Slow Train Coming?

Misguided Economic Regulation of U.S. Railroads, Then and Now

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Executive Summary

The last few decades have seen tremendous improvements in the U.S. railroad industry. After a century of severe regulation nearly brought the United States railroad industry to ruin, policy makers in the 1970s began a process that ultimately resulted in the Staggers Rail Act of 1980, which largely deregulated the industry. But that has not put an end to the political fight over freight rail.

Beginning with the enactment of the Interstate Commerce Act of 1887, the federal government increasingly regulated railroad ownership, operations, and investments in the United States through the Interstate Commerce Commission (ICC). While initially the ICC had little power to enforce rulings, it was subsequently granted significant ratemaking, entry and exit, and operational authority due to the efforts of the Progressive movement. Once railroads became heavily regulated, innovation slowed and American railroads began their long decline. During World War I, the heavily regulated railroads were nationalized by President Woodrow Wilson. After the war, the railroads were returned to private management—albeit in the context of a stultifying regulatory environment.

In the 1930s, new competition from motor carriers and more advanced waterborne transportation began costing the railroads passengers and freight. The U.S. railroad industry enjoyed a brief resurgence during World War II, as tires and gasoline were tightly controlled for consumers and the military relied heavily on the railway network to move goods and troops.

Yet following World War II, the railroads continued their decline. By the 1960s, it had become apparent to all that the industry was in dire straits. It was during this decade that economists, regulators, and politicians began seriously considering deregulatory relief—as the alternative, widely discussed at the time, was outright and permanent nationalization of the nation’s railroads.

Following the 1970 bankruptcy of the Penn Central Railroad—the largest bankruptcy in U.S. history until it was eclipsed by Enron in 2001—Congress and the Nixon administration began advancing a deregulatory agenda. In the meantime, the federal government created Amtrak to take responsibility for unprofitable passenger movements and Conrail to assume control of freight rail operations in the Northeastern U.S.

Finally, in 1980, Congress passed the Staggers Rail Act, which largely deregulated the railroads. Since 1980, America’s railroads—and indeed their customers and consumers—have enjoyed large gains. These include steep declines in real freight rates and train accidents, and a massive increase in railroad worker productivity. Unlike other modes of transportation, the railroad industry has financed these improvements—to the tune of $500 billion since the Staggers Act.

But some shippers are upset with the market rates they must pay to access rail carriers’ private networks. The most vocal are bulk commodity shippers in the West and Midwest, who may lack access to inland waterways and may be served by only one or two railroads. They allege that railroads are using their market power to extract monopoly rents and that federal regulators must step in to resolve this problem.

These claims are not new and they are baseless. These shippers are pushing a set of policies that will ultimately harm railroads, shippers, consumers, and the overall U.S. economy.