Surface transportation board nominees should rebuff rent seekers

The Senate Commerce Committee will vet Trump administration nominees for the Surface Transportation Board (STB) next Wednesday, beginning the process of filling three vacancies at the independent agency tasked with oversight of the railroads. Make no mistake: while the STB may not garner the attention of Cabinet agencies such as the EPA or even other independent bodies like FERC or the FCC, it has significant power. Out of sight and out of mind to many, private freight railroads serve a critical role in U.S. commerce, thus making the outsized role of the STB critical to the health of the U.S. economy.

The nominees and Senate Committee members should understand that the rail industry is one of America’s greatest deregulatory stories; and they all should stand firm behind the strong economic evidence and oppose efforts to enact backdoor rate regulations at the expense of consumers. The evidence shows that consumers, shippers and the industry benefited from the deregulatory reforms that took place in the 1980s. Returning to burdensome and unnecessary rules would ultimately undo these gains.

Let’s look at the historical record.

In 1887, the Interstate Commerce Commission was created to prevent rail companies from setting abusive rates. But as regulations increased over time, that regulatory body became completely out of touch with the modern rail industry. Research shows that the return on investment for railroads averaged 2.4 percent during the period 1962 to 1978, far below the fair rate-of-return experienced by other regulated industries.

Many rail companies became insolvent and most teetered on bankruptcy, as regulations forced rail operators to travel on inefficient and unprofitable routes and laws prohibited the abandonment of tracks. While this resulted in spiking rail transportation costs and increasing prices for everyday products – all during a decade that produced the highest increase in consumer prices on record – the nation’s attention was quickly drawn away from rail toward the open interstate highway system.

The dilapidated state of the rail network and high prices became so dire that the government had 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.

The economic evidence shows that these regulatory reforms brought the industry back from the brink of disaster: consumer prices fell dramatically, all while the industry experienced unparalleled improvements in financial strength and service quality. Railroad productivity tripled and resulted in falling transportation prices of 44 percent in just 10 years after deregulation. For shippers, lower rail costs yielded 65 percent lower prices; for consumers, this resulted in $10 billion in annual consumer welfare benefits. The empirical evidence is clear, the reduction in onerous price and routing controls was a big win for the industry, shippers and consumers.

Unfortunately, this historical record and the evidence was largely ignored the STB just a few years ago when several onerous regulations were proposed. In the ensuing months, the nominees who are likely to be approved to join the STB will be considering these proposed regulations. Among the regulations slated for consideration is allowing rail competitors to use another railroad’s assets and facilities. Essentially, it would force railroads to share their traffic and rail lines — even at below market prices. Another measure would even cap the revenues railroads can earn, which would reduce the cashflow operators need to make the private capital investments.

If private railroad transportation becomes costlier, there will be less private investment and fewer jobs. Higher costs and less investment in railroads will put more trucks on the public roadways, thereby increasing traffic, increasing congestion, leading to more wear and tear on the public infrastructure and increased pollution. It will reduce intermodal competition and cost consumers much, much more.

These regulations would never pass a cost-benefit test – which has been avoided to date. “Instead of demonstrating with evidence that anticompetitive abuse is widespread, the STB proposal simply claimed that proving anticompetitive abuse is too difficult,” says a new report from the Mercatus Center at George Mason University.

As the American Consumer Institute wrote last year alongside other organizations, “Congress has repeatedly rejected railroad re-regulation, regardless of political control.” Indeed, this nonpartisan issue is easy, and this trend should continue, starting today with this little-watched hearing.

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 this produced major benefits for consumers. In the months ahead, as new STB board is staffed, regulators must be mindful of the past and avoid burdensome and unnecessary proposed rules. That mindful approach would put the well-being of American consumers first.

Steve Pociask is president of the American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization.