Privatization Gone Wrong: How Los Angeles' World-Class Public Transit System Collapsed

This is the story of how private enterprises both built and destroyed LA's magnificent public transit system

Let me tell you a little story: Once upon a time (the 1920s to be exact), the city of Los Angeles had the most extensive public transit system in the world. In fact, it was so extensive that even today, most major cities in the world don’t hold a candle to it.

The system was mostly built up of trams, or streetcars as the Americans call them, that covered almost the entire territory of Los Angeles at the time.

By commuting with these trams, you could live in downtown LA, travel for a hike on the mountains in Griffith Park in the morning and sulk up the evening sun on Venice beach in the afternoon.

As you might be aware, today’s Los Angeles is more recognized as a car-infested, super congested asphalt jungle with horrible air quality and almost no public transit…

What Happened to Los Angeles’ Public Transit?

In the 1960s, the once magnificent Los Angeles tram system was slowly but decisively entirely dismantled.

There are many theories as to why, but the most prominent is that the greatest American car companies at the time, General Motors (GM) and Ford bought up the tracks and trams from their previous owner, The Pacific Electric Railway System Company (Pacific Electric for short), and decided to demolish them to sell more cars.

This theory is so widespread that it’s featured in the cult-classic film Who Framed Roger Rabbit as the masterplan of the villain Judge Doom.

Though this theory has some truth to it, the real story is not as exciting…

Pacific Electric was an entirely private company and their main goal for building the tram network was to increase Los Angeles’ property values. They did this by providing great public transit connections to either existing properties or properties under construction.

This strategy worked tremendously well while property values were rising in the city as developers would pay Pacific Electric hefty sums of money to get their properties served by the reliable and extensive tram network.

However, when LA’s property market slumped during the Great Depression and World War 2, the funding from the property developers dried up.

As a consequence, companies like GM and Ford could buy the entire Pacific Electric tram network for pennies on the dollar and dismantle it.

Why Privately Owned Public Transit Suck

Just as the Pacific Electric story showed us, the core issue of privately owned public transit is the skewed and short-term incentive structure it provides.

Private companies might be able to run more efficient and profitable transit systems compared to publicly operated transit in the short run, but when circumstances change for whatever reason, it’s very likely that they fold, leaving the taxpayers to clean up their mess.

Just imagine if most public transit systems were privately owned during the ongoing pandemic. All but the most risk averse private transit companies would likely go bankrupt as commuters suddenly stopped using their services. When the pandemic subsides, the now defunct transit lines would result in many people completely losing their ability to commute anywhere without a car for the foreseeable future…

Also, the incentive structure that makes privately owned companies successful are not especially aligned with providing good, reliable public transit systems for the masses.

Hence, building public transit solely to please only one interest group, such as property developers, might be a profitable move short-term. However, in the long run, such a network just isn’t compatible with how regular commuters want to use it.

For people to give up cars in favor of public transit, they need access to places they enjoy, regardless of profitability for the operator. Places such as parks, beaches, libraries and natural landmarks might not lead to an increase in economic activity, but they’re just as important for commuters as their work and their home.

Yes, there is a place for private enterprises in the public transit sector, but for the love of God, do not think that just privatizing a railway network or bus systems will magically make them better. In all likelihood, they will become even worse…