All Commentary
Thursday, August 1, 1996

Deregulating Freight Transportation

Transportation Regulation Limited Options and Increased Prices

Deregulating Freight Transportation is a thoughtful and timely book written by Paul Teske, Samuel Best, and Michael Mintrom. The authors describe how the movement to deregulate transportation finally succeeded and how it is saving the U.S. economy billions of dollars each year.

Much of this book is the story of the ICC (Interstate Commerce Commission) and the CAB (Civil Aeronautics Board) and why railroads, trucking, and the airlines were so inefficient during much of this century. The authors describe the origin of state and federal regulation. The ICC was empowered in the early 1900s because some shippers complained loudly about rebates and rate discrimination. Railroads gave rebates to large shippers who did volume business; railroads also gave discounts to shippers who did business along the well-traveled routes. To the railroad owners, this behavior simply followed good cost-benefit analysis. The fixed costs in railroading meant that shippers with small loads and shippers who lived in remote areas were expensive to service—therefore, they should pay more.

What small shippers lacked in economic clout they offset with their political muscle. They lobbied state legislatures and later Congress to get laws passed that fixed rates and regulated the railroad industry. The regulating of the trucking industry followed in the 1920s and 1930s, and the CAB in airlines followed the ICC model in the 1930s.

According to Teske, Best, and Mintrom, federal regulation meant fewer transportation options, higher prices, and industries governed by the politics of lobbying, not the economics of competition. Much of this was exposed in the 1970s. Intrastate rates, which were not always subject to regulation, were often discovered to be remarkably low. Southwest Airlines in Texas and Pacific Southwest in California became models of low costs and excellent service. Senate hearings in 1975 exposed the inefficiency of the regulated airlines. The resulting clamor led the airlines to “experiment” with competition and free markets. Consequently, passenger fares dropped 30 percent from 1976 to 1990.

The presence of frequent fliers and busy travel agents led to demands that trucking and railroads follow suit. The ICC was under fire and could barely justify its existence to critics. During the 1980s and early 1990s, Teske, Best, and Mintrom describe the initial dismantling of the ICC and how shippers have profited. The authors, in fact, recommend the abolition of the ICC and also an improved single base-state system to meet varying state standards for loads and vehicles.

The authors conclude that “reliance on the market as a regulator will be the main American policy toward freight transportation in the next century.” At a time when free-market thinkers grieve over failed federal programs in medical care, Social Security, and welfare it’s nice to read a success story—and that’s what Teske, Best, and Mintrom have given us.