Letter for the U.S. House T&I Committee Record: “Board Member Views on Surface Transportation Board Reauthorization”

By SBE Council at 12 May, 2022, 8:20 am

May 11, 2022

The Honorable Peter A. DeFazio

Chairman

Committee on Transportation and Infrastructure

The Honorable Sam Graves

Ranking Member

Committee on Transportation and Infrastructure

The Honorable Donald M. Payne, Jr.

Chairman

Subcommittee on Railroads, Pipelines, and Hazardous Materials

The Honorable Rick Crawford

Ranking Member

Subcommittee on Railroads, Pipelines, and Hazardous Materials

Dear Chairman DeFazio, Ranking Member Graves, Chairman Payne and Ranking Member Crawford:

Small businesses understand quite well the frustrations related to supply chain challenges and tight labor markets as our economy works to recover from the pandemic. Indeed, by operating up and down each supply chain across industries, small businesses are playing and will continue to play essential parts in getting our economy back on a solid growth track.

Of course, getting back on a growth track involves the many entrepreneurs and businesses of all sizes operating in our broad transportation system, including America’s freight railroads. Small businesses are part of key freight rail sectors, and are served by freight railroads.

With the House Committee on Transportation and Infrastructure, Subcommittee on Railroads, Pipelines, and Hazardous Materials scheduled to hold a hearing on May 12, 2022, titled “Board Member Views on Surface Transportation Board Reauthorization” in its Subcommittee on Railroads, Pipelines, and Hazardous Materials, the Small Business & Entrepreneurship Council (SBE Council) hopes that Members will keep in mind the concerns of  small business owners relating to government regulation, and that is, increased regulation in any industry, including ramped up regulation on freight railroads, comes with considerable costs, reduced incentives for investment, and diminished productivity and efficiency.

Indeed, as we work to emerge from this pandemic economy, SBE Council would hope that no elected officials would scapegoat certain industries, nor would they be looking to impose more intrusive and damaging regulations that raise costs. That, again, includes increased regulation of railroads. In fact, one would hope that Congress and the Biden administration would be actively seeking ways to reduce burdens on entrepreneurs, businesses and investors in order to help spur the economy forward.

Railroad Innovation and Efficiency: A Deregulatory Success Story. The freight railroad industry actually provides one of the most glaring examples in economic history of regulation undermining investment and business operations, and then partial deregulation providing a foundation for industry renewal.  Railroads had suffered long decline and decay under excessive and intrusive regulation until the passage of the Staggers Rail Act in 1980.

As the Federal Railroad Administration has explained (“Impact of the Staggers Rail Act of 1980,” March 2011):

“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.”

Again, it was after Congress passed and President Jimmy Carter signed into law the Staggers Rail Act that the railroad industry returned to health and profitability. The Staggers Rail 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 were predictable and now are widely recognized, such as dramatic improvements in industry capital investment, innovation, efficiency and productivity, maintenance and safety, market share, profitability, and reduced costs and enhanced service for customers.

Other than the politics of special-interest pressures, it is bewildering that the Surface Transportation Board, the Biden administration, or Congress would even consider returning to a regulatory regime that would undercut investment, innovation, operations and service.

Getting a Clear Picture of the Freight Railway Sector.  It is essential that Congress, the administration and their appointees make decisions with a clear picture of the freight railway sector operating within the larger transportation industry. Make no mistake, the transportation business is highly competitive and dynamic.

Railroads not only compete against each other, but also with trucking, barges, pipelines, geographic or locational competition, product substitution, and so on. For good measure, as in most industries, there also is cooperation and complementary work in this sector, perhaps best exemplified by the intermodal freight container, which can move from ship to train to truck without unloading cargo. And then there’s the economic fact of life that future innovations and new competitors remain constant factors across industries in our dynamic economy. Who would have predicted even just a short time ago, for example, that a company like Amazon would create its own distribution network?

Competition in all its forms spur railroads, and other players in the transportation business, to be mindful of costs, prices and quality of service. Any businesses that ignore these essential points will find themselves in decline.

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

Percent of Employer Firms by Size in Key Sectors Directly or Indirectly Impacted by Freight Railroads

Data Source: U.S. Census Bureau, 2019 latest data. Calculations by SBE Council.

The Roots of Inflation. In the end, trying to assign blame for our current inflation woes to particular industries, such as freight railroads, is a political endeavor; it is not about sound economics or policymaking. As SBE Council has pointed out before, there’s a great deal to ponder, integrate and disentangle in the current period of inflation, from monetary policy to supply-chain problems to a tight labor market to policymaking working against growth in other areas.Data Source: U.S. Census Bureau, 2019 latest data. Calculations by SBE Council.

If we understand that inflation is about too much money chasing too few goods, then we need tax and regulatory policies, for example, to be providing relief to spur production. We do not need policies hoisting additional burdens on entrepreneurs, investors and businesses that generate risks, uncertainties and unwarranted costs.

Obviously, this applies to freight railroads, which are a central part of our transportation system. This has become evident once more during this pandemic.

The Association of American Railroads has reported that “during the first half of 2021, railroads handled the highest volume of intermodal traffic ever moved in a January-June period. Some weeks in late 2020 and the first half of 2021, U.S. railroads were handling more than 300,000 containers and trailers per week, levels that no one expected when the pandemic began.” And later: “Railroads continue to move huge amounts of cargo, despite current supply chain challenges. In the first quarter of 2022, railroads moved more chemicals than in any other quarter in history; the second-most grain for a first quarter since 2011; and the fourth-most intermodal units for a first quarter in history.”

At the same time, like other industries currently, rail service suffers from assorted challenges, such as on the supply chain and labor fronts, and that means the small businesses that rely on freight rail service are being hurt as well.

SBE Council stands against making a difficult situation even more challenging by turning back toward a regime of over-regulation, including proposals to mandate reciprocal switching, or “forced access,” on American railroads.

I hope that you will join with America’s small businesses in opposing re-regulation and increased regulation that will only make our current difficulties worse and hamper economic growth going forward. Instead, we need to embrace and advance a pro-entrepreneur, pro-investment, pro-innovation policy agenda that will help alleviate supply-chain and tight labor market problems across industries, including in the freight rail sector, and re-ignite robust economic growth.

Sincerely,

Raymond J. Keating

Chief Economist

cc: Members of the Subcommittee on Railroads, Pipelines, and Hazardous Materials, Committee on Transportation and Infrastructure