What is Subsidy?

Should governments subsidize transportation? If government subsidizes transportation, should it subsidize producers or consumers? If a government give money to consumers, they can spend it on what they want, paying for a service, which if it covers operating costs, can lead to more investment. If it gives money directly to producers, they spend it on more supply. Which leads to a better outcome?

Let’s think about “subsidy” for a moment. Below are a few examples.

  1. If I buy a ticket on a train, and it pays my share of both the fixed and variable elements of the full cost of the trip, am I subsidizing the train? [No]
  2. If my mom buys the ticket for me, is she subsidizing the train or subsidizing me? [me]
  3. If my employer buys the ticket for me, is it subsidizing the train or subsidizing me? [me]
  4. If a store buys the ticket for me, is it subsidizing the train or subsidizing me? [me]
  5. If I buy a ticket which pays the marginal cost of my trip, but not the fixed cost, and my mom pays the difference, is she subsidizing me or the train? [the train]
  6. If I buy a ticket which pays the marginal cost of my trip, and my city pays the fixed cost, is the city subsidizing me or the train? [the train]
  7. If I buy a ticket which pays the marginal cost of my trip and the state pays the fixed cost, is the state subsidizing me or the train? [the train]
  8. If I buy a ticket which pays the marginal cost of my trip, and the federal government pays the fixed cost, is the state subsidizing me or the train? [the train]
  9. If the state gives me money and I buy a ticket which pays for the full cost of the train, is the state subsidizing me or the train? [me]

American Heritage says:
“sub•si•dy (sŭbˈsĭ-dē)

n.
  • Monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest.”

Wiktionary gives the etymology: “From Anglo-Norman subsidie, from Old French subside, from Latin subsidium, from subsidere (to settle down, stay, remain).” This doesn’t help much.
Dictionaries imply that subsidy is primarily from a government. You can then decide what is government (family? homeowners association? but city, state, and federal certainly apply).

This is relevant in transportation accounting. According to the Amtrak Annual Report for instance Amtrak is a publicly owned corporation that gets a subsidy (which it calls “funding”) from the federal government. If it were to declare that subsidy to be revenue, it would earn a “profit.” (Apparently it once did, but does so no longer).

It also gets subsidies from state governments. It does declare those subsidies to be revenues. If you think about it as providing a service to the states, this makes sense. Any contractor to the state which charges in exchange for a service books that revenue as income. So in Amtrak-accounting, state-supported services are “passenger-related” revenue, but federal support is not.

States are certainly closer to passengers than the federal government, and from a federalism perspective, to minimize off-diagonal outcomes in the correspondence problem (that is making sure local problems are addressed locally and national problems are addressed nationally), and from the idea of subsidiarity, placing these subsidies at lower levels of government has advantages, but I am not sure there is an objective reason why one is revenue and one is subsidy.

I certainly advocate reframing current US practice in transit subsidies away from thinking of transit agencies as money-losing, and instead towards an organization or utility providing services for users. Hopefully most of those users are passengers.  It also would provide service for governments if governments want a particular service that users cannot pay for directly. The government would not be subsidizing the transit agency, it would be subsidizing users of the service by paying someone to provide the service. The difference in thinking is subtle, but important.