Mr. Burt is a former legislative assistant to Congressman James F. Hastings, member of the House Subcommittee on Transportation and Commerce.
The choice confronting us today is clear: either abolish the Interstate Commerce Commission, or accept the impending breakdown of transportation.
We can have deregulation and a free market.
We can, to a point, also endure nationalization with its army of featherbedders whose pretenses at “service” will be a sad joke on shippers and taxpayers alike.
But regulated transportation – the politically palatable middle ground – is nearing the end of the line.
Like the canals before them, early railroads received substantial government aid which caused over-investment in facilities. When direct Federal support began to recede in the 1870′s, a day of reckoning loomed which could not be forestalled despite the industry’s hapless attempts at cartelization. Rather than permit the weakest carriers to face the music, Congress in 1887 created the Interstate Commerce Commission to regulate competition and pricing.
Initially confounded by the multifarious forms of rebating with which companies had circumvented private pooling, the Act to Regulate Commerce needed several “perfecting” amendments. However, with the passage of the Mann-Elkins Act in 1910, the ICC began policing its price-fixing system with relative effectiveness. The Transportation Act of 1920 formalized the Federal government’s commitment to railroading as a public cartel.
All this merely encouraged shippers to avoid rail transport. Regulation or no, this was bound to occur. Trucking, barges, pipelines, and air transport all developed to some degree as the market’s answer to attempted rail monopoly. For instance, railroads tended to set rates low on competitive routes (despite cartels) while holding up rates to places they served alone ; hence, the short-haul trucker. But the growth of such alternatives through the 1920′s and ’30′s hardly implied an efficient free-market reallocation of traffic, for government still meddled with all transportation. Overbuilt trackage, shielded pricing, and the headlong leap into building public roads, waterways, and airports combined to initiate an exaggerated shift of business to the railroads’ new competitors.
Despite such distortion, the grip of the rail cartels was so loosened that Congress was persuaded to bring the newcomers under regulation: trucks and buses in 1935, and water carriers in 1940. This time, “fairness” and “equality” did not cloak the intent to cartelize the competitors, and shipper groups almost unanimously opposed extending regulation. Shaken by the depression, trucking firms pleaded for it.
Today, exemptions mean that the ICC regulates and sustains a cartel made up of one-tenth of barge traffic, one-third of trucking, and all of railroading. Airlines are similarly overseen by the Civil Aeronautics Board. Economists say that transportation policy amounts to an implicit tax of more than $10 billion a year. This figure, derived mainly from the costs of idled resources and regulatory misallocation of traffic among transport modes, cannot begin to account for the awesome loss of opportunities. But the U.S. Department of Transportation has found the case sufficiently convincing to press for regulatory reform: speeding up the ICC’s rate-making process, allowing “zones of reasonableness” within which railroads and truckers may freely tinker with rates, and supervising traffic associations (rate bureaus) to ensure that these agents of the public cartel do not act “anticompetitively.”
Instead of merely enumerating costs of regulation, a more logical approach would note these six major features of regulation which have been the undoing of transportation:
Antitrust
The major impetus for regulatory reform comes from those who would remodel transport regulation along the lines of antitrust policy. Envisioning “perfect competition” – an economy where consumers are so wooed by producers that all political complaints about “high prices” or “scarcity” have been stilled – they overlook the certainty that antitrust policy will foster inefficiency by imposing artificial limits upon the size and functions of transport firms. Unreached economies of scale and pervasive misallocation of traffic to less able carriers can be the only result.
Startling evidence of this has been unearthed recently in the case of trailer or container-on-flatcar rail traffic, which., was once touted as the savior of transportation because it uses trucks for short-haul pickup and delivery of containers while availing itself of the rails’ long-haul efficiency. “Piggyback,” as such shipments are called, now loses money for many railroads. Why? The idea is untarnished ; however, because railroads are prevented from owning truck firms performing piggyback’s “retail” services, and because the ICC requires railroads essentially to price their services “by the mile,” incentives have been bent towards maximizing the percentage of each piggyback trip spent on the rails. Thus, low-volume piggyback and container terminals have proliferated, suffocating the concept of efficient “wholesale” rail service. Antitrust guarantees such expensive mischief.
Egalitarianism
In response to its recent critics, the ICC has returned to waving its most infamous bloody shirt: “unfair and unequal treatment.” That the would-be reformers have also bowed to this emotional appeal is apparent in the fact that their proposals leave intact extensive ICC powers compelling carriers to handle each other’s equipment “without prejudice,” to cooperate in any through route or inter-line rate “reasonably” proposed by connecting carriers, and to peg freight charges to mileage (the “long-haul/short-haul clause”) so as not to favor shippers in any one location.
But discrimination incurs no injustice. The only thing “binding” a customer to any product such as transportation is his continued judgment that, whatever its undesirabilities, he is still better off buying it than not. In contrast, forcing carriers to sell their product on terms other than their own is but slavery.
Ironically, price discrimination often benefits those who bewail it. For example, wherever several producers of the same product who are located differently ship to the same destination, strict mileage rates result in the nearest producer’s underselling all others. This, of course, reduces the number of competing shippers, each of whom now bears a much higher proportion of the overall costs of the transportation company. On the other hand, reducing rates to more distant producers permits costs to be spread over many rather than few customers. This makes possible many kinds of transportation which could not be supported by “nearest” shippers alone. Though discrimination simultaneously increases transport efficiency, and contributes to the plenitude of goods “from all over” found in most marketplaces, it has occasioned such lasting envy among its imagined victims that its benefits seem permanently forgotten.
To the extent, then, that egalitarianism wastes transportation resources, it is responsible for the railroads’ dismal return on investment. Despite the ICC, though, proscribed price discrimination often reappears as service discrimination – by far a relatively inefficient substitute.
Consider the latest generation of “hy-cube” boxcars designed to handle auto-parts. These emerged when railroads were prevented from cutting rates to the auto makers, or from bending ICC car-service rules to assure GM and
Ford a dependable supply of freight cars. By building the capacity of two older cars into one big new one, railroad managers cleverly improved their ability to assure car supply and do so at effectively discounted rates. However, costs were run up in ways that didn’t show until later. When auto traffic slackens, by-cube cars amount to little more than white elephants. As maintenance forces have discovered, the weight of the big cars crushes already-weak track structures. Adding insult to injury, by-cubes are found to generate extreme lateral “waddling” movements at slow speeds which figure in an increasing number of derailments.
Common Carrier Obligations
How would we fare if carriers weren’t required to provide stable service for everybody?
We’d be better off . . . with more variety and improved transportation. Best of all, most of us could quit footing the bill for those “disadvantaged” people who choose to do their business from relatively inaccessible corners of the world.
The common carrier obligation, a queer but time-honored anomaly of common law requiring transport firms to serve all “reasonable” corners, underlies nearly every power of the ICC. It also accounts for the familiar behavior of transport employees toward the public. As Clarence Carson observes, theirs is the enthusiasm of a serf)
Included in the category of “common carrier” ICC decisions are those governing railroad branchline abandonments, truck service to small communities, and the rail passenger-service discontinuations of the 1960′s. The CAB’s requiring airlines to serve small airports is yet another example. When carriers are required to serve all (or when tax monies support Amtrak’s passenger trains), unspirited, mediocre service is “assured” to “disadvantaged” recipients at the expense of others. More importantly, such requirements abort better ideas by keeping their potential markets locked in the cold arms of the common carrier.
Railroads ran long-distance passenger trains decades after it had become clear that such operations had been doomed by union rules and government subsidy of interstate highways and airways. After Congress created Amtrak to perpetuate the existing passenger-train concept, the public agency shortly dropped over one hundred trains from its schedules. Such a quantum leap backwards for the
I Clarence B. Carson, Throttling the Railroads (Irvington, New York: Foundation for Economic Education, Inc., 1971, p. 44.) common carrier triggered an entrepreneurial response which incorporated major technological innovation, today lavishes unheard-of service on its patrons, and, for the first time in memory, runs full, happy trains. “Auto-Train” could never have been born had Amtrak or the railroads lived up to their common carrier obligation.
Prohibitions against railroad branchline abandonments have forestalled another better idea : the independent feeder “shortline” railroad which, without union rules and with personal attention to rural shippers, can make money out of many previously uneconomic branches. Similarly, it is evident that deregulation of trucking would encourage widespread entry of low-capital entrepreneurs into service-oriented pickup and delivery. Lastly, the experience with CAB-unregulated intrastate air carriers in the Southwest gives reason to expect that deregulation would not only increase the profitability of national airlines concentrating on dense routes, but also increase travel between lightly-populated points served by efficient small air carriers.
All of this is the other side of the coin: “common carriage” actually circumscribes the different means by which people may avail themselves of transportation. It does so by spreading the erroneous notion that most shippers will find it more advantageous to force their desires upon a common carrier – despite low probability of success – than to pay their own way on the free market. Politically, this formula is dynamite, emphasizing emotional appeal and obscuring complex truths.
The Incentive to Protect
To this point we have analyzed dogmas retained under “reformed” regulation which are, however, not essential to regulation per se. Even more pernicious are the institutional dynamics of regulation.
One of these is the ICC’s historic (though hotly denied) policy of holding one carrier’s rates up to protect the traffic of another -known as “umbrella ratemaking.” Another means to the same end is the Commission’s effort to sustain weak carriers at the expense of stronger competitors, as when the Milwaukee Road was given trackage rights into Portland, Oregon and Louisville, Kentucky as conditions for ICC approval of the Burlington Northern and Louisville & Nashville/Monon Railroad mergers.
Such practices are rationalized in part by Congress’ mandate in 1940 to “promote sound and economic conditions” among regulated carriers. Despite a simultaneous directive (and another in1958) to refrain from disturbing the “inherent advantages” of its subjects, the Commission has repeatedly seized upon the 1940 language to excuse its sustaining weaker carriers by robbing stronger ones.
With good reason ! All of the ICC’s political incentives place a premium upon increasing the number of its constituents – at least as long as it can do so at the expense of strong carriers’ finances or inelastic consumer demand. The excess capacity, lingering financial anemia, and periodic bankruptcies can all be blamed on “capitalism” or “mismanagement,” and charged to the taxpayers eventually.
Congress, too, would apparently prefer to “fly now and (let the other guy) pay later”; witness the current imbroglio over allowing the Lehigh Valley or Rock Island railroads to be abandoned. Umbrella policy, then, is also consonant with political shortsightedness, and is therefore a permanent feature of economic regulation.
The Threat of Intervention and Its Uses
Recently, the ICC has stressed that only a small percentage of rates are suspended, and fewer still refused, because they are too low. Nonetheless, the cartel is alive and well. Inflation means that rate decreases take the form of relatively smaller rate increases. Moreover, most of the Commission’s work has already been done, for rates of various kinds do not go into effect until they have been approved by organizations of carriers known as “rate bureaus.”
If confined to the innocuous data-gathering services they tout, rate bureaus’ expenses would be minor. Instead, the approximately ninety rail, truck, and water traffic associations each collect millions of dollars every year from member carriers, most of which is spent to maintain forces of potent legal and lobbyist talent used on behalf of cartel interests. Protests by well-funded and sophisticated rate bureaus routinely bring on ICC suspension of independent rate filings – what few there are -and thus raise the probable costs of filing “cut rates.” Combined with the ICC’s casting railroads in the dual roles of competitors/cooperators, the deterrent is usually sufficient to obviate any need for open Commission enforcement of cartel pricing. Indeed, rate bureaus themselves seldom overtly request “minimum rate orders,” so deep-rooted is their pervasive influence.
As long as the power of suspension and refusal over management decisions exists, there will be people to exploit it and magnify its superficially minor impact. Amendments to the Interstate Commerce Act in 1948 assured “the free and unrestrained right to take independent action” in filing rates. Regulatory reform legislation would do no more than reaffirm this principle with similarly hollow words.
The Destruction of Regulated Transport
The recent remarkable upsurge in unregulated owner-serving “private” trucking, “contract carriers” (trucking firms devoted to single customers), and illegal gypsy haulers reminds us that the market is ever at work devising paths around government obstacles.
Characteristically, regulation generates artificial monopoly gains in some economic sectors to dissipate them elsewhere. Briefly, consumers of the first product are trapped, enabling the regulators to reap loot sufficient to support their beneficiaries. But the consumer victims rather quickly discover “next-best” substitutes for the regulated item. Though in transportation the substitution process is made more difficult by immense capital costs, even these will be overcome given enough incentive by cartel pricing.
Once this occurs, three choices unfold to public policymakers : (1) extend regulation to the substitutes, (2) initiate direct tax subsidy of intended beneficiaries, or (3) give up the whole unsavory game. Again and again, Congress has chosen to extend regulation -most notably in 1935 when truck competition was beginning to dislodge both the rail cartel and its rationale. Now, regulatory reform proposes permanent direct subsidy to railroads in the form of a “trust fund” financed by a tax on all (including unregulated) carriers. Continuing diversion of business to unregulated carriers would likely lead Congress to extend regulation to them, also.
One must question how long this can go on before the public recognizes the dangers underlying continued regulation. Surely, many consumers will always find ways to avoid the regulatory cartel. Already we are seeing plant and inventory duplication to avoid transport altogether – better known as economic Balkanization. As the gap keeps widening between original free-market possibilities and remaining substitutes, however, we all become poorer. The only way the cartel can be made to work for its beneficiaries is by complete government control of the economy, at which point it should be evident just how much we have been impoverished.
But it will be too late then. Regulation’s defenders claim that viable free-market transportation alternatives were never possible. But the truth is that government intervention put us on the path to where we are today. If justice and necessity are to prevail, transportation will be deregulated. Regulatory reform is not enough.
