January 2021 | Commentary | Viewpoint: Logistics & Supply Chain Analysis

Rail Price Controls? Ridicule the Thought

Tags: Legislation, Public Policy, and Regulations, Rail

In 1980, CNN, fax machines, and camcorders made their debut, and for the first time since 1887, the rail industry was deregulated. Today CNN has many 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.

Charles Sauer, Founder and President, The Market Institute

That is what happens in competitive markets: Competition drives down prices, while 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.

Almost nobody who currently works in rail policy has the institutional knowledge of what the rail industry was like before it was freed from government constraints. Now that things are good and shipping is cheap, bureaucrats are considering what should be unthinkable: restoring price controls.

In 1887, Congress passed the Interstate Commerce Act. The intent was to break the railroads' monopoly power. This never works, but Congress loves trying.

Fast forward 100 years, and regulations and price controls almost bankrupted the rail industry. So, in 1980, Congress passed the Staggers Rail Act, which allowed for deregulation and for shippers to compete. 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. Yet, the Surface Transportation Board (STB) is considering a revenue ceiling.

Price controls in any form stunt innovation and investment, and they provide perverse incentives that disrupt and cause inefficiencies that hurt everyone.

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 at the University of Chicago, recently released a paper outlining an updated methodology to modernize how the STB monitors the freight rail industry's financial health.

Their methodology compares the financial performance of the railroads to the financial performance of companies operating in competitive (unregulated) markets for purposes of assessing revenue adequacy. They argue persuasively that railroads are an integral part of the economy and that redefining how the industry is measured would stem 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 will 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 will 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.

During the past 40 years, society, knowledge, and technology have progressed, but the government is contemplating going backward.

We should ridicule this thought. The government needs to find ways to make the rail industry more competitive. If we can ship goods faster and cheaper, stores can sell more, rail can make more money, and consumers can get more for less.

Let's not look back to 1887 in 2021.






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