Goolsbee 1-0 Salmon

Back in March 2006, Austan Goolsbee was a little-known Chicago economics professor, and I was an all-but-unknown blogger. In a fit of dudgeon, I took it upon myself to attack an article that Goolsbee wrote in Slate on the subject of Santigo's bus system. Goolsbee said that the deregulated system in Chile's capital was a good thing; I was not so sure, and was much more enthusiastic about the fact that Santiago's buses were soon to be regulated, with pay-per-passenger being replaced by a more conventional hourly-pay system.

After my blog entry appeared, I had an email exchange with Goolsbee. He predicted:

Are you under the impression that replacing competing companies with a few giant firms and then removing all incentives to the drivers is a good idea? It is a recipe for monopolization. Prices will rise and delays will get worse.

I wasn't convinced. I said as much, and I got this in return:

No question that I would predict that this new system will lead to more delays and the concentration of ownership to higher prices. We will agree to revisit this issue in a year and see if it was born out. I am prepared to admit that the incentives didn't work if that doesn't happen.

After that, life intervened. I started blogging for Nouriel Roubini and then for Portfolio; Goolsbee became the economic advisor to Barack Obama. In Santiago, the new system came onstream in February 2007, and by now the results are crystal-clear:

Almost overnight, the new "planned" system cut mass transit ridership, increased congestion everywhere in the city, and tripled average commute times from forty minutes to two hours. As President Michelle Bachelet later said in a speech, "It is not common for a president to stand before the nation and say 'Things haven't gone well.... But that is exactly what I want to say in the case of Transantiago.... The inhabitants of Santiago, especially the poorest, deserve an apology."
The roll-out was not a total disaster, however. The new planned system did solve one of the major problems it had targeted: profits were eliminated overnight. Where the old system had made $60 million a year, the new planned system immediately began to lose, and has continued to lose, more than $600 million per year.

So, Austan, you were right and I was wrong. I guess that makes it a good thing that you're advising the next president of the United States (probably), and I'm, um, still a blogger.

(HT: Cowen)

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