By Steve Pociask
April 5, 2017 at 5:00 am ET
Decades of overregulation nearly bankrupted the nation’s freight railroads during the 1970s by adding layers of costly red tape that raised prices for railroads and, ultimately, all American consumers. Significant regulatory reforms helped the industry bounce back, and consumer prices fell dramatically, as research has clearly shown. Regulators must remember this lesson as they consider the imposition of new onerous rules that could increase costs for railroads — and for shoppers at the checkout counter.
In 1887, the Interstate Commerce Commission was created to prevent rail companies from setting abusive rates. But as regulations increased overtime, that regulatory body became completely out of touch with the modern rail industry. As regulations grew more onerous, the industry began to suffer and teeter on bankruptcy. One study by Harris and Keeler found that the return on investment for railroads averaged around 2.42 percent during the period 1962 to 1978, far below the fair rate-of-return experienced by other regulated industries.
The railroad industry remained saddled with institutionalized disadvantages from nearly 90 years prior. Trains were forced to travel by out-of-date, inefficient and unprofitable routes, because of laws that prohibited the abandonment of tracks — all while the nation’s attention was quickly being drawn toward the idea of building an interstate highway system. As the rail industry continued to fall apart, transportation costs were spiking, increasing the prices of everyday products nationwide — all during a decade that produced the highest increase in consumer prices on record.
The dilapidated state of the rail network and high prices became so dire that the government made the choice to take drastic action. After considering the options of a federal bailout or nationalizing the industry, Congress opted in 1980 to deregulate railroads to revitalize the industry and improve consumer welfare as quickly as possible.
What followed were unparalleled improvements in the industry’s financial strength and service quality. Rail costs fell by half and productivity tripled. Transportation costs decreased by 4 percent in the first two years, 20 percent in five years, and 44 percent in 10 years after deregulation. But most importantly, these reduced transportation costs led to lower-priced goods, which have produced nearly $10 billion in annual economic benefits for consumers. Overall, rail cost reductions yielded 65 percent lower prices for shippers and, ultimately, consumers.
Despite the success of deregulation, in 2015, Congress reauthorized the U.S. Surface Transportation Board, an independent agency tasked with regulating railroad rate and service disputes, as well as possible mergers. The organization has since proposed a number of new regulations that affect how competitors can use another railroad’s assets and facilities, which have the potential to force railroads to share their traffic and rail lines — even at below market prices. Such new regulations act to discourage investment, impede competition and put the industry back into the 1970s. These regulations would undoubtedly create inefficiencies, delays, and higher costs, thereby leading to higher transportation costs and ultimately increased consumer prices.
Nearly 40 years ago, we learned how a smarter approach to regulation allowed the rail industry to operate in a more cost-effective and efficient manner, and how it produced major benefits for consumers. Yet, we are now in a position in which regulators are pushing for the same type of red tape that nearly destroyed the industry and led to higher consumer prices across the country.
These regulations would never pass a cost/benefit test. What they will do is serve to concentrate industries, as well as limit industry investment into infrastructure and heighten competition between modes of transportation. Federal regulators must take note of how these choices played out in the past and prioritize the well-being of American consumers by avoiding burdensome and unnecessary new rail rules.
Correction: A previous version of this column misstated congressional action regarding the U.S. Surface Transportation Board in 2015.
Steve Pociask is president of the American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization.
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