:52.070
of the ethical argument.

00:37:52.070 --> 00:37:54.080
It's the practical
argument look,

00:37:54.080 --> 00:37:56.510
we can ask for 100 percent
national money all we want,

00:37:56.510 --> 00:37:57.740
they're never going to do it.

00:37:57.740 --> 00:37:59.690
We've got to have
something different.

00:37:59.690 --> 00:38:02.900
So they put together this a
third, a third, a third package

00:38:02.900 --> 00:38:04.610
and they succeeded.

00:38:04.610 --> 00:38:09.150
Now, the national government
is the most fraudulent

00:38:09.150 --> 00:38:10.980
of the three parties.

00:38:10.980 --> 00:38:14.250
Because if you think
of the, and this

00:38:14.250 --> 00:38:16.740
was true with the
alleged labor government

00:38:16.740 --> 00:38:20.640
then even more true
with the conservatives.

00:38:20.640 --> 00:38:26.590
What's the marginal rate of
income taxation in the UK right

00:38:26.590 --> 00:38:27.090
now?

00:38:27.090 --> 00:38:29.425
AUDIENCE: Well it depends
on what bracket you're in,

00:38:29.425 --> 00:38:32.130
but the highest bracket is
45% above 150,000 pounds.

00:38:32.130 --> 00:38:33.880
FREDERICK SALVUCCI:
OK, and what if you're

00:38:33.880 --> 00:38:37.092
say 80,000, 50,000 pounds?

00:38:37.092 --> 00:38:39.810
AUDIENCE: You pay like a
marginal rate of like 30%.

00:38:39.810 --> 00:38:42.520
FREDERICK SALVUCCI: OK 30%.

00:38:42.520 --> 00:38:46.310
So [INTERPOSING VOICES]
Yeah so 30%.

00:38:46.310 --> 00:38:49.060
So we're going to
build Crossrail.

00:38:49.060 --> 00:38:53.280
This is an unusual burst
of construction activity.

00:38:53.280 --> 00:38:56.892
We're going to import a bunch of
Polish workers to do the work.

00:38:56.892 --> 00:38:59.100
They're going to leave their
wives and kids back home

00:38:59.100 --> 00:39:02.280
in Poland, getting
educated back there.

00:39:02.280 --> 00:39:05.250
They're going to live
on marginal conditions

00:39:05.250 --> 00:39:09.060
where they are, and the
national governments taking 30%

00:39:09.060 --> 00:39:10.440
off the top of what they make.

00:39:10.440 --> 00:39:12.660
Maybe more than 30%.

00:39:12.660 --> 00:39:15.300
So this one third that
the national government

00:39:15.300 --> 00:39:17.700
contributed, they're
getting it all back

00:39:17.700 --> 00:39:24.390
from what they're taking out
of that blip in employment

00:39:24.390 --> 00:39:25.677
that the project is causing.

00:39:25.677 --> 00:39:27.510
So they're the most
fraudulent of the three.

00:39:27.510 --> 00:39:30.030
They're not really
contributing, but boy they

00:39:30.030 --> 00:39:35.820
made them crawl through a
sewer pipe to get the money.

00:39:35.820 --> 00:39:43.420
But the point is,
you need to identify

00:39:43.420 --> 00:39:46.300
who the beneficiaries are.

00:39:46.300 --> 00:39:50.130
And, at the very least, you
need to enlist their support

00:39:50.130 --> 00:39:52.920
to get someone
else to pay taxes.

00:39:52.920 --> 00:39:54.750
And you may not
get away with that.

00:39:54.750 --> 00:39:57.960
So you may have to do something
to make the constituency

00:39:57.960 --> 00:40:01.020
that benefits put some of
their own money on the table.

00:40:01.020 --> 00:40:02.880
And the analog on
that in Boston would

00:40:02.880 --> 00:40:06.240
be, it's very nice to get
federal and state money

00:40:06.240 --> 00:40:08.911
to upgrade transit services.

00:40:08.911 --> 00:40:10.410
But that's state
money is coming out

00:40:10.410 --> 00:40:14.850
of parts of the state that
are much less affluent.

00:40:14.850 --> 00:40:19.800
So why shouldn't Boston and
Cambridge and Somerville

00:40:19.800 --> 00:40:23.340
put some money into
both the operation

00:40:23.340 --> 00:40:25.800
and maintenance of the service.

00:40:25.800 --> 00:40:29.250
Seems to me, there's an ethical
argument that they ought to.

00:40:29.250 --> 00:40:32.342
And there's a stronger political
argument that they better,

00:40:32.342 --> 00:40:34.050
because the rest of
the state's not going

00:40:34.050 --> 00:40:36.380
to pay for Boston anymore.

00:40:36.380 --> 00:40:40.080
Boston's doing too well
economically to expect sympathy

00:40:40.080 --> 00:40:42.570
from the rest of
the state on paying

00:40:42.570 --> 00:40:44.190
for the investment
in the services

00:40:44.190 --> 00:40:46.330
that the Boston
economy requires.

00:40:46.330 --> 00:40:48.690
So the point is,
if you're trying

00:40:48.690 --> 00:40:53.270
to deal with the Baumol problem,
and you are, you can be lucky

00:40:53.270 --> 00:40:54.260
and that's nice.

00:40:54.260 --> 00:40:55.640
And you should at
least recognize

00:40:55.640 --> 00:40:56.750
that you're being lucky.

00:40:56.750 --> 00:41:00.740
But then you also have to say
who are the beneficiaries?

00:41:00.740 --> 00:41:03.890
If I make up this fancy
externality argument

00:41:03.890 --> 00:41:06.950
that it's good for society
for there to be more transit,

00:41:06.950 --> 00:41:08.990
there must be some real
human beings in back

00:41:08.990 --> 00:41:10.220
of that external benefit.

00:41:10.220 --> 00:41:12.030
I better figure
out who they are.

00:41:12.030 --> 00:41:14.930
And at the very least, get
them to support me politically,

00:41:14.930 --> 00:41:17.750
and preferably even willing
to put some of their own money

00:41:17.750 --> 00:41:18.450
on the table.

00:41:18.450 --> 00:41:20.720
So it's kind of a thought
process to go through.

00:41:23.970 --> 00:41:32.720
Another strategy that is
often, maybe to greater degree

00:41:32.720 --> 00:41:38.590
described as a panacea, and that
is well, let's contract out.

00:41:38.590 --> 00:41:43.690
These unions are,
not to be pejorative,

00:41:43.690 --> 00:41:45.340
they're just too
good at what they do.

00:41:45.340 --> 00:41:47.310
It's not that they
are nasty people.

00:41:47.310 --> 00:41:49.694
That they've got leverage,
and they're using it.

00:41:49.694 --> 00:41:50.860
They think that's their job.

00:41:50.860 --> 00:41:55.780
They're getting more wages and
benefits for their employees.

00:41:55.780 --> 00:41:57.490
So why would you be surprised.

00:41:57.490 --> 00:42:00.310
But you're having
a real problem.

00:42:00.310 --> 00:42:09.020
So if you contract out,
maybe you won't pay as much

00:42:09.020 --> 00:42:14.190
of a Baumol premium.

00:42:14.190 --> 00:42:19.620
Now, deconstruct
what I just said.

00:42:19.620 --> 00:42:21.610
Do you buy that?

00:42:21.610 --> 00:42:25.160
What if we contracted out
all the bus service for the T

00:42:25.160 --> 00:42:28.440
to third party?

00:42:28.440 --> 00:42:32.222
So Paul Revere could
run everything.

00:42:32.222 --> 00:42:37.442
AUDIENCE: [INAUDIBLE] So you'd
have to bribe them somehow.

00:42:37.442 --> 00:42:39.900
You can't have-- you couldn't
have one private service when

00:42:39.900 --> 00:42:41.910
the whole thing, because
they'd just unionized

00:42:41.910 --> 00:42:43.630
to the private service.

00:42:43.630 --> 00:42:46.230
Unless there was some
kind of right to work law

00:42:46.230 --> 00:42:48.500
that was passed [INAUDIBLE]
in Massachusetts.

00:42:48.500 --> 00:42:53.680
So you'd have to like contract
it out to 30 agencies.

00:42:53.680 --> 00:42:57.790
And they would also all have
to have a different union

00:42:57.790 --> 00:42:59.280
[INAUDIBLE] random.

00:42:59.280 --> 00:43:02.770
Rather than all joining some
one Transit Workers Union.

00:43:02.770 --> 00:43:05.870
I don't think there's any, now
thinking it out, any way you

00:43:05.870 --> 00:43:09.230
could force them to do that.

00:43:09.230 --> 00:43:13.250
FREDERICK SALVUCCI:
So you're saying

00:43:13.250 --> 00:43:18.042
if you can't do that it's
of no value to contract out?

00:43:18.042 --> 00:43:19.750
AUDIENCE: I don't
think it's of no value,

00:43:19.750 --> 00:43:21.710
but I think it's
of marginal value.

00:43:24.650 --> 00:43:27.160
FREDERICK SALVUCCI:
Anybody want to argue?

00:43:27.160 --> 00:43:28.990
You got a little more
than that out of it?

00:43:33.459 --> 00:43:35.000
AUDIENCE: I think
I know we're going.

00:43:35.000 --> 00:43:38.690
But still hopefully
this is [INAUDIBLE]

00:43:38.690 --> 00:43:42.120
that you can sort of by
contracting some of it out,

00:43:42.120 --> 00:43:44.385
you can have a check on
the power of the unions.

00:43:44.385 --> 00:43:45.760
And sort of what
you're saying is

00:43:45.760 --> 00:43:48.630
that you can have sort
of two systems that

00:43:48.630 --> 00:43:54.010
keep each other in line
with one system [INAUDIBLE]..

00:43:54.010 --> 00:43:56.940
I guess the problem, like
the problem with unions

00:43:56.940 --> 00:43:59.760
is they're often not
necessarily based on the company

00:43:59.760 --> 00:44:00.860
you work for.

00:44:00.860 --> 00:44:02.830
They're often based
on a type of trade.

00:44:02.830 --> 00:44:05.910
So you could end up
having two companies that

00:44:05.910 --> 00:44:08.540
run bus services,
but actually they all

00:44:08.540 --> 00:44:10.100
destroy the bus [INAUDIBLE]

00:44:10.100 --> 00:44:12.016
And it's quite possible
that in the short-term

00:44:12.016 --> 00:44:14.610
you might have more competition
than longer-term [INAUDIBLE]

00:44:14.610 --> 00:44:17.920
basically [INAUDIBLE]

00:44:17.920 --> 00:44:20.440
FREDERICK SALVUCCI:
So is this competition

00:44:20.440 --> 00:44:23.440
you're trying to get,
is this all competition

00:44:23.440 --> 00:44:26.689
among rival workers?

00:44:26.689 --> 00:44:27.230
AUDIENCE: No.

00:44:27.230 --> 00:44:31.390
[INAUDIBLE] between
[INAUDIBLE] work [INAUDIBLE]

00:44:31.390 --> 00:44:32.390
FREDERICK SALVUCCI: Yes.

00:44:32.390 --> 00:44:34.348
The companies are going
to make profit on this.

00:44:34.348 --> 00:44:38.550
So it's not just the employees.

00:44:38.550 --> 00:44:43.140
It's also the private companies.

00:44:51.630 --> 00:44:57.140
So Javier runs the numbers.

00:44:57.140 --> 00:44:59.750
And looks at well,
let's see there

00:44:59.750 --> 00:45:01.500
are a bunch of places
in the United States

00:45:01.500 --> 00:45:03.540
that do contract
out for service.

00:45:03.540 --> 00:45:10.050
And let's see if services that
are contracted out cost less.

00:45:10.050 --> 00:45:13.110
Now, before I tell
you what he found,

00:45:13.110 --> 00:45:16.010
what would you expect to find?

00:45:16.010 --> 00:45:18.890
A, how many of you
think you would expect

00:45:18.890 --> 00:45:22.670
to find that it costs
less to contract out

00:45:22.670 --> 00:45:24.575
than to do it all in-house?

00:45:24.575 --> 00:45:27.564
AUDIENCE: Is this across all
state the same labor law?

00:45:27.564 --> 00:45:28.730
FREDERICK SALVUCCI: Do you--

00:45:28.730 --> 00:45:29.630
all states.

00:45:29.630 --> 00:45:31.350
And we're just talking buses.

00:45:31.350 --> 00:45:33.990
We're not confusing
it with rail,

00:45:33.990 --> 00:45:36.730
which is every city is
a little bit different.

00:45:36.730 --> 00:45:38.000
It's just bus drivers.

00:45:38.000 --> 00:45:39.760
AUDIENCE: I'll go
with [INAUDIBLE]..

00:45:39.760 --> 00:45:40.530
Cost less.

00:45:40.530 --> 00:45:41.821
FREDERICK SALVUCCI: Costs less.

00:45:41.821 --> 00:45:43.962
Anybody disagree?

00:45:43.962 --> 00:45:45.462
AUDIENCE: Yeah, I
think it has more.

00:45:45.462 --> 00:45:47.070
I think it probably
costs way more.

00:45:47.070 --> 00:45:49.209
FREDERICK SALVUCCI: Cost
more to contract out?

00:45:49.209 --> 00:45:50.000
That's interesting.

00:45:50.000 --> 00:45:50.500
Why?

00:45:52.980 --> 00:45:57.750
AUDIENCE: Because once you
contract it out, you have--

00:45:57.750 --> 00:45:59.890
you don't want to
bring it back in-house.

00:45:59.890 --> 00:46:01.711
And potentially in a
lot of these markets

00:46:01.711 --> 00:46:03.210
you don't actually
have competition.

00:46:03.210 --> 00:46:04.420
You have one player.

00:46:04.420 --> 00:46:08.560
So that one player you'd
be subsidizing more,

00:46:08.560 --> 00:46:11.400
potentially pay more rent
to the employer rather than

00:46:11.400 --> 00:46:12.600
the employees.

00:46:12.600 --> 00:46:16.380
Because that one employer has
a lot of leverage over you

00:46:16.380 --> 00:46:18.590
to drive up the amount
you get paid overtime.

00:46:18.590 --> 00:46:19.590
FREDERICK SALVUCCI: Yes.

00:46:19.590 --> 00:46:22.530
So that's very insightful.

00:46:22.530 --> 00:46:24.930
And that's fairly accurate.

00:46:24.930 --> 00:46:28.590
What the data shows that
Javier pulled together

00:46:28.590 --> 00:46:34.680
is that contracting out
does reduce cost somewhat.

00:46:34.680 --> 00:46:41.100
But that in comparison to places
that provide all bus service

00:46:41.100 --> 00:46:43.350
with in-house employees.

00:46:43.350 --> 00:46:48.510
But that the cost performance
is consistently better

00:46:48.510 --> 00:46:52.120
in those places that do a
combination of contracting out

00:46:52.120 --> 00:46:53.520
and in-house.

00:46:53.520 --> 00:46:56.057
And that's probably partly
because once the contractors

00:46:56.057 --> 00:46:58.390
figure out you don't know how
to do it yourself anymore.

00:46:58.390 --> 00:46:59.820
They get you over a barrel.

00:46:59.820 --> 00:47:02.220
And they take advantage
of the leverage.

00:47:02.220 --> 00:47:05.970
And it's partly because
you can't manage something

00:47:05.970 --> 00:47:07.740
if you don't know how
to do it yourself.

00:47:07.740 --> 00:47:10.980
So when you're contracting
out, the transit manager

00:47:10.980 --> 00:47:13.510
has to know how to
manage that contract.

00:47:13.510 --> 00:47:17.640
And if you're not doing anything
in-house that's a weakness.

00:47:17.640 --> 00:47:23.250
So that indicates that the mixed
strategy seems better than all

00:47:23.250 --> 00:47:25.220
of one or all of the other.

00:47:25.220 --> 00:47:26.850
But if you had to
choose, you might

00:47:26.850 --> 00:47:29.820
choose for the
contracted model based

00:47:29.820 --> 00:47:31.230
on the way the numbers look.

00:47:31.230 --> 00:47:36.390
But the half and half or
the part that, some of each,

00:47:36.390 --> 00:47:39.744
seems to be a better strategy.

00:47:39.744 --> 00:47:45.230
AUDIENCE: Is it also the case
that maybe some services are

00:47:45.230 --> 00:47:48.045
going to be run more
efficiently by contractors,

00:47:48.045 --> 00:47:52.715
whereas some services can be
run more efficiently in-house?

00:47:52.715 --> 00:47:54.302
Plus it makes sense
to contract out

00:47:54.302 --> 00:47:58.810
when those services that can be
done more efficiently that way.

00:48:02.690 --> 00:48:05.030
FREDERICK SALVUCCI: It's
possible, but I don't think so.

00:48:05.030 --> 00:48:09.440
I mean a bad, and
unscrupulous manager,

00:48:09.440 --> 00:48:13.070
or a set of
unscrupulous employees

00:48:13.070 --> 00:48:16.400
could, for example,
look at a bus

00:48:16.400 --> 00:48:22.190
route that is not very full.

00:48:22.190 --> 00:48:25.430
But there's a policy
headway that says well

00:48:25.430 --> 00:48:28.370
even if the bus isn't
full we should not

00:48:28.370 --> 00:48:33.350
provide less than a bus every
15 minutes in this corridor.

00:48:33.350 --> 00:48:39.240
An unscrupulous manager or an
unscrupulous union might say,

00:48:39.240 --> 00:48:43.470
all these people will fit in a
bus every 30 minutes, screw it.

00:48:43.470 --> 00:48:45.590
We're just going to
run half the service.

00:48:45.590 --> 00:48:47.910
And if they don't get caught
they'll pocket the money

00:48:47.910 --> 00:48:49.870
if it's a contractor.

00:48:49.870 --> 00:48:53.490
And if it's the workers,
they'll just play cards and not

00:48:53.490 --> 00:48:54.680
run half the routes.

00:48:54.680 --> 00:49:06.094
In Puerto Rico when we were
doing work there the story was,

00:49:06.094 --> 00:49:07.510
I don't know if
you have verified.

00:49:07.510 --> 00:49:11.500
Discovery was one for
me, one for the company.

00:49:11.500 --> 00:49:14.470
The schedule says there's
a bus every 15 minutes,

00:49:14.470 --> 00:49:15.860
we run one every 30 minutes.

00:49:15.860 --> 00:49:18.940
That's good enough, and we
play dominoes in between.

00:49:18.940 --> 00:49:20.638
Have you heard the story?

00:49:20.638 --> 00:49:25.618
AUDIENCE: Well when I consulted
for them and with [INAUDIBLE]

00:49:25.618 --> 00:49:30.750
that was the case [INAUDIBLE]
The reality is that they didn't

00:49:30.750 --> 00:49:35.210
have the buses to operate,
no buses in good condition.

00:49:35.210 --> 00:49:38.070
So they only had half the fleet.

00:49:38.070 --> 00:49:43.624
So we couldn't pull
out [INAUDIBLE] Sot

00:49:43.624 --> 00:49:45.556
it ended up being what you said.

00:49:45.556 --> 00:49:46.094
[INAUDIBLE]

00:49:46.094 --> 00:49:48.010
FREDERICK SALVUCCI: So
anyway what I'm saying,

00:49:48.010 --> 00:49:50.220
though, is that
you could view it

00:49:50.220 --> 00:49:55.380
as a kind of corrupt
practice by a contractor.

00:49:55.380 --> 00:49:58.320
Or you could view it as an
unethical practice by workers.

00:49:58.320 --> 00:50:06.270
But there's leverage in a market
where policy wants a better

00:50:06.270 --> 00:50:11.430
level of service than
the service requires

00:50:11.430 --> 00:50:12.390
in market terms.

00:50:12.390 --> 00:50:14.640
There aren't enough
people paying fares.

00:50:14.640 --> 00:50:16.470
Because you lose
some riders when you

00:50:16.470 --> 00:50:19.410
mistreat your riders that way.

00:50:19.410 --> 00:50:21.780
But if your fares
are low, and you're

00:50:21.780 --> 00:50:27.780
mostly dependent on
subsidy, then your customer,

00:50:27.780 --> 00:50:30.030
if you will, whether
you are employees

00:50:30.030 --> 00:50:32.370
or whether you're a
company, your customer

00:50:32.370 --> 00:50:36.060
is the agency paying
you with subsidy.

00:50:36.060 --> 00:50:38.430
Your customer is
not the rider who's

00:50:38.430 --> 00:50:40.410
paying a fare to get a service.

00:50:40.410 --> 00:50:48.180
So you've changed the dynamic of
who your institution is trying

00:50:48.180 --> 00:50:50.130
to please in its behavior.

00:50:50.130 --> 00:50:54.840
And workers aren't particularly
better than companies

00:50:54.840 --> 00:50:57.800
in exploiting
situations like that.

00:50:57.800 --> 00:50:59.400
It happens both ways.

00:50:59.400 --> 00:51:07.710
So the theory is that you
won't get the benefits

00:51:07.710 --> 00:51:12.520
unless there is competition
among different companies.

00:51:12.520 --> 00:51:14.880
If you go to
private contracting.

00:51:14.880 --> 00:51:17.130
Even if you only do
partial contracting.

00:51:17.130 --> 00:51:18.682
You look at the
data and say well,

00:51:18.682 --> 00:51:20.140
I'm not going to
make that mistake.

00:51:20.140 --> 00:51:21.135
I'm going to do some.

00:51:21.135 --> 00:51:25.170
You still would like to
have multiple companies.

00:51:25.170 --> 00:51:29.580
Well, in some areas there
aren't multiple companies.

00:51:29.580 --> 00:51:32.580
You can't just will
them into existence.

00:51:32.580 --> 00:51:38.730
And if your objective
in the competition

00:51:38.730 --> 00:51:42.930
is to minimize the amount
you're paying in subsidy,

00:51:42.930 --> 00:51:46.170
you may make this such
a marginal business

00:51:46.170 --> 00:51:49.950
that it's quite unattractive
for people to come into it.

00:51:49.950 --> 00:51:56.820
So if you've got a strategy to
control Baumol's disease based

00:51:56.820 --> 00:52:02.580
on contracting out, you can't
be excessively cost conscious

00:52:02.580 --> 00:52:04.650
or you will destroy
the incentive

00:52:04.650 --> 00:52:07.000
for people to be part of it.

00:52:07.000 --> 00:52:09.790
So you've got to think
about why you're doing it.

00:52:09.790 --> 00:52:13.410
Now, if you're
doing it to improve

00:52:13.410 --> 00:52:18.870
the quality of the service,
and to provide more service,

00:52:18.870 --> 00:52:28.090
then you may be able to have a
growing business opportunity.

00:52:28.090 --> 00:52:32.100
So that more companies will
want to come into the area

00:52:32.100 --> 00:52:34.540
because it looks like a
good place to do business.

00:52:34.540 --> 00:52:37.430
But if it's a kind of
stable, 10 years from now

00:52:37.430 --> 00:52:40.100
is the same number
of riders is today,

00:52:40.100 --> 00:52:41.900
it's a pretty dead end business.

00:52:41.900 --> 00:52:46.130
So you're not going to really
get top managers trying

00:52:46.130 --> 00:52:50.480
to provide better
service for less money,

00:52:50.480 --> 00:52:53.480
either in the public sector
or when you contract out.

00:52:53.480 --> 00:52:55.610
But there's a more
fundamental theoretical thing.

00:52:55.610 --> 00:52:58.890
And I'm going on too
long about Baumol.

00:52:58.890 --> 00:53:02.480
But what's the maximum
you would expect

00:53:02.480 --> 00:53:08.490
to get out of a strategy of
contracting out and getting

00:53:08.490 --> 00:53:10.560
competition?

00:53:10.560 --> 00:53:12.870
Would you totally offset
the Baumol's disease?

00:53:15.525 --> 00:53:17.440
AUDIENCE: Just delay.

00:53:17.440 --> 00:53:20.946
FREDERICK SALVUCCI: So why
are you saying no, Leo?

00:53:20.946 --> 00:53:29.545
AUDIENCE: Because [INAUDIBLE]
People [INAUDIBLE]

00:53:29.545 --> 00:53:33.330
That's the way I feel
[INAUDIBLE] actually brings

00:53:33.330 --> 00:53:36.290
a lot of the fighting
between the two parties.

00:53:36.290 --> 00:53:41.394
You have to realize that
they don't [INAUDIBLE]..

00:53:41.394 --> 00:53:43.560
FREDERICK SALVUCCI: There's
some of that but there's

00:53:43.560 --> 00:53:45.390
a more fundamental issue.

00:53:45.390 --> 00:53:48.690
The theory that
Baumol put forward

00:53:48.690 --> 00:53:50.430
is that in order
to attract labor

00:53:50.430 --> 00:53:52.890
you're going to have
to pay the prevailing

00:53:52.890 --> 00:53:54.660
wage in the metropolitan area.

00:53:54.660 --> 00:53:57.620
And therefore, you
are stuck with costs

00:53:57.620 --> 00:54:00.330
to grow faster than
the rate of inflation.

00:54:00.330 --> 00:54:02.820
You can have all the
competition in the world.

00:54:02.820 --> 00:54:06.810
It's not going to change the
prevailing wage in a Baumol

00:54:06.810 --> 00:54:09.390
disease industry.

00:54:09.390 --> 00:54:13.680
You are going to have
to pay the Baumol

00:54:13.680 --> 00:54:16.530
premium that Baumol identified.

00:54:16.530 --> 00:54:20.160
What you may escape
is the premium

00:54:20.160 --> 00:54:23.820
on top of Baumol that
Javier identified,

00:54:23.820 --> 00:54:26.010
which is coming out of
the political leverage.

00:54:26.010 --> 00:54:28.220
As opposed to the
workplace leverage

00:54:28.220 --> 00:54:33.800
that unions and contractors
have in the legislature

00:54:33.800 --> 00:54:36.490
on affecting the--

00:54:36.490 --> 00:54:41.420
So you shouldn't,
theoretically, expect no matter

00:54:41.420 --> 00:54:43.730
how skillful you are
with contracting out,

00:54:43.730 --> 00:54:46.220
no matter how much
competition you get,

00:54:46.220 --> 00:54:50.990
you will still need to pay
something like the prevailing

00:54:50.990 --> 00:54:53.030
wage or you won't have workers.

00:54:53.030 --> 00:54:54.887
If you pay too little,
you'll get workers

00:54:54.887 --> 00:54:57.470
with very bad habits, who don't
show up on Monday because they

00:54:57.470 --> 00:54:58.910
went drinking over the weekend.

00:54:58.910 --> 00:55:01.610
And you start providing
a lousy service.

00:55:01.610 --> 00:55:10.130
So you are stuck with the
problem that Baumol identified.

00:55:10.130 --> 00:55:13.220
What you may reduce
is the premium

00:55:13.220 --> 00:55:16.370
on top of that that comes from
the political complication,

00:55:16.370 --> 00:55:20.050
the political power of
labor, and companies

00:55:20.050 --> 00:55:25.370
in the legislative process that
is providing the subsidy, which

00:55:25.370 --> 00:55:27.650
is essential to deal with it.

00:55:27.650 --> 00:55:31.310
The first practical question
for Baumol's disease industry

00:55:31.310 --> 00:55:32.990
is where are you going
to get the money?

00:55:32.990 --> 00:55:34.860
You need the subsidy.

00:55:34.860 --> 00:55:36.380
And then the process
for getting it

00:55:36.380 --> 00:55:37.790
has these other complications.

00:55:37.790 --> 00:55:39.410
Yes?

00:55:39.410 --> 00:55:40.910
AUDIENCE: So basically
you're saying

00:55:40.910 --> 00:55:42.368
it's the government
themselves that

00:55:42.368 --> 00:55:44.840
pay the subsidy to the
contractor to induce them

00:55:44.840 --> 00:55:48.500
to participate in the market?

00:55:48.500 --> 00:55:50.814
Because basically
the private companies

00:55:50.814 --> 00:55:52.230
aren't subject to
Baumol's disease

00:55:52.230 --> 00:55:57.330
because they wouldn't take the
contractor to do the business,

00:55:57.330 --> 00:56:01.080
unless the government
pays them [INAUDIBLE]

00:56:01.080 --> 00:56:02.520
counteract Baumol's disease.

00:56:02.520 --> 00:56:03.010
FREDERICK SALVUCCI: Right.

00:56:03.010 --> 00:56:04.930
So even if there's
lots of competition,

00:56:04.930 --> 00:56:06.880
and there are 10
different companies,

00:56:06.880 --> 00:56:08.410
they're not going
to bid below what

00:56:08.410 --> 00:56:10.730
it's going to cost them
to offer the service.

00:56:10.730 --> 00:56:13.240
They're going to have to
pay the prevailing wage.

00:56:13.240 --> 00:56:16.510
So don't be surprised
over a decade when

00:56:16.510 --> 00:56:17.980
you see that that's
gone up faster

00:56:17.980 --> 00:56:19.510
than the rate of inflation.

00:56:19.510 --> 00:56:23.020
If you should define
success as being,

00:56:23.020 --> 00:56:25.960
if you would
maintain that growth

00:56:25.960 --> 00:56:29.030
at or below the
rate of inflation,

00:56:29.030 --> 00:56:33.030
in the prevailing wage, then
you're doing something right.

00:56:33.030 --> 00:56:36.850
Now, if simultaneously
the region is growing,

00:56:36.850 --> 00:56:38.710
so are these external benefits.

00:56:38.710 --> 00:56:42.220
And you're able to actually
charge more for the service

00:56:42.220 --> 00:56:45.400
as they have been at
transport for London,

00:56:45.400 --> 00:56:48.580
then you may actually
begin to offset

00:56:48.580 --> 00:56:52.480
even that part of the problem
that Baumol identified.

00:56:52.480 --> 00:56:56.050
But the point is
that contracting out

00:56:56.050 --> 00:57:00.170
is an interesting strategy,
but it's not a panacea.

00:57:00.170 --> 00:57:04.570
It's unlikely to get you
below the Baumol threshold,

00:57:04.570 --> 00:57:05.270
so to speak.

00:57:05.270 --> 00:57:07.000
But it may get you--

00:57:07.000 --> 00:57:10.180
it may help you reduce this
premium that you'd otherwise

00:57:10.180 --> 00:57:13.000
be condemned to pay.

00:57:13.000 --> 00:57:19.890
So this diagram is
just a way of saying

00:57:19.890 --> 00:57:23.100
once you're running a
business subsidized,

00:57:23.100 --> 00:57:26.520
your organization chart
is really complicated.

00:57:26.520 --> 00:57:29.610
I mean in Massachusetts
you've got a governor,

00:57:29.610 --> 00:57:32.160
the Secretary of Transportation
serves at the pleasure

00:57:32.160 --> 00:57:33.660
of the governor.

00:57:33.660 --> 00:57:34.970
There's a board of directors.

00:57:34.970 --> 00:57:36.053
There's a general manager.

00:57:38.680 --> 00:57:42.230
In some, just within
Massachusetts,

00:57:42.230 --> 00:57:45.217
there have been times when
the general managers served

00:57:45.217 --> 00:57:46.550
at the pleasure of the governor.

00:57:46.550 --> 00:57:48.758
There have been other times
when the general managers

00:57:48.758 --> 00:57:52.080
at a contract from the board.

00:57:52.080 --> 00:57:56.030
So if you've got a
situation where there's

00:57:56.030 --> 00:58:00.260
a secretary, a board, and
the general manager, now

00:58:00.260 --> 00:58:00.980
who's the boss?

00:58:00.980 --> 00:58:02.000
Is that the secretary?

00:58:02.000 --> 00:58:03.920
Is it the board?

00:58:03.920 --> 00:58:08.030
That general manager then has to
manage this production system.

00:58:08.030 --> 00:58:09.620
Has to worry about customers.

00:58:09.620 --> 00:58:11.630
Has to worry about fares.

00:58:11.630 --> 00:58:13.720
But he's got to deal with labor.

00:58:13.720 --> 00:58:15.800
Needs support for the taxes.

00:58:15.800 --> 00:58:16.870
Who controls that?

00:58:16.870 --> 00:58:19.150
Congress, the legislature?

00:58:19.150 --> 00:58:24.230
Labors got more access
to those sources of power

00:58:24.230 --> 00:58:26.797
than the management
structure does.

00:58:26.797 --> 00:58:29.130
The governor who's supposed
to be on top of all of this,

00:58:29.130 --> 00:58:31.380
he may be from a different
party than the legislature.

00:58:31.380 --> 00:58:34.910
Legislature may not even like
the guy, so he's not much use.

00:58:34.910 --> 00:58:38.270
What's going to get you
votes in the legislature

00:58:38.270 --> 00:58:42.591
for some law that's going to
help you run a better transit

00:58:42.591 --> 00:58:43.090
system?

00:58:43.090 --> 00:58:45.850
It might be capital
to buy new buses.

00:58:45.850 --> 00:58:48.720
Might be just the
operating subsidy.

00:58:48.720 --> 00:58:50.760
Labor's a big piece of this.

00:58:50.760 --> 00:58:55.500
So you've got to recognize
the kind of power

00:58:55.500 --> 00:58:57.840
and influence they're
going to have.

00:58:57.840 --> 00:59:01.620
So let's talk about the
history of the labor movement.

00:59:01.620 --> 00:59:04.290
Talked last time a little
bit about the commons union,

00:59:04.290 --> 00:59:05.310
the eight hour day.

00:59:11.100 --> 00:59:15.290
What's the story with
immigrants and labor?

00:59:15.290 --> 00:59:22.300
We all holding hands,
singing solidarity forever,

00:59:22.300 --> 00:59:27.940
American-born immigrants
all loving each other?

00:59:27.940 --> 00:59:30.732
AUDIENCE: Immigrants always
get the scraps of work.

00:59:30.732 --> 00:59:32.190
FREDERICK SALVUCCI:
Yes, immigrants

00:59:32.190 --> 00:59:33.200
are the last ones in.

00:59:33.200 --> 00:59:38.160
So whoever is the earlier group
tends to dominate the jobs.

00:59:38.160 --> 00:59:40.110
Tend to dominate the
management structure.

00:59:40.110 --> 00:59:44.340
Tends to dominate the power
positions within the union.

00:59:44.340 --> 00:59:48.720
So there's not this--

00:59:48.720 --> 00:59:51.600
there's not real solidarity
within the union.

00:59:51.600 --> 00:59:53.970
You get factions
within the union.

00:59:53.970 --> 00:59:59.400
And the newest immigrants
are usually underrepresented,

00:59:59.400 --> 01:00:04.560
sometimes dramatically
so by the union.

01:00:04.560 --> 01:00:09.400
We had a situation at the
T, where through a fluke

01:00:09.400 --> 01:00:12.390
we were able to hire
part-time workers.

01:00:12.390 --> 01:00:16.490
This piece of
legislation went through.

01:00:16.490 --> 01:00:19.700
And the pay scale for the
part-time workers without it

01:00:19.700 --> 01:00:21.590
was outrageously
low, and did not

01:00:21.590 --> 01:00:24.440
include health care benefits.

01:00:24.440 --> 01:00:25.620
Well, I was really offended.

01:00:25.620 --> 01:00:26.870
I said, we're a public agency.

01:00:26.870 --> 01:00:30.740
We're treating these
people horribly.

01:00:30.740 --> 01:00:35.000
And we don't want
them to hate us.

01:00:35.000 --> 01:00:37.520
I would hate us if I
had to work these hours

01:00:37.520 --> 01:00:41.540
without a decent pay,
without health care benefits.

01:00:41.540 --> 01:00:46.260
Let's at least pay
health care benefits.

01:00:46.260 --> 01:00:48.990
Union says no,
you can't do that.

01:00:48.990 --> 01:00:52.860
You can't confer a benefit
except through the bargaining

01:00:52.860 --> 01:00:54.310
process.

01:00:54.310 --> 01:00:58.200
Oh, well surely you agree
that your dues paying members

01:00:58.200 --> 01:00:59.740
should have health
care benefits.

01:00:59.740 --> 01:01:00.780
Nope, we don't care.

01:01:03.870 --> 01:01:05.079
You're taking their dues.

01:01:05.079 --> 01:01:06.495
You're supposed
to represent them.

01:01:06.495 --> 01:01:06.870
Nope.

01:01:06.870 --> 01:01:08.578
You're going to have
to give us something

01:01:08.578 --> 01:01:11.160
if you want us to allow
you to pay benefits

01:01:11.160 --> 01:01:14.280
to those part-time employees.

01:01:14.280 --> 01:01:16.980
I mean you'd like
to strangle them,

01:01:16.980 --> 01:01:22.347
but there are rules
to bargaining, and so

01:01:22.347 --> 01:01:27.430
[INAUDIBLE] that are
all about leverage,

01:01:27.430 --> 01:01:30.400
and very little
about public policy.

01:01:30.400 --> 01:01:34.710
And your first expectation
about how people will behave

01:01:34.710 --> 01:01:36.860
is very often not the case.

01:01:36.860 --> 01:01:40.390
There are these sort
of perverse incentives.

01:01:40.390 --> 01:01:44.800
And the first preoccupation
on the Union side

01:01:44.800 --> 01:01:47.930
is usually to get re-elected.

01:01:47.930 --> 01:01:49.670
And the more
democratic the union--

01:01:49.670 --> 01:01:51.110
do you think
democratic unions are

01:01:51.110 --> 01:01:54.440
better than autocratic unions?

01:01:54.440 --> 01:01:57.290
How many people vote
for democratic unions?

01:01:57.290 --> 01:01:59.180
AUDIENCE: Can you
explain the difference?

01:01:59.180 --> 01:02:00.680
FREDERICK SALVUCCI:
Democratic union

01:02:00.680 --> 01:02:03.800
is one where there are
elections every couple of years.

01:02:03.800 --> 01:02:06.860
And often the
president of the Union

01:02:06.860 --> 01:02:08.690
loses, and a new
president comes in.

01:02:08.690 --> 01:02:12.020
And there's a real give
and take and debate.

01:02:12.020 --> 01:02:15.800
So in the autocratic
union there's

01:02:15.800 --> 01:02:19.910
a family that's been the
president and business

01:02:19.910 --> 01:02:21.990
agent for the past 25 years.

01:02:21.990 --> 01:02:27.350
And when the old man gets
old, his nephew gets the job.

01:02:27.350 --> 01:02:29.970
So you got both kinds
of unions around here.

01:02:29.970 --> 01:02:32.818
Which one do you
think is preferable?

01:02:32.818 --> 01:02:35.108
AUDIENCE: [INAUDIBLE] better
for the workers or profit

01:02:35.108 --> 01:02:37.286
[INAUDIBLE]

01:02:37.286 --> 01:02:38.660
FREDERICK SALVUCCI:
Well, either.

01:02:38.660 --> 01:02:39.800
Take it separately.

01:02:39.800 --> 01:02:40.939
Better for the workers.

01:02:40.939 --> 01:02:42.980
AUDIENCE: Just because
you're asking the question

01:02:42.980 --> 01:02:44.420
I'm going to go with autocrat.

01:02:44.420 --> 01:02:46.820
I think it's a tie.

01:02:46.820 --> 01:02:50.960
FREDERICK SALVUCCI: Yes,
well the democratic union--

01:02:50.960 --> 01:02:54.200
the union is-- the
union leader is

01:02:54.200 --> 01:02:57.200
so afraid he'll lose
the next election,

01:02:57.200 --> 01:02:59.790
he won't make any decisions.

01:02:59.790 --> 01:03:06.080
So we, at one point,
had hired smart people

01:03:06.080 --> 01:03:08.450
like John Attanucci
to figure out

01:03:08.450 --> 01:03:09.872
better ways of producing stuff.

01:03:09.872 --> 01:03:11.330
And they run these
numbers and say,

01:03:11.330 --> 01:03:17.300
hey, we can structure the
work for the rail side

01:03:17.300 --> 01:03:22.000
into four 10 hour
days, a 40 hour week.

01:03:22.000 --> 01:03:23.590
People will get long weekends.

01:03:23.590 --> 01:03:25.810
We can make the numbers work.

01:03:25.810 --> 01:03:28.900
It'll save us money,
and the employees

01:03:28.900 --> 01:03:33.299
will make the same money
and have three day weekends.

01:03:33.299 --> 01:03:34.840
And they sort of
test it with people,

01:03:34.840 --> 01:03:38.200
and the workers
really like this idea.

01:03:38.200 --> 01:03:41.390
Union wouldn't accept it,
because they were afraid

01:03:41.390 --> 01:03:43.580
that it would become an issue.

01:03:43.580 --> 01:03:46.280
So you couldn't even
give them something

01:03:46.280 --> 01:03:50.180
that you knew the workers wanted
because they were so weak.

01:03:50.180 --> 01:03:51.740
They were afraid to make a deal.

01:03:51.740 --> 01:03:53.840
You get a more autocratic
union, and there

01:03:53.840 --> 01:03:56.372
are some not so nice
things about the autocrats,

01:03:56.372 --> 01:03:57.830
but they're willing
to make a deal.

01:03:57.830 --> 01:04:00.260
They know they're going
to be president next year.

01:04:00.260 --> 01:04:03.034
They've got enough confidence
they're going to get reelected,

01:04:03.034 --> 01:04:04.950
that they're better able
to step back and say,

01:04:04.950 --> 01:04:07.040
well, what's the long view here.

01:04:07.040 --> 01:04:11.150
And they may be exercising
that power, on a good day,

01:04:11.150 --> 01:04:14.780
they're exercising that power
on behalf of the workers.

01:04:14.780 --> 01:04:19.790
But they're not so
hypersensitive to a faction

01:04:19.790 --> 01:04:23.210
that they're unwilling
to make a deal.

01:04:23.210 --> 01:04:26.030
In the dynamic of
the union, the union

01:04:26.030 --> 01:04:28.340
is just like any
other organization.

01:04:28.340 --> 01:04:31.100
The people who count are
the people who show up.

01:04:31.100 --> 01:04:37.010
So you have a union meeting
once a month, who shows up?

01:04:37.010 --> 01:04:38.680
A small subset of people.

01:04:38.680 --> 01:04:40.520
Everybody else--
Everyone else is

01:04:40.520 --> 01:04:43.079
out bowling or watching
television, or doing

01:04:43.079 --> 01:04:44.120
whatever they like to do.

01:04:44.120 --> 01:04:45.453
They don't go to union meetings.

01:04:45.453 --> 01:04:47.960
So you got to take
care of the ones who

01:04:47.960 --> 01:04:50.900
show up at the meetings, because
that's the attentive public.

01:04:50.900 --> 01:04:53.300
They're the ones that
are paying attention.

01:04:53.300 --> 01:04:58.400
So the dynamic within the union
may appear to be democratic,

01:04:58.400 --> 01:05:02.360
but it's also dominated
by small factions

01:05:02.360 --> 01:05:06.430
whose interests may diverge
from that of the larger group.

01:05:06.430 --> 01:05:10.070
And especially if there has
been a period of ethnic change.

01:05:10.070 --> 01:05:13.550
Typically, the dominant
group in the union

01:05:13.550 --> 01:05:19.070
reflects the ethnic
composition of 25 years ago.

01:05:19.070 --> 01:05:24.861
And the smarter ones realize
that they better pay attention

01:05:24.861 --> 01:05:26.360
to the new workers,
or they're going

01:05:26.360 --> 01:05:29.270
to lose their
positions more quickly.

01:05:29.270 --> 01:05:31.600
But the nastier ones just
say, the hell with it.

01:05:31.600 --> 01:05:33.174
I'm going to take
care of my people,

01:05:33.174 --> 01:05:34.340
and I don't care about them.

01:05:34.340 --> 01:05:39.590
So democracy is a mixed
blessing sometimes.

01:05:39.590 --> 01:05:42.710
But it always makes it
interesting and complicated.

01:05:45.460 --> 01:05:50.570
Go to Item H because we're
running out of time here.

01:05:50.570 --> 01:05:53.755
World War II labor shortages,
wage and price control.

01:05:59.090 --> 01:06:03.500
Do any of you know the
story of the World War II

01:06:03.500 --> 01:06:04.882
wage and price controls?

01:06:04.882 --> 01:06:05.840
What was going on then?

01:06:05.840 --> 01:06:07.850
AUDIENCE: Wages were frozen.

01:06:07.850 --> 01:06:08.810
Yes.

01:06:08.810 --> 01:06:12.350
So consumption of
products was also frozen.

01:06:12.350 --> 01:06:14.660
FREDERICK SALVUCCI: Yes,
because the government was--

01:06:14.660 --> 01:06:16.010
AUDIENCE: [INAUDIBLE] war.

01:06:16.010 --> 01:06:18.620
FREDERICK SALVUCCI: Yes, and
the government was afraid of,

01:06:18.620 --> 01:06:21.140
that the shortages would
lead to price spikes,

01:06:21.140 --> 01:06:23.060
and there'd a huge
political backlash.

01:06:23.060 --> 01:06:26.760
So they put in wage
and price controls.

01:06:26.760 --> 01:06:29.150
So the industries that were
producing, particularly

01:06:29.150 --> 01:06:31.310
for the war effort,
because that's

01:06:31.310 --> 01:06:33.560
where the was a lot
of money to be made,

01:06:33.560 --> 01:06:35.810
needed to attract workers.

01:06:35.810 --> 01:06:41.219
But they couldn't offer
higher wages under the rules.

01:06:41.219 --> 01:06:43.010
They started offering
health care benefits.

01:06:43.010 --> 01:06:45.800
It was the only way
they could compete.

01:06:45.800 --> 01:06:49.610
At the end of the war, some of
the socialist labor leaders,

01:06:49.610 --> 01:06:52.370
Walter Reuther and
others, looking

01:06:52.370 --> 01:06:55.860
at what was going
on in Europe said,

01:06:55.860 --> 01:06:58.070
well, this is a stupid
way to fund health care.

01:06:58.070 --> 01:06:59.730
Let's have health
care for everybody,

01:06:59.730 --> 01:07:02.610
and let's do it in an
across the board way.

01:07:02.610 --> 01:07:06.970
And the big businesses said
no, we like it this way,

01:07:06.970 --> 01:07:10.410
because this gives us an
advantage that our workers are

01:07:10.410 --> 01:07:12.660
getting health benefits,
and the other aren't.

01:07:12.660 --> 01:07:14.250
And that's to our benefit.

01:07:14.250 --> 01:07:18.870
So these bastards who yap about
out-of-control health care

01:07:18.870 --> 01:07:23.100
costs, the reason we've got
this backward system we've got

01:07:23.100 --> 01:07:26.010
is because of their greed,
and their unwillingness

01:07:26.010 --> 01:07:28.710
in the post-world War II
environment, when you really

01:07:28.710 --> 01:07:31.590
could have gotten a much
broader base Medicare

01:07:31.590 --> 01:07:33.712
for all kind of approach.

01:07:33.712 --> 01:07:34.920
They didn't want it that way.

01:07:34.920 --> 01:07:36.503
Now they complain
that they're paying.

01:07:36.503 --> 01:07:38.160
And I don't blame
them for complaining.

01:07:38.160 --> 01:07:41.040
The system now,
it's kind of weird.

01:07:41.040 --> 01:07:46.680
But it was a product of
the peculiar politics

01:07:46.680 --> 01:07:49.420
of that point in time.

01:07:49.420 --> 01:07:54.230
And you also do
get, theoretically,

01:07:54.230 --> 01:07:59.150
it's possible that
labor unions might

01:07:59.150 --> 01:08:04.640
like the idea that only
union members get health care

01:08:04.640 --> 01:08:05.330
benefits.

01:08:05.330 --> 01:08:08.000
And that they're not conferred
on the whole population,

01:08:08.000 --> 01:08:11.270
because it's another
reason to join the union.

01:08:11.270 --> 01:08:14.390
Fortunately the unions
aren't that narrow.

01:08:14.390 --> 01:08:16.970
And they tend to be a
little bit more progressive.

01:08:16.970 --> 01:08:21.380
But they're acting against
their own interests, in a sense.

01:08:21.380 --> 01:08:24.920
It does confer some
advantage on them

01:08:24.920 --> 01:08:28.370
if health care has
to be bargained for.

01:08:28.370 --> 01:08:31.069
It's a reason to join a union,
and be active in the union.

01:08:31.069 --> 01:08:33.319
So you get all these
perverse incentives that

01:08:33.319 --> 01:08:35.810
come out of this kind of stuff.

01:08:35.810 --> 01:08:39.120
We talked about right
to work a little bit.

01:08:39.120 --> 01:08:44.250
So item C, ridership growth
is never instantaneous.

01:08:44.250 --> 01:08:47.235
The point that [INAUDIBLE]
made earlier in the class.

01:08:50.130 --> 01:08:53.439
A lot of important things
take time to achieve.

01:08:53.439 --> 01:08:56.670
You don't instantaneously
get a benefit.

01:08:56.670 --> 01:09:00.750
If you provide more service,
and you guessed right,

01:09:00.750 --> 01:09:03.342
maybe there'll be a
ridership growth in the area

01:09:03.342 --> 01:09:04.800
that you're providing
more service.

01:09:04.800 --> 01:09:07.109
But it doesn't happen
the day you start.

01:09:07.109 --> 01:09:09.010
It's going to take
time to build.

01:09:09.010 --> 01:09:14.490
And that time
period, and the lag

01:09:14.490 --> 01:09:18.120
with which-- even if you get
really well and a lot of riders

01:09:18.120 --> 01:09:21.090
come, and you generate
a lot more revenue,

01:09:21.090 --> 01:09:23.760
that revenue is going to
come later than the cost

01:09:23.760 --> 01:09:25.830
that you have to
expend early on.

01:09:25.830 --> 01:09:33.190
So you get this sort of
swerve in your pattern.

01:09:36.010 --> 01:09:39.300
Now, this is a
couple of years old,

01:09:39.300 --> 01:09:40.960
but unfortunately
it's still true.

01:09:40.960 --> 01:09:42.689
There's this sort
of nasty attitude

01:09:42.689 --> 01:09:45.279
that well, we've got
to grind down costs.

01:09:45.279 --> 01:09:46.529
We've got to grind down costs.

01:09:46.529 --> 01:09:48.970
We've got to grind on costs.

01:09:48.970 --> 01:09:51.550
But the only reason we
have a transit system

01:09:51.550 --> 01:09:54.149
here is it actually happens to
be important to the economy.

01:09:54.149 --> 01:09:55.940
And we're lucky that
the economy's growing.

01:09:55.940 --> 01:09:58.240
We actually need more service.

01:09:58.240 --> 01:10:04.810
So to me, it's more important
to provide more service

01:10:04.810 --> 01:10:07.765
than it is to grind down
the cost of the service.

01:10:11.110 --> 01:10:14.350
If the only thing you're doing
is quote "saving money," then

01:10:14.350 --> 01:10:16.690
shut the system down
and save all the money.

01:10:16.690 --> 01:10:18.640
Presumably, you're
around because you're

01:10:18.640 --> 01:10:20.710
providing something of value.

01:10:20.710 --> 01:10:24.880
And you ought to be providing
higher value, and more of it,

01:10:24.880 --> 01:10:26.614
up to some reasonable limit.

01:10:26.614 --> 01:10:28.030
But certainly I
don't think anyone

01:10:28.030 --> 01:10:30.370
who rides the T
would argue we've

01:10:30.370 --> 01:10:35.260
reached the level where there's
too much service out there.

01:10:35.260 --> 01:10:39.430
We've got a long way to go
in improving service to get

01:10:39.430 --> 01:10:41.170
anywhere near to such a danger.

01:10:43.900 --> 01:10:48.670
This brings me back to this
question of contracting out.

01:10:48.670 --> 01:10:53.050
Because to me, most of the
discussion about contracting

01:10:53.050 --> 01:10:56.460
out, if you're reading the
Boston papers, is about,

01:10:56.460 --> 01:10:59.140
oh we'll contract out
and we'll save money.

01:10:59.140 --> 01:11:01.360
And labor costs too much,
and blah, blah, blah.

01:11:01.360 --> 01:11:04.900
In the first place, you're
not going to save much money.

01:11:04.900 --> 01:11:07.960
The workers-- Paul
Revere, the company

01:11:07.960 --> 01:11:14.230
that runs the blue M2 bus
that you see on Mass Avenue,

01:11:14.230 --> 01:11:16.737
they're also a union operation.

01:11:16.737 --> 01:11:18.070
They've got the Teamsters Union.

01:11:18.070 --> 01:11:19.486
They provide health
care benefits.

01:11:19.486 --> 01:11:21.400
They pay decently.

01:11:21.400 --> 01:11:28.430
It's not about-- a good, private
contracting scheme in my view,

01:11:28.430 --> 01:11:32.110
is not about paying
workers less.

01:11:32.110 --> 01:11:34.360
It's about providing
a better service.

01:11:34.360 --> 01:11:37.890
How many of you use
the number one bus?

01:11:37.890 --> 01:11:41.970
And are any of you able
to use the M2 shuttle?

01:11:41.970 --> 01:11:45.700
OK, which one comes
first usually?

01:11:45.700 --> 01:11:50.590
AUDIENCE: M2, the one
depending on the day.

01:11:50.590 --> 01:11:52.330
FREDERICK SALVUCCI: Which one--

01:11:52.330 --> 01:11:55.180
which one are you more
likely to find a seat on?

01:11:55.180 --> 01:11:56.920
AUDIENCE: M2.

01:11:56.920 --> 01:11:58.910
FREDERICK SALVUCCI: The
M2 is a better service.

01:11:58.910 --> 01:12:01.280
That's what you could get.

01:12:01.280 --> 01:12:04.010
That's not because the T
is inherently inferior.

01:12:04.010 --> 01:12:07.010
There is not enough
service on that line.

01:12:07.010 --> 01:12:09.650
But Paul Revere runs
a reasonable service

01:12:09.650 --> 01:12:12.970
because, if they don't, they
won't get chosen next time.

01:12:12.970 --> 01:12:20.060
There is some competition, not
just for cost, but for quality.

01:12:20.060 --> 01:12:22.460
And to me, you want
to be in that area.

01:12:22.460 --> 01:12:28.660
And the other issue is if
you want to increase service,

01:12:28.660 --> 01:12:33.190
and you talk to the
MBTA, you go to a meeting

01:12:33.190 --> 01:12:35.140
and say the service is lousy.

01:12:35.140 --> 01:12:38.170
We want more bus service
on the number one bus.

01:12:38.170 --> 01:12:41.860
And the answer is, fine
what service would you

01:12:41.860 --> 01:12:46.180
suggest we cut so we can reroute
those buses onto the number

01:12:46.180 --> 01:12:47.170
one?

01:12:47.170 --> 01:12:48.920
We'll cut the
baloney, that's crazy.

01:12:48.920 --> 01:12:50.890
Those other routes
need the service too.

01:12:50.890 --> 01:12:52.840
They're in this
sum zero game where

01:12:52.840 --> 01:12:56.500
they refuse to add service
except by taking away.

01:12:56.500 --> 01:12:59.080
Consequently they
never add service.

01:12:59.080 --> 01:13:00.790
And they said, well,
it's a tough world.

01:13:00.790 --> 01:13:02.040
We only get so much equipment.

01:13:02.040 --> 01:13:03.280
We only got so much drivers.

01:13:03.280 --> 01:13:05.860
We only have so many
maintenance facilities,

01:13:05.860 --> 01:13:07.580
land of 1,000 excuses.

01:13:07.580 --> 01:13:09.110
We can't expand.

01:13:09.110 --> 01:13:12.010
You want more service,
contract for it.

01:13:12.010 --> 01:13:13.390
Put some money on the table.

01:13:13.390 --> 01:13:16.360
Have a bid, work and
get some competition

01:13:16.360 --> 01:13:17.945
so it isn't just Paul Revere.

01:13:17.945 --> 01:13:19.570
You'll get more
service a hell of a lot

01:13:19.570 --> 01:13:21.790
faster than you
will ever get it out

01:13:21.790 --> 01:13:23.110
of the public sector machine.

01:13:23.110 --> 01:13:30.580
So I think there's a pro rider
argument for contracting out

01:13:30.580 --> 01:13:33.910
that I believe is quite valid.

01:13:33.910 --> 01:13:35.230
But no one makes that.

01:13:35.230 --> 01:13:41.060
You have this kind of contest
between the anti-cost,

01:13:41.060 --> 01:13:44.360
grind down workers, it's a
victory if we pay people less.

01:13:47.140 --> 01:13:51.940
And the union that says,
do everything in-house.

01:13:51.940 --> 01:13:53.740
Neither of those
parties is really

01:13:53.740 --> 01:13:56.260
speaking on behalf
of the riding public.

01:13:56.260 --> 01:14:00.220
So you want to think
about those aspects.

01:14:00.220 --> 01:14:03.670
Usually people talk about
the union relationship

01:14:03.670 --> 01:14:07.120
as bargaining for--

01:14:07.120 --> 01:14:08.530
union wants higher wages.

01:14:08.530 --> 01:14:13.250
Management wants lower
wages, et cetera, et cetera.

01:14:13.250 --> 01:14:16.380
Bargaining takes
place periodically.

01:14:16.380 --> 01:14:18.210
You might have a
two year contract,

01:14:18.210 --> 01:14:21.680
you might have a
three year contract.

01:14:21.680 --> 01:14:24.710
You set the terms in wages
and working conditions

01:14:24.710 --> 01:14:25.490
for that period.

01:14:25.490 --> 01:14:27.320
Then you bargain again.

01:14:27.320 --> 01:14:29.240
If you can't reach
agreement, there

01:14:29.240 --> 01:14:32.540
are procedures for
binding arbitration.

01:14:32.540 --> 01:14:36.437
Why do we have
binding arbitration?

01:14:36.437 --> 01:14:37.770
Why don't we just have a strike?

01:14:40.380 --> 01:14:41.730
You know?

01:14:41.730 --> 01:14:44.460
AUDIENCE: Why do
we find [INAUDIBLE]

01:14:44.460 --> 01:14:45.460
FREDERICK SALVUCCI: Yes.

01:14:45.460 --> 01:14:48.280
At the MBTA we have
binding arbitration.

01:14:48.280 --> 01:14:51.220
It's not the case in every
transit agency in the country.

01:14:51.220 --> 01:14:53.602
In Philadelphia if they
can't reach agreement,

01:14:53.602 --> 01:14:54.310
there's a strike.

01:14:58.094 --> 01:14:59.746
AUDIENCE: They put
it in state law.

01:14:59.746 --> 01:15:02.204
FREDERICK SALVUCCI: Yes, why
was it put into the state law?

01:15:02.204 --> 01:15:03.580
AUDIENCE: To avoid strike.

01:15:03.580 --> 01:15:04.580
FREDERICK SALVUCCI: Yes.

01:15:04.580 --> 01:15:06.770
So in Massachusetts the
thing was, wait a minute,

01:15:06.770 --> 01:15:11.450
strikes are really
painful for everybody.

01:15:11.450 --> 01:15:14.660
Let's just have a
bureaucratic process

01:15:14.660 --> 01:15:18.350
to settle disputes
that can't be resolved,

01:15:18.350 --> 01:15:19.650
but let's not have a strike.

01:15:19.650 --> 01:15:21.650
Too many people are hurt
when you have a strike.

01:15:21.650 --> 01:15:24.860
The workers-- workers lose
their health care benefits.

01:15:24.860 --> 01:15:28.010
I mean, your kid's
got a kidney problem,

01:15:28.010 --> 01:15:30.710
and you have no health
care, that's a problem.

01:15:30.710 --> 01:15:33.060
So it's a problem for the
worker to be on strike.

01:15:33.060 --> 01:15:34.410
It's not easy.

01:15:34.410 --> 01:15:36.950
It's a problem for the
public, there's no service.

01:15:36.950 --> 01:15:40.920
So binding arbitration
I think is a good idea.

01:15:40.920 --> 01:15:43.460
There are those who argue the
Philadelphia system is better.

01:15:43.460 --> 01:15:44.330
I think it's wacky.

01:15:44.330 --> 01:15:48.010
They shut down the city
every periodically.

01:15:48.010 --> 01:15:49.760
AUDIENCE: They lose
their health insurance

01:15:49.760 --> 01:15:50.719
when they go on strike?

01:15:50.719 --> 01:15:53.009
FREDERICK SALVUCCI: Yes, if
you're not employed anymore

01:15:53.009 --> 01:15:54.110
you lose the benefit.

01:15:54.110 --> 01:15:55.568
AUDIENCE: But when
you're on strike

01:15:55.568 --> 01:15:57.240
aren't you still employed?

01:15:57.240 --> 01:16:00.210
FREDERICK SALVUCCI: Not
if the contracts run out.

01:16:00.210 --> 01:16:04.500
I mean it's like,
it's a bizarre world.

01:16:04.500 --> 01:16:07.050
AUDIENCE: But in most
[INAUDIBLE] is that going to be

01:16:07.050 --> 01:16:08.480
the issue, because
if they have--

01:16:08.480 --> 01:16:10.340
FREDERICK SALVUCCI: No.

01:16:10.340 --> 01:16:13.140
Yes, in other places you would
have a more civilized way

01:16:13.140 --> 01:16:15.970
of dealing with it, because you
didn't have this odd World War

01:16:15.970 --> 01:16:16.470
II.

01:16:16.470 --> 01:16:16.770
[INTERPOSING VOICES]

01:16:16.770 --> 01:16:19.160
AUDIENCE: The English have
way more strikes than we do.

01:16:19.160 --> 01:16:20.987
Maybe that's because they're
not [INAUDIBLE] health

01:16:20.987 --> 01:16:21.960
care when they go on strike.

01:16:21.960 --> 01:16:23.610
FREDERICK SALVUCCI:
That could be true.

01:16:23.610 --> 01:16:25.790
But they also--

01:16:25.790 --> 01:16:28.560
I don't know if those are legal
strikes or illegal strikes.

01:16:28.560 --> 01:16:31.470
Because sometimes
in Massachusetts

01:16:31.470 --> 01:16:36.350
even though we've got
binding arbitration,

01:16:36.350 --> 01:16:38.740
and it's against
the law to strike,

01:16:38.740 --> 01:16:40.860
occasionally they'll walk out.

01:16:40.860 --> 01:16:43.730
And it's very dramatic.

01:16:43.730 --> 01:16:45.270
You put the labor
leaders in jail,

01:16:45.270 --> 01:16:47.900
and that gets them
more votes next time,

01:16:47.900 --> 01:16:50.500
because it shows how committed
they were to the cause.

01:16:50.500 --> 01:16:52.150
A lot of theater involved

01:16:52.150 --> 01:16:59.580
But the only point is the
drama is around the bargaining.

01:16:59.580 --> 01:17:05.140
And potential strike, wildcat
strike, binding arbitration.

01:17:05.140 --> 01:17:08.010
And it's about how much
money in the envelope.

01:17:08.010 --> 01:17:13.320
But at least as important as
what's bargained explicitly,

01:17:13.320 --> 01:17:16.470
is the day to day relationship
between management and labor

01:17:16.470 --> 01:17:20.607
between the bargaining,
because you've got a job to do.

01:17:20.607 --> 01:17:21.690
You've got to run service.

01:17:21.690 --> 01:17:24.220
And there are
these arcane rules.

01:17:24.220 --> 01:17:27.540
And the rules are so arcane that
if you comply with every rule,

01:17:27.540 --> 01:17:29.520
you can't run the service.

01:17:29.520 --> 01:17:32.100
Oh I'm not going to drive the
bus because the windshield

01:17:32.100 --> 01:17:35.560
wiper is broken, and the
rulebook says I can't drive it.

01:17:35.560 --> 01:17:36.420
But it's sunny out.

01:17:36.420 --> 01:17:37.260
It's not raining.

01:17:37.260 --> 01:17:38.219
We'll fix it tonight.

01:17:38.219 --> 01:17:39.760
Nope, I'm not going
to drive the bus.

01:17:39.760 --> 01:17:41.440
It's not in perfect condition.

01:17:41.440 --> 01:17:46.530
So there's always an
informal relationship

01:17:46.530 --> 01:17:49.140
between the employer
and the employee,

01:17:49.140 --> 01:17:52.920
or the management
and the employee.

01:17:52.920 --> 01:17:55.170
And that day to
day relationship is

01:17:55.170 --> 01:17:59.730
very critical to the quality
of service you can provide.

01:17:59.730 --> 01:18:04.560
And the papers never
talk about that aspect

01:18:04.560 --> 01:18:06.240
of the Labor-Management
relationship.

01:18:06.240 --> 01:18:08.070
It's almost always
about the bargaining,

01:18:08.070 --> 01:18:10.444
and how much is in the paycheck,
and what the health care

01:18:10.444 --> 01:18:11.880
benefits are.

01:18:11.880 --> 01:18:18.120
So you really need to think
about the quote unquote

01:18:18.120 --> 01:18:22.140
"culture of the place," and what
it's like to actually provide

01:18:22.140 --> 01:18:24.520
service in a union environment.

01:18:24.520 --> 01:18:27.030
And if you didn't
have a union, you'd

01:18:27.030 --> 01:18:29.220
still have to solve the
problem of how to get--

01:18:29.220 --> 01:18:30.750
how to motivate your workers.

01:18:30.750 --> 01:18:35.790
So it's not-- the union is just
giving you an articulated forum

01:18:35.790 --> 01:18:38.250
to deal with this issue,
which can actually

01:18:38.250 --> 01:18:39.799
be kind of convenient.

01:18:39.799 --> 01:18:41.340
If you don't have
a union, you almost

01:18:41.340 --> 01:18:44.880
need to invent one because you
need some basis to communicate

01:18:44.880 --> 01:18:46.680
with your workers
about, OK, how we're

01:18:46.680 --> 01:18:48.240
going to get this thing done.

01:18:48.240 --> 01:18:55.470
So if you shift your focus from
the paycheck bargaining aspect

01:18:55.470 --> 01:18:59.340
to the management of the
production of the work,

01:18:59.340 --> 01:19:02.725
I think you'll be looking at
the more important problem.

01:19:06.180 --> 01:19:08.440
And I'm out of time
in two minutes.

01:19:08.440 --> 01:19:12.510
So let's see if there's
anything else in here.

01:19:12.510 --> 01:19:15.980
Here, how many of
you have seen this?

01:19:15.980 --> 01:19:18.659
OK so what is it?

01:19:18.659 --> 01:19:20.700
AUDIENCE: They've been
trying to do a few things.

01:19:20.700 --> 01:19:24.560
Trying to get a increase state
income tax by a little bit,

01:19:24.560 --> 01:19:26.275
particularly on the rich.

01:19:26.275 --> 01:19:30.390
And they're trying to
get some more money out

01:19:30.390 --> 01:19:33.882
than what the state provides in
transit, education, and health

01:19:33.882 --> 01:19:34.854
care.

01:19:34.854 --> 01:19:37.290
Or in this case, in transit.

01:19:37.290 --> 01:19:40.080
FREDERICK SALVUCCI: And so
they're putting a lot of energy

01:19:40.080 --> 01:19:41.070
into this.

01:19:41.070 --> 01:19:44.370
And it's a direct--

01:19:44.370 --> 01:19:48.840
the union has gained, in
my view, a lot of leverage.

01:19:48.840 --> 01:19:54.420
Because the management at the
MBTA has been so into we're

01:19:54.420 --> 01:19:57.040
going to privatize
this to save money.

01:19:57.040 --> 01:19:59.340
We can do it cheaper
by contracting it out.

01:19:59.340 --> 01:20:01.950
They never talk about
we can improve service

01:20:01.950 --> 01:20:04.050
by contracting it out.

01:20:04.050 --> 01:20:06.840
So they've totally,
in my view, blown it

01:20:06.840 --> 01:20:10.410
because all they're doing is
saying we can do it cheaper

01:20:10.410 --> 01:20:12.300
if we contract out.

01:20:12.300 --> 01:20:15.090
And they've left
the playing field

01:20:15.090 --> 01:20:19.860
open to labor to pose as
the champion of the riders.

01:20:19.860 --> 01:20:22.800
And say, oh we are
friendly transit providers.

01:20:22.800 --> 01:20:26.100
Give us more money and you
can have better service.

01:20:26.100 --> 01:20:30.690
Never dealing with the fact that
the service production at the T

01:20:30.690 --> 01:20:32.400
is pretty bad.

01:20:32.400 --> 01:20:38.830
And the Paul Revere, private
companies, do a better job.

01:20:38.830 --> 01:20:40.980
They are closer to that
efficiency frontier

01:20:40.980 --> 01:20:43.250
that [INAUDIBLE]
was talking about

01:20:43.250 --> 01:20:49.050
of getting as much
quality service as you can

01:20:49.050 --> 01:20:51.660
out of a given resource base.

01:20:51.660 --> 01:20:55.530
It's always possible to
get less than you paid for.

01:20:55.530 --> 01:20:58.140
It's rare that you can get
more than you paid for.

01:20:58.140 --> 01:21:01.900
That discussion never
happens that there's

01:21:01.900 --> 01:21:03.400
a reason for contracting out.

01:21:03.400 --> 01:21:06.920
Because we can grow faster,
we can provide better service.

01:21:06.920 --> 01:21:08.890
So the playing
field has been left

01:21:08.890 --> 01:21:12.160
totally open to labor
who says management

01:21:12.160 --> 01:21:13.340
doesn't care about you.

01:21:13.340 --> 01:21:15.550
They don't care how
crowded your bus is.

01:21:15.550 --> 01:21:18.760
They don't care how
lousy the service is.

01:21:18.760 --> 01:21:20.620
They're just into
being mean to labor.

01:21:20.620 --> 01:21:23.052
I mean that's basically--

01:21:23.052 --> 01:21:24.510
I think it's a
really dumb strategy

01:21:24.510 --> 01:21:27.180
by the current
management at the T.

01:21:27.180 --> 01:21:28.890
That's a very
objective statement.

01:21:28.890 --> 01:21:34.200
And it's a minute late so, sorry
to go on too long and thanks

01:21:34.200 --> 01:21:36.350
for being here.