Will Regulators Fail To Learn From The Past Mistakes Of U.S. Railroad Regulation?

The history of U.S. railroads provides an interesting case study on federal regulation. They were the first sector of the economy to come under heavy regulatory control and nearly went extinct because of it. Following enactment of the Interstate Commerce Act in 1887 — which created the Interstate Commerce Commission — Progressive movement technocrats, populist farmers, and shipping interests demanded more and more regulation, often with the support of large segments of the railroad industry. Several decades took their toll, and by World War I, excessive regulation of railroads caused massive inefficiencies and soon led President Woodrow Wilson to nationalize the entire industry for the remainder of the war.

But industry conditions following de-nationalization were not much better. Time and time again, the only perceived solution to problems caused by failed regulation was more, not less, regulatory intervention. It is this dynamic I examine in my new study on railroad regulation, “Slow Train Coming? Misguided Economic Regulation of U.S. Railroads, Then and Now.”

Eventually, conditions got so bad in the railroad industry that it looked like it could not be saved. Following the 1970 bankruptcy of the Penn Central Railroad, the largest corporate bankruptcy in U.S. history until it was eclipsed by Enron in 2001, fears of outright and permanent nationalization of the railroads began to grow. It was only then that policy makers began to seriously advocate for deregulatory policies. This culminated in the Staggers Rail Act of 1980, which largely deregulated the industry. Today, more than 30 years later, the railroads are booming. Shippers and consumers have enjoyed a 45-percent decline in average inflation-adjusted freight rates while the railroads have seen a more than 400-percent increase in rail employee productivity. This renewed prosperity has allowed railroads to invest heavily back into their own networks, to the tune of $500 billion since 1980.

But these obvious gains have not satisfied a small but vocal group of rent-seeking coal, agricultural, and petrochemical shippers. Since the Staggers Act, they have routinely decried federal regulators as being too conservative while demanding more political control over rates. Their powerful political allies, most notably Senate Commerce Committee Chairman Jay Rockefeller (D-W.V.), happily do their bidding. But the disgruntled rent-seeking shippers make their mischief not only on Capitol Hill, where they have so far failed to enact the re-regulatory policies introduced by Sen. Rockefeller and others, but in the far more opaque regulatory state.

Currently, their regulator, the Surface Transportation Board, is considering a shipper request to enact dramatic forced access policies. But if you examine the recent comment filings, you might notice something strange coming from the Obama administration. One of the coal shipper filings argues that the proposed reciprocal switching mandates don’t go far enough. This is absurd on its face because the proposal in question actually would result in a huge shift in STB mission and practice, but not particularly surprising. What is surprising is another filer essentially agreeing: the Department of Agriculture.

In USDA’s case, it is doing the bidding of rent-seeking oilseed shippers from the Midwest rather than Wyoming coal companies and Western utilities, but the goals and policies both groups seek are nearly identical. The irony is that this administration is simultaneously waging a war on coal-fired electricity through Utility MACT, etc., while going to bat for the worst and most naked rent-seeking segments of American Big Business against the most environmentally friendly, least subsidized domestic transportation mode. In case you’re wondering, the STB has found no evidence of market power abuse on the part of the Class I railroads. This is pure crony capitalism.

The regulatory proceeding is currently open. If the Surface Transportation Board decides to side with these shippers — a major departure from precedent — it is likely time for Congress to abolish the agency. U.S. railroads are now booming, mostly due to the fact that they are now able to behave as owner-operators – market agents – rather than bureaucrats’ pawns. The question is whether we will learn from past policy mistakes or begin making them all over again.

Read the study here.