Railroad deregulation

The Economist chronicles another deregulation success story:

Amtrak’s passenger services are sparse compared with Europe’s. But America’s freight railways are one of the unsung transport successes of the past 30 years. They are universally recognised in the industry as the best in the world.

Their good run started with deregulation at the end of Jimmy Carter’s administration. Two years after the liberalisation of aviation gave rise to budget carriers and cheap fares, the freeing of rail freight, under the Staggers Rail Act of 1980, started a wave of consolidation and improvement.

Staggers gave railways freedom to charge market rates, enter confidential contracts with shippers and run trains as they liked. They could close passenger and branch lines, as long as they preserved access for Amtrak services. They were allowed to sell lossmaking lines to new short-haul railroads. Regulation of freight rates by the Interstate Commerce Commission was removed for most cargoes, provided they could go by road.

Before deregulation America’s railways were going bust. The return on capital fell from a meagre 4.1% in the 1940s to less than 3% in the 1960s. In 1970 the collapse of the giant Penn Central caused a huge shock, including a financial crisis. By 1980 a fifth of rail mileage was owned by bankrupt firms.

Rail’s share of intercity freight had slumped to 35% from 75% in the 1920s. Tracks were neglected and fell into disrepair, leading to a downward spiral of speed restrictions and deteriorating service. The term “standing derailment” was coined to describe the toppling-over of stationary freight wagons when the track gave way beneath their wheels.

Several factors had combined to bring about this sorry state of affairs. Services and rates were tightly regulated. Companies were obliged to run passenger services that could not make a profit. And road haulage received a huge boost from the building of the interstate highway system, which began in the late 1950s.

Although this was supposed to be financed by taxes on petrol and diesel, railmen saw it as a form of subsidy to a new competitor, the nationwide trucking industry. In a neat twist, the poor condition of today’s highways and the lack of public money for repairs have tilted the competitive advantage back to a rejuvenated rail-freight industry.

Giving the railroads the freedom to run their business as they saw fit led to dramatic improvements. The first result was a sharp rise in traffic and productivity and fall in freight costs. Since 1981 productivity has risen by 172%, after years of stagnation. Adjusted for inflation, rates are down by 55% since 1981 (see chart 1). Rail’s share of the freight market, measured in ton-miles, has risen steadily to 43%—about the highest in any rich country.

Something to keep in mind next time you hear a politician ranting and raving about deregulation.