Full steam ahead: How 50 years of deregulation revitalized US freight rail

This week marks the 50^th anniversary of the Railroad Revitalization and Regulatory Reform Act of 1976, better known as the 4R Act. For much of the 20^th century, the US railroad industry was entrapped by the snare of regulation that limited pricing flexibility, dictated service levels, and constrained market competition. As Reason Foundation analyst Marc Scribner details in his research paper on the history of freight rail deregulation, the 4R Act was the first major shift in how the US governs freight railroads. The 4R Act eased federal control over rates, allowed railroads to set prices within a “zone of reasonableness,” and permitted Amtrak to acquire the Northeast Corridor between Washington, DC and Boston, a transfer that created long-term financial and management challenges.

The 4R Act also created exemptions from Interstate Commerce Commission (ICC) oversight for certain services. At the time, the ICC was a powerful regulatory agency charged with policing rail transport. The ICC resisted many deregulatory measures, often interpreting new authorities narrowly and opposing expansive market flexibility. Over subsequent years, a series of deregulatory laws gradually hollowed out the ICC’s regulatory role, a process that culminated in its abolition with the ICC Termination Act of 1995 and the transfer of remaining regulatory functions to the Surface Transportation Board.

The reforms under the 4R Act deepened with the Staggers Rail Act of 1980, unleashing competition and modernizing operations. The Carter administration helped advance this landmark legislation through Congress, ensuring that rail deregulation progressed alongside reforms in other transportation industries, such as aviation. Staggers gave railroads much greater freedom to set rates, enter new markets, and negotiate contracts directly with shippers, while easing regulatory oversight of mergers and line abandonments. It also allowed railroads to tailor services to market demand, encouraging efficiency, investment in infrastructure, and the development of more competitive and financially sustainable operations.

While most measurable gains emerged after Staggers in 1980, the 4R Act was the catalyst that made those reforms possible. By streamlining regulatory processes and highlighting the need for systemic reform, the 4R Act laid the groundwork for the comprehensive deregulatory measures that followed.

The results of rail deregulation speak for themselves: US freight railroads are more efficient, financially stable, and vital to the economy than at any point in decades.

Freight rate declines

Even with rail volumes surging, real average rail freight rates dropped by 44 percent since 1980, according to the Association of American Railroads. As one academic study calculated, the deregulatory effects amounted to $28 billion per year (in 2001 dollars) in rate reductions.

Independent analysis from the National Academies similarly found that real rail rates fell about 10 to 25 percent by the start of the 1990s relative to levels projected under continued regulation. Deregulation allowed market-based pricing, contract rates, and competitive responses, which pushed carriers to lower prices as productivity rose and excess regulatory cost-padding disappeared.

Productivity and efficiency gains

MIT scholar Carl Martland calculated that deregulation lowered variable costs by an estimated 31 to 45 percent while annual cost reductions averaged about 5 to 7 percent. An econometric study from Penn State estimated that deregulation generated $15 billion [in 1990 dollars] in annual efficiency gains.

Those efficiency gains were not merely impressive in absolute terms. Research published by the Cato Institute found that following the Staggers Act, railroad productivity growth substantially outpaced that of other transportation sectors, as well as the broader private business sector. By restoring pricing flexibility and competitive discipline, deregulation allowed railroads to reorganize operations, invest in cost-saving technologies, and achieve productivity gains that exceeded those of similarly situated industries.

Improved economic welfare

It was not only the rail industry that benefited from deregulation, but the US economy as a whole. A study from the US Department of Agriculture acknowledged $11.5 to $18.5 billion in annual economic welfare gains (in 2003 dollars). The Brookings Institution estimated that “shippers and their customers have gained $20 billion [in 1990 dollars] a year in benefits.” These gains flowed from efficiency improvements and intensified intermodal competition that reduced the deadweight loss previously created by rate and service regulation.

Increased capital investment

Railroads saw a significant uptick in capital spending following deregulation, rising from $950 million in 1980 to $3.5 billion in 1985. This surge in investment reflects not just higher spending, but also the improved financial conditions created by deregulation, which set the stage for railroads to invest more efficiently and strategically.

An econometric study from the Phoenix Center documents a causal relationship between the financial health of railroads and their investment behavior, showing that post‑deregulation improvements in revenue and returns enabled higher capital investment. Improved revenue adequacy and pricing flexibility made long-term private investment financially viable, reversing decades of underinvestment caused by regulated rates that failed to cover capital costs.

Taking a step back

Freight rail deregulation stands out as a clear example of how reduced government micromanagement can deliver more efficient and competitive outcomes. As CEI founder Fred Smith and Marc Scribner demonstrated in Reviving Capitalism, heavily regulated industries struggle not because markets fail, but because regulation suppresses capital formation and innovation. Freight rail in much of the 20^th century fits that pattern precisely, with inflexible and stringent rules preventing railroads from pricing services realistically or attracting the private investment needed to maintain and modernize infrastructure.

The reforms embodied in the 4R Act and subsequently with the Staggers Act replaced rigid rate-setting and service mandates with market discipline, which allowed railroads to price services realistically, shed unproductive lines, and reinvest in their networks. That shift unlocked private capital, stabilized an industry once on the brink of collapse, and improved service reliability for shippers.

Over time, deregulation also supported meaningful improvements by giving railroads both the financial capacity and the flexibility to invest in infrastructure, equipment, and new technologies. The result was a freight rail system that became more competitive, more resilient, and better able to adapt to changing economic conditions without constant regulatory meddling. This same deregulatory discipline is needed today as it was needed back in the late 1970s and early 1980s.

Clearing the remaining regulatory obstacles

The first piece that I wrote here at CEI covered how the Federal Railroad Administration uses 1970s-era mandates to hold back progress on automated track inspections. Legacy constructs like the stand-alone cost test and the common carrier obligation also continue to shape rate and service disputes in ways that can be costly and slow to resolve.

The Surface Transportation Board’s recent proposal to eliminate rarely used reciprocal switching regulations from the Code of Federal Regulations is a largely symbolic but important step in clearing away regulatory deadwood rather than layering on new mandates. This proposal can act as a guide to what can be done to address remaining regulatory barriers in the freight rail industry.

Resisting re-regulation

CEI Senior Fellow Iain Murray argues that rail markets function best when regulators resist the temptation to intervene and instead allow innovation and competition to do their work. Murray’s argument acts as a reminder that the greatest threat to the rail industry is no longer the heavy-handed regulation of the past, but the risk that policymakers will derail that progress through gradual re-regulation. To maintain the benefits of rail deregulation requires defending the freedom that has allowed freight rail to thrive. While there are some areas of improvement, the real task is to ensure that decades of deregulatory progress are not derailed.