DERAILING AMERICA?
THE PROSPECTS AND PLATFORMS OF MODERN REGULATORY RESURGENCE
J.A.Schmitz
“Transportation—as an integrated system—is an essential component of America’s global competitiveness, and, as such, it can no longer be relegated to the backbench of U.S. public policy.”
—Thomas Donohue, President and CEO of the U.S. Chamber of Commerce
CURRENT ENVIRONMENT
As the United States’ most capital intensive large industry, with high fixed costs and widely varying elasticity of shipper demand, freight rail currently subsists only upon a frail substratum of demand-based pricing (similar to that employed by all air carriers, car rental companies, and movie theaters without restriction). Many argue that it is differential pricing which has allowed the industry to approximate its cost of capital recently for the first time since the 1940s. Others suggest that it is differential pricing which contributes to the US’ maintenance of the best – and least subsidized – freight rail system in the world.
Current legislative proposals run the risk of returning the US freight rail industry to its regulatory environment of the 1970s, when a third of all track was operated under bankruptcy. During that time (prior to the Staggers Rail Act of 1980 which significantly deregulated the industry and allowed for demand-based pricing) average inflation-adjusted shipper rates were double what they are today, productivity was half what it is today, and accidents were three times as prevalent as they are today. In fact, prior to the balance of regulation which ensued (arguably incited by the last era of concerted academic attention to the topic (Waters, 2007) ), the average 2% ROI in such a capital intensive industry (which currently reinvests at a rate of 18%) led to calls for nationalization which would have cost American taxpayers $200 billion. Instead, the freight rail regulatory system was re-examined and re-invented and has since reinvested $400 billion of its privately amassed capital.
Indeed, our regulatory policy choices are often stark. The mere dichotomy of regulated versus deregulated eras (Gallamore, 1999) demands more quantitative analysis of all current proposals. Because empirics offer us the highest standards of objectivity (Meyer et al, 1959), much could be made of modern innovations in the private sector such as Jacobs and Associates “Regulatory Guillotine” to provide an objective Regulatory Impact Assessment (RIA) in advance of - and not subsequent to – ratification. Again, due to the inherent synergy of the interface of business and government (ex, the Transatlantic Business Dialogue delivering difficult trade negotiations where governments fail) there is much to be honed from its unsentimental practicality and from its transference of the debate to an appropriately wider context.
From a less myopic perspective, imminent regulatory resurgence may have far-reaching impacts on our economy, if the least price elastic shippers are allowed rates developed for the most price elastic. The unfortunate and unintended result may be the cessation of some rail service and accordingly higher average rates. Indeed, as some empirical (domestic historical and international) work suggests that rates, within that scenario and in the aggregate, may well rise for all, not decline for some, under greater regulatory control. Along a regulatory trajectory, the US freight rail industry would move from private contracts to concession contracts to discretionary regulation to private contracts with some discretionary regulation (Gómez-Ibáňez, 2003) and now, perhaps surprisingly, to majority discretionary regulation under some proposals.
Moreover, as the attached chart indicates, legislation may move much more than the industry’s margin of profit under automatic arbitration, and would thus impact the only source of infrastructure reinvestment for the most capital intensive industry in America at a time when that very reinvestment would afford the domestic economy its greatest return. Surely, if these proposals are effected and that situation were to manifest, some public and private collaboration will be necessary to address the resultant maintenance and infrastructure issues and support a coordinated transportation policy...at the very least.
But...what do the prospects suggest for regulation on whole? Are we entering a period of retrenchment whereby exogenous dynamics (Enron, Bear Stearns, the I-35W bridge collapse) change both the public preferences and capacities for expanded regulation? Because so much of regulation is organizationally-dynamically driven as pendulum swings given the relative “inertia” of regulating agencies (Gómez-Ibáňez, 2003), have we now commenced an inflexible trajectory? Alternatively, may that trajectory be analyzed and/or affected given our understanding of organizational predilections toward regulation (Nicolaidis, Schmitz 1995) namely the autonomy of regulatory agencies (Schmitz, 1995) facilitating the “contagion” of the enterprise (Nicolaidis, 1995).
With average ROI (by the more liberal historical cost versus replacement cost standards) just starting to approximate cost of capital in the most capital intensive industry in America, freight rail is just now emerging from a period of industry-harvestation . This fact suggests a wealth of dividends for public welfare and modern challenges. Statistics best elucidate the impending infrastructure crisis: imports and exports are predicted to increase by 50% to provide 35 percent of the country’s GDP by 2020 and 60% by 2030 (effectively doubling current demand on freight transportation in just over a decade) . Roadway driver miles have increased by 150% in the past 25 years while infrastructure has increased by only 20%. Congestion already exacts monetary tolls as the new trade tariff: costing Americans over $200 billion each year mostly in productivity lost... forever. When faced with a similar crisis in the 1950s, the United States responded with a coordinated plan for the Interstate Highway System, but today, faced with an arguably larger and more significant event horizon, there remains no hint of emerging coordination and scarcely little understanding of consequence. At this occasion, much more than private sector profits will be affected. The current regulatory proposals will indeed impact issues of greater national concern and visibility: independence from foreign oil (one railcar can haul a ton of freight 423 miles on a single gallon of fuel), environmental progress, international competitiveness (given the specialization of the American market, just in time deliveries, and the globalization of the economy), American quality of life (given highway congestion without recourse) and the health of our domestic economy (congestion costs American taxpayers $200 billion per year)...
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