PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

America’s Railroads: Small Business on Board

By at 2 March, 2017, 4:44 pm

by Raymond J. Keating-

Make no mistake, since railroads were partially deregulated in 1980, U.S. small businesses have reaped significant and varied benefits. Current proposals to increase regulatory controls over U.S. railroads – in effect, to impose varying degrees of re-regulation – makes no sense and would be destructive for investment, innovation, service, and the overall economy. In fact, it’s time to review the current regulatory structure to ensure that unnecessary, outdated and redundant regulation is not holding back capacity, efficiency, or innovation in this vital sector.

Railroad Deregulation and Its Benefits

To the surprise of some, the period of deregulation that occurred under President Ronald Reagan actually got started during the presidency of Jimmy Carter. Specifically, Congress moved on transportation deregulation, which included the 1978 Airline Deregulation Act and the Staggers Rail Act of 1980.

The Staggers Act partially deregulated the rails. As noted in a policy analysis from the Federal Railroad Administration (FRA), under this law, “many regulatory restraints on the railroad industry were removed, providing the industry increased flexibility to adjust their rates and tailor services to meet shipper needs and their own revenue requirements. As a result, 30 years after deregulation, the railroad industry’s financial health has improved significantly, service to rail customers has improved while overall rates have decreased, and rail safety, regardless of the measure, has improved.” Also, a decades-long decline in railroad market share was halted, followed by some growth. And it’s critical to recognize that capital investment and return on investment stepped up dramatically, and, as reported in another FRA report, as a result, innovation, technological advancements and operational changes enhanced efficiency and improved productivity.

Railroads and Our Economy

These changes and advancements are significant given the role that railroads and their 140,000-mile network play in the economy. The FRA notes that freight is moved via rail, water, pipeline, truck and air, and in the U.S., “The rail network accounts for approximately 40 percent of U.S. freight moves by ton-miles (the length freight travels) and 16 percent by tons (the weight of freight moved).”

A 2016 study from Towson University’s Regional Economic Studies Institute found that in 2014, U.S. major railroads’ “operations and capital investment supported approximately 1.5 million jobs (1.1 percent of all U.S. workers), $273.6 billion in output (1.6 percent of total U.S. output), and $88.4 billion in wages (1.3 percent of total U.S. wages),” while also generating $32.8 billion in tax revenues.

And in terms of investment, it was explained in the Towson study: “Class I Railroads account for the majority of the industry’s mileage and revenue. Despite a slight decline in the early 1980s, total Class I Railroads’ spending on infrastructure and equipment remained fairly consistent, at about $20 billion annually [all numbers in 2014 dollars], between 1983 and 2011. Since 2011, spending on infrastructure and equipment has increased to an average of nearly $26 billion per year. In 2014, railroad capital and maintenance expenditures topped $28 billion and are estimated at $29 billion for 2015.”

Railroads and Small Businesses

Given the ubiquitous role of small businesses throughout the U.S. economy, the benefits of growth in investment, innovation and productivity in the railroad sector obviously accrue to small enterprises, their employees, and their customers.

First, it must be recognized that small and mid-size businesses make up a significant percentage of firms in, for example, the railroad rolling stock manufacturing industry – which, according to the U.S. International Trade Commission, “consists principally of manufacturers producing locomotives, rail cars, electric multiple units, parts for these vehicles, and multimodal shipping containers” – and the support activities for rail transportation sector. Consider the following breakdown (2014 data latest):

Railroad Rolling Stock Manufacturing

Firm Size     Percent of Total Firms
Less than 20 employees     49.1 percent
Less than 100 employees     69.1 percent
Less than 500 employees     83.6 percent

Source: U.S. Census Bureau

Support Activities for Rail Transportation

Firm Size     Percent of Total Firms
Less than 20 employees     62.9 percent
Less than 100 employees     80.9 percent
Less than 500 employees     89.4 percent

Source: U.S. Census Bureau

Second, assorted industries benefit from investment and innovation in railroads in terms of being able to better move their goods to market thanks to competition between various modes of transportation, and lower costs, increased safety and improved efficiency and productivity in the railroad industry. In fact, many agricultural, energy and manufacturing industries rank among the top goods shipped via rail. And again, these industries are overwhelmingly populated by small businesses. Just as an example, consider the breakdown by firm size of two broad categories of industries that use the services offered by the railroad industry:

Manufacturing

Firm Size     Percent of Total Firms
Less than 20 employees     74.8 percent
Less than 100 employees     93.6 percent
Less than 500 employees     98.5 percent

Source: U.S. Census Bureau

Mining, Quarrying, and Oil and Gas Extraction

Firm Size     Percent of Total Firms
Less than 20 employees     82.4 percent
Less than 100 employees     94.9 percent
Less than 500 employees     98.3 percent

Source: U.S. Census Bureau

So, when considering the economic importance of railroads, small businesses on the supply side and as customers must be factored into the equation. That includes, of course, when it comes to potential public policy changes affecting railroads.

Policymakers Need to Resist Regulation and Look for Ways to Provide Regulatory Relief

Unfortunately, assorted special interests and/or regulators recently have pushed for or are considering increased, unwarranted regulation on railroads. These efforts include “forced access,” whereby the Surface Transportation Board (STB) would force railroads to provide access to their private networks to competing railroads. Another STB proposal would impose economic regulations for the first time in 20 years on railroads as they pertain to five commodities – primary steel products, coke made from coal, hydraulic cement, scrap steel and crushed stone. Indeed, a few players are calling for the broad imposition of price controls. These proposals make no sense given that the transportation industry is increasingly competitive, with expanding choices for customers. If these regulatory measures were imposed, the results inevitably would involve less efficiency, reduced quality of service, and restrained investment and innovation. Again, that would be bad news for small businesses in the railroad business and as railroad customers.

For good measure, the U.S. Department of Transportation (DOT) is proceeding with a final rule mandating the use of a particular braking system on certain trains. Also, the FRA wants to mandate two-person crews on freight trains. As is often the case when government tries to mandate particular technologies or operational matters on the private sector, it becomes glaringly clear that government bureaucrats and regulators fail to understand the industry and technology used in the business. For example, Edward Hamberger, president and CEO of the Association of American Railroads, pointed out that the braking system being mandate by the DOT is “unproven,” noting that “this unfounded and costly rule could divert funds that might be better spent on safety initiatives with far greater impact.” And on two-person crews, he noted, “After all, railroads around the world — including Amtrak and major commuter rail lines — have used single-person train crews for decades. A comparison between U.S. railroads with single-person crews and those with multiple-person crews showed no difference in safety.”

Special interests that use government for their own advantage and misguided regulators have imposed unnecessary regulatory burdens across industries and the U.S. economy. And in each case, regulations always fall hardest on small businesses. That’s no different when it comes to railroads – with small businesses working in the sector and small business customers suffering when government regulation overreaches.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

 

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