All Commentary
Saturday, May 1, 1971

Transportation: Regulation vs. Competition

Mr. Hagedorn is Vice-President and Chief Economist of the National Association of Man­ufacturers. This column appeared in NAM Reports, March 1, 1971.

The recent economic reports of the President, and of his Council of Economic Advisers, have been the occasion of much discussion and controversy. This week we want to call attention to a section of the council’s report which has attracted relatively little notice, but which contains some profound economic wisdom. This is a rather brief section headed “Transporta­tion,” which appears as one part of a chapter entitled “Economic Growth and the Efficient Use of Resources.”

The council’s discussion of the economics of the transportation industry is in a low key. Conclu­sions are suggested rather than asserted and no firm recommenda­tions for changes in government policy are offered.

Yet, the message of the council’s comments is clear. It is this:

Gov­ernment regulation of transporta­tion has resulted in injury, rather than benefit, both to the industries which provide transportation serv­ices and to the public which de­pends on them. All would be better off if more reliance were placed on competition and less on regu­lation. Government intervention in this critical sector of our economy has resulted in an inefficient use of resources.

The history of the Interstate Commerce Commission, first es­tablished in 1887, has been one of increasing extension of its pow­ers, and increasing futility in their exercise. The end result has been that the country has an un­economic transportation system —uneconomic in the sense that more manpower and capital are devoted to that purpose than need be and they are used less efficiently than they might be.

The commission was originally established at a time when rail­roads had a near monopoly of freight transportation. Its object was to protect shippers against this monopoly power. But early in this century, the commission was given the additional power to en­force minimum freight rates—in other words, to suppress any rate competition that might break out among the roads. When a competi­tive form of freight transporta­tion—trucking—did emerge it was placed under the regulatory power of the commission.

The Bureaucratic Procedure Cannot Stand Competition

We do not believe that there is necessarily anything sinister or corrupt in that history. It is in the nature of government economic intervention to develop in that way. When a public body is estab­lished to oversee an industry it cannot rely on something so nebu­lous and unpredictable as compe­tition. It will inevitably view com­petition—whose effects are never foreseeable in detail—as an ob­stacle to the attainment of the ex­plicit objectives the public body was intended to serve.

Competition has a way of break­ing out, no matter how much you try to suppress it. But suppression of competition usually results in turning it into uneconomic chan­nels. The pattern of development in an industry is distorted in ways that are disadvantageous both to the industry and to the public.

An illustration of this is the effect of the suppression of rate competition in the transportation industry. The rivalry among car­riers took the form of attempts to offer better and more frequent service. The council’s economic report points out that: “This is one reason why the transportation industry as a whole has more ca­pacity than the total traffic re­quires. . .”

This overcapacity is a burden on the carriers and a misallocation of our national economic resources. From the point of view of the shippers, it might seem that bet­ter and more frequent service is a good thing. But wouldn’t it be still better to let the market decide whether the shippers might prefer lower rates to this additional serv­ice?

Regulation of air transportation by the Civil Aeronautics Board seems to have had similar effects. During the period of rapid growth in air traffic during the 1960′s the airlines were prohibited from com­peting with each other by cutting rates. They thereupon competed by offering increased service and this resulted in uneconomic investment in facilities and equip­ment—a problem plaguing them severely at present.

Direct and Indirect Effects

What is at stake in the question of regulation vs. competition is not merely an abstract principle. An unpublished government study estimates that, as a result of de­regulation, a reduction of at least 10 per cent could be expected in cost to shippers of freight trans­portation by common carriers.

The distortion introduced by regulation into the pattern of transportation costs can also have undesirable social effects. The economic report of the council ar­gues that it has been a contribut­ing factor in the joint problems of rural depopulation and urban con­gestion. As a result of regulation, transportation costs on finished goods tend to be higher than rates on shipments of raw materials. This causes fabricators to locate close to their urban markets rather than close to their sources of ma­terials, or somewhere in between.

One of the worst effects of reg­ulation, and one which makes es­cape from it very difficult, is that in its course vested interests are established. These might be dam­aged as a result of deregulation.

We use the term “vested inter­ests” in no deprecatory sense. Atrucker who holds an ICC certifi­cate has a thing of value. He has acquired it in good faith because he has to have it to conduct his business. In the normal course of business transactions he may have bought and paid for it just like any other asset. Opening trucking to unlimited competition might greatly reduce the value of that asset—depriving the certificate holder of part of his property.

We do not know of any solution to these inequities. They could be mitigated, but not eliminated, by phasing deregulation over a long period. The lesson is that, in the course of government regulation, a tangled web is woven—from which it is impossible to escape without some pain and injustice.

We surmise that the Adminis­tration, after laying this intellec­tual groundwork, may offer legis­lative proposals for a move toward deregulation in the transportation industry.

But perhaps the larger import of the discussion is that govern­ment regulation of any phase of economic life, no matter how well intended, may create more prob­lems than it solves. The intended beneficiaries often are hurt as much as those who are regulated. Advocates of Federal legislation for the protection of consumers might take notice.

  • Mr. Hagedorn was the Vice-President and Chief Economist of the National Association of Manufacturers.