In 1980, CNN, Post-it Notes, fax machines, camcorders, and Charles Sauer (that’s me!) all made their debut, and for the first time since 1887, the rail industry was deregulated. Fast-forward to today and CNN has many more competitors, fax machines have been surpassed and their technology incorporated into other products, and camcorders are not only cheaper — almost all of us carry a better quality one in our pockets. Also, rail rates are 44% lower, and the market is flourishing.
That is what happens in competitive markets: Competition starts driving down prices, while at the same time, the service usually increases. However, things that happened 40 years ago are hard to remember today. When it comes to public policy, that is a problem.
For instance, almost nobody that is currently working in rail policy has the institutional knowledge of what the rail industry was like before it was freed from the constraints of government. So, now that things are good and shipping is cheap, government bureaucrats are considering what should be the unthinkable: restoring price controls.
In 1887, Congress passed the Interstate Commerce Act. The intent of Congress was to break the monopoly power of the railroads (think John D. Rockefeller). This never works, but Congress loves trying.
Fast-forward 100 years, and the regulations and price controls had almost completely bankrupted the rail industry. So, in 1980, Congress passed the Staggers Rail Act, which allowed for the deregulation of government and allowed shippers to compete. In fact, according to a Department of Transportation study, this “resulted in significant economic efficiency benefits.” Freight rates fell by 45%.
Now, America’s freight railroads are all in much stronger financial positions and offer the most competitive shipping rates in the world. Or, at least they are in a much stronger position right now. The Surface Transportation Board is considering a revenue ceiling. It is the equivalent of suggesting that Steven Spielberg go back to filming his movies on the equipment that was available 40 years ago instead of modernizing.
Price controls in any form are bad. They hurt innovation, they hurt investment, and they provide perverse incentives that disrupt and cause inefficiencies in markets that end up hurting everyone.
That said, with the proliferation of technology since 1887, if the government is intent on looking into regulating the rail industry, officials can at least update their methodology. Kevin Murphy and Mark Zmijewski, economic professors from the University of Chicago, recently released a paper outlining an updated methodology to modernize how the STB monitors the financial health of the freight rail industry. In a nutshell, their methodology compares the financial performance of the railroads to the financial performance of companies operating in competitive (i.e., unregulated) markets for purposes of assessing revenue adequacy. They argue persuasively that railroads are an integral part of the economy and that a redefinition of how the industry is measured would stem off constant efforts to increase utility-style regulation of the sector.
This is important because increased regulations and price controls make rail less attractive to investors. U.S. freight railroads, which are almost entirely privately owned, invest an average of $25 billion annually to maintain and modernize the network. And, with freight demand expected to rise by 35% in the United States by 2040, they are going to need every dollar of those investments. But, if price controls are implemented, and if investors can get higher returns by investing in other industries, it doesn’t take a financial wizard to figure out where the investments are going to go.
If investors can make more money by investing in social media apps, then that is where they will invest. At the same time, the lack of investment would put a stranglehold on the rail industry. That doesn’t benefit anyone in the long run.
Over the last 40 years, society has progressed, knowledge has progressed, technology has progressed, but the government is contemplating going backward. We should not only not go backward — we should fully ridicule the thought of going backward. The government needs to be looking at ways to make the rail industry even more competitive. If goods can be shipped even faster and cheaper, stores can sell more goods, rail can make more money, the stores can make more money, consumers can get more for less, and everyone would benefit.
Let’s not look back to 1887 in 2020.
Charles Sauer (@CharlesSauer) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is president of the Market Institute and previously worked on Capitol Hill, for a governor, and for an academic think tank.
