Lessons from the Staggers Act at 40: How Deregulation Reinvigorated the Railroad Industry

By at 13 October, 2020, 9:07 pm

by Raymond J. Keating-

October 14, 2020 is an important anniversary in the history of pro-growth, pro-consumer, pro-investment and pro-small-business policymaking. Forty years earlier, President Jimmy Carter signed the Staggers Act into law.

The Staggers Act was a major step forward in deregulating the railroad industry in terms of pricing services and establishing rail rates, making route decisions, and establishing shipper contracts, that is, allowing freight railroads to make decisions based on market conditions. This was a monumental shift in railroad policymaking.

Previously, federal command-and-control regulation was driving America’s railroads into bankruptcy. The Federal Railroad Administration explained the situation this way: “Prior to 1980, economic regulation prevented railroads from any flexibility in pricing needed to meet both intra as well as intermodal competition. Regulation also prohibited carriers from restructuring their systems, including abandoning redundant and light density lines, a necessity for controlling cost. Added to these problems was the industry’s inability to cover inflation due to the regulatory time lag in rate adjustments. As a consequence, nine carriers were bankrupt, the industry had a low return on investment and was unable to raise capital, and faced a steady decline in market share.”

The Staggers Act provided a sound policy foundation for rail operators to respond to the market, to implement necessary efficiencies, and to spur investment, thereby providing improved service and lower prices for shippers and consumers. The results were profound. Unleashed from the heavy shackles of regulation, the rail freight industry experienced vast improvements in efficiency and productivity, capital investment, maintenance and safety, market share, profitability, and reduced costs and enhanced service for customers. Specifically, productivity, industry volume and revenue shifted from stagnation and decline to growth, and rail rates for consumers, including small businesses, declined. As The Economist magazine pointed out, “America’s freight railways are … universally recognised in the industry as the best in the world.”

In two reports in recent years (see here and here), SBE Council has spelled out the benefits of freight railroad deregulation for the economy broadly and for small businesses. In fact, all industries benefiting from improved rail, whether as customers of or suppliers to railroads, are overwhelmingly populated by small businesses.

For example, that includes such sectors as support activities for rail transportation (with 82.1 percent of employer firms having fewer than 100 workers), freight transportation arrangement (96.1 percent of employer firms having fewer than 100 workers), warehousing and storage (70.5 percent of employer firms having fewer than 100 workers), retail trade (98.4 percent of employer firms having fewer than 100 workers), mining, quarrying and oil and gas extraction (94.8 percent of employer firms having fewer than 100 workers), and manufacturing (93.4 percent of employer firms having fewer than 100 workers). Make no mistake, a healthy freight rail industry thanks to deregulation has been a major positive for small businesses in all kinds of ways.

The key lesson is clear: Lift or avoid heavy-handed, costly regulation; allow market dynamics, competition and incentives to work; and the results will be positive for industries, businesses, consumers, and the economy.

Therefore, it should be obvious that re-regulation in the area of railroads must be avoided, including various calls that seem to regularly pop up to re-impose price controls. The surest path to undermining America’s railroad industry would be to impose price controls. After all, the industry operates within a highly competitive market for transporting freight, with investment and technological changes pushing productivity gains and consumer benefits ever forward. Price controls explicitly work against such investments.

And the same goes for government stepping in to dictate how railroads open up their rail lines to competitors via forced access regulations. These kinds of regulatory intrusions would reduce the ability and incentive to invest in rail capacity, maintenance and innovation; generate additional costs; and undermine reliability, speed, efficiency and safety.

Another lesson to take away from the Staggers Act is that sound deregulatory policymaking should not be the exclusive domain of one particular party. Consider that in recent times, Republicans generally have been viewed as being more open to regulatory restraint, while Democrats have succumbed to a “regulate first” stance.

The Staggers Act should make clear that both parties need to be open to sound regulatory policies. After all, the Staggers Act was passed by a Congress in which Democrats had complete control, in both the House and Senate, and it was signed into law by a Democratic president, Jimmy Carter.

For good measure, assorted deregulatory efforts that began in the very late 1970s and 1980 were built and considerably expanded upon by President Ronald Reagan’s Republican administration. Again, pro-growth, pro-consumer, pro-small-business policymaking should be embraced by both major political parties.

Indeed, the 40th anniversary of the Staggers Act provides a powerful reminder of the positive impact of sound regulatory policies, and that such policymaking should be a bipartisan affair.

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

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