PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

The Biden “Competition” Executive Order and U.S. Railroads: Small Businesses and Consumers Could Pay a Big Price

By at 15 September, 2021, 11:15 am

by Raymond J. Keating –

The United States has the most productive freight railroad system in the world. The Biden administration has responded to this by effectively calling for a return to a burdensome, misguided regulatory system from decades past that will undermine the productivity and competitiveness of the American freight rail system.

As SBE Council has noted previously, President Joe Biden’s “Executive Order on Promoting Competition in the American Economy,” released in July, ranks as a breathtaking call for increased regulation of large businesses across the economy. Unfortunately, this EO is short on basic economic common sense, including that it ignores that businesses in the marketplace earn market share by serving consumers well; that just because a business is large does not mean it is immune from the forces of competition and consumer sovereignty; and that it misses or is simply unconcerned that the burdens of increased regulation, which, one way or another, fall heavily upon smaller businesses targeted by the Executive Order (EO) or as consumers of these products and services.

Big-Tech Bashing Seeps to Other Sectors, Including Freight Railroads

While much of the anti-big-business talk from the administration, as well as from both progressives and populists in Congress, has been focused on so-called “Big Tech” – in particular, Amazon, Apple, Facebook and Google – the reality is that the push for more regulation has been far broader. That includes freight railroads. The Biden EO urged the Surface Transportation Board and its chairman to:

● “consider commencing or continuing a rulemaking to strengthen regulations pertaining to reciprocal switching agreements”;

● and “consider rulemakings pertaining to any other relevant matter of competitive access, including bottleneck rates, interchange commitments, or other matters.”

In the accompanying “Fact Sheet” to the EO from the administration, it was asserted: “In 1980, there were 33 ‘Class I’ freight railroads, compared to just seven today, and four major rail companies now dominate their respective geographic regions. Freight railroads that own the tracks can privilege their own freight traffic— making it harder for passenger trains to have on-time service—and can overcharge other companies’ freight cars.”

It then continued regarding the President’s EO: “Encourages the Surface Transportation Board to require railroad track owners to provide rights of way to passenger rail and to strengthen their obligations to treat other freight companies fairly.”

Some of this might sound nice to the untrained ear, but digging below grand assertions dressed up in vague, accusatory language, what does it actually mean and call for?

This is about government regulatory interference in the market, at the behest of certain companies, in the form of imposing forced switching, or forced access, on railroads. It means turning back toward an era of over-regulation under which railroads declined and decayed.

1980s Regulatory Modernization Propelled Investment, Competition, Safety and Profitability

SBE Council published a report on the realities of how railroads operated, were regulated, and the necessary changes that were signed into law in 1980 by President Carter that gave the industry life once again.

Those changes occurring some forty-plus years ago have resulted in long-run improvements to the railroad industry, with the benefits being obvious for the industry and the customers it serves. And make no mistake, as players within the rail sector, among those being served, as well as among those who provide goods and services to railroads and their employees, small businesses have experienced rewards thanks to the freight railroad industry flourishing under partial deregulation.

For our purposes, consider a few key points from the SBE Council report:

● “As the Federal Railroad Administration reported: ‘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 Association of American Railroads explained, “By the 1970s, eight decades of over-regulation had brought America’s freight railroads to the brink of ruin. More than 20 percent of rail mileage was owned by bankrupt railroads; safety was deteriorating; and tracks, locomotives, and freight cars were falling apart and railroads couldn’t afford to repair them. Railroads were unable to provide the safe, efficient, cost-effective rail service that American businesses need to grow.”

● “But the railroad industry only returned to health and profitability after Congress passed and President Jimmy Carter signed into law the Staggers Rail Act of 1980. The Staggers Act partially deregulated railroads in terms of setting prices for services and setting rail rates, making decisions regarding what routes to use, and establishing shipper contracts, that is, allowing freight railroads to make decisions based on market conditions… The benefits from this major deregulatory measure are recognized across the board in terms of vast improvements in industry efficiency and productivity, capital investment, maintenance and safety, market share, profitability, and reduced costs and enhanced service for customers.”

The following chart from the Association of American Railroads shows the improvement in industry performance, including benefits accruing to customers, after the Staggers Acts was passed, tracking rail rates, revenue, volume and productivity.

Source: Association of American Railroads

The Association of American Railroads has reported that since passage of the Staggers Act:

● Customers have experienced average real rail rates that are 44 percent lower than they were in 1981.

● Freight railroads have invested $740 billion in their operations.

● Train accident and hazmat accident rates have declined by 33 percent and 64 percent, respectively.

● The rail employee injury rate in 2020 registered an all-time low.

● And, while return on net investment “had been falling for decades” prior to the Staggers Act, after it passed, returns registered 4.4 percent in the 1980s, 7 percent in the 1990s, 8 percent from 2000 to 2009, and 12% from 2010 to 2019.

The AAR also pointed out: “Short line and regional railroads, most of which are new since Staggers, operate approximately 45,000 miles in 49 states, preserving rail service and rail jobs that otherwise would have been lost if not for the Staggers Act.”

These were and are striking changes from the decimation previously suffered by the industry due to gross over-regulation.

SMBs are Dominant in Railroad Sector

As for small businesses and freight railroads, the sectors directly and indirectly related to and served by railroads are no different from the rest of the U.S. economy, that is, smaller firms are the majority of firms in each industry. Consider the latest data on the role of small business in each of these sectors:

Data Source: U.S. Census Bureau, 2018 latest data. Calculations by author.

Positive Economic Impact and What’s at Stake  

Finally, as for the total economic impact of America’s freight railroads, the reach is extensive, across a wide array of industries, and according to a study by economists and researchers at the Regional Economic Studies Institute (RESI) at Towson University (“Economic and Fiscal Impact Analysis of Class I Railroads in 2017”) released in October 2018:

“Class I railroads’ operations and capital expenditures supported over 1.1 million jobs (0.8 percent of all U.S. workers), $219.5 billion in output (1.1 percent of total U.S. output), and $71.3 billion in wages (0.9 percent of total wages in the U.S.).”

Biden’s Intrusive and Inappropriate Regulatory Overreach

Unfortunately, the Biden administration’s hyper-regulation agenda places much of this at serious risk. The Biden EO’s call for forced switching would undermine the efficiency of the rail system, and raise costs for customers and consumers overall. This regulatory measure would allow large companies, who simply do not wish to pay market rates for shipping, and competitors to lobby so that government would mandate that railroads hand over traffic to competitors.

The results should be obvious, including reduced network efficiencies, slower rail traffic, and increased costs for customers. These and other regulatory measures would reduce incentives to invest in railroads, again, thereby reducing innovation and competition, and raising costs.

And with American businesses and consumers already suffering from supply chain problems related to the pandemic, these regulatory intrusions would only make such matters worse. Indeed, imposing severe regulatory burdens never makes economic sense, but doing so during tough economic times ranks as being particularly egregious.

As the AAR recently explained:

“Railroads — one of the most environmentally friendly freight transportation modes — compete against each other and other transportation modes to win business and remain viable. The significant investments in private infrastructure made by railroads — nearly $25 billion annually — are only possible under a market-based economic regulatory framework overseen by the STB… For decades, large corporations dissatisfied with paying fair-market rates to ship products by rail have sought to leverage political influence to change that framework and force railroads to hand over traffic to competitors who might charge less. These proposals have varied over the years, but all had one thing in common: they would benefit select favored shippers at the expense of the efficiency of the whole rail network, including passenger operations.”

AAR President and CEO Ian Jefferies said, “Any STB action mandating forced switching would put railroads at a severe disadvantage to freight transportation providers that depend upon tax-payer funded infrastructure. Such a rule would degrade rail’s significant benefits to both customers and the public by throttling network fluidity, disincentivizing investment, increasing costs to shippers and consumers, and ultimately diverting traffic onto trucks and the nation’s already troubled highways.”

The Biden EO has been billed as an effort to stop monopolies and “excessive market concentration,” but there are no real monopolies at work in the market when free from government interference and mandates. Current market leaders compete against current, emerging and future competitors. That certainly goes for freight railroads. Consider a few points on freight rail market share (from AAR):

In terms of U.S. chemical shipments based on tonnage transported, railroads had 19 percent of market share in 2020 compared to 20 percent water and 57 percent trucks.

In terms of grain shipments, rail had about 25 percent, according to the latest USDA data, which was less than half that of trucks.

And the latest numbers on overall U.S. freight tonnage, trucks had 68 percent of the market, pipelines 18 percent, and rail 10 percent.

For good measure, if some kind of “monopoly power” or “market failure” existed, one would expect to see sizeable profits for railways, especially when compared to the broader economy. But as noted in the following AAR chart, that simply is not the case.

There is No Market Failure

No so-called “market failure” is at work when it comes to freight transportation. Indeed, the market is quite robust in terms of competition, as well as investment and innovation. However, a surefire way to reduce competition is through government over-regulation that undermines the ability of businesses and industries to innovate and compete with others. That’s exactly what the Biden EO would do if regulations and mandates are ramped up against freight railroads. And of course, small businesses wind up being hurt as enterprises that work in the freight industry, serve the freight industry, and/or are served by freight railroads.

Consider the following from a letter signed by members of a wide coalition, including eight former secretaries of the U.S. Department of Transportation and assorted state and local officials:

“Since the implementation of a balanced system of economic regulation under the Staggers Act, which protects rail customers while allowing railroads to manage their assets and pricing, U.S. freight railroads have invested hundreds of billions of dollars in the rail network. Rail traffic has doubled, rail productivity has more than doubled, rail rates are down more than 40 percent, and recent years have been the safest on record.”

The Biden administration needs to realize the tremendous benefits derived from a robust freight railroad system operating within a broadly competitive transportation market and under a more reasonable regulatory regime, and back off from misguided and costly regulation that will only undermine American railroads, small businesses and consumers.

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

 

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