November 25, 2020

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Summarizing The Success Of 40 Years Of Deregulation In Air And Freight Transportation

In 1980 Democrats held the presidency and both houses of Congress. The 96th Congress marked a generation in which both the Senate and House had stayed blue. However, the economy overall had suffered the drawbacks of some 90 years of misguided industrial regulation and central planning from both parties. Moreover, Americans suffered from stagflation (prolonged stagnation and inflation), gasoline shortages brought on by a fickle foreign oil supply, limited options for transportation, and limited consumer goods, which were expensive to ship.  A growing bipartisan, academic and policy consensus documented that regulatory control entrenched the power of incumbent firms, incentivized collusive relationships between regulators and companies, created barriers to entry in the market, and precluded the competition that would incentivize innovation and choice. Congress and the Carter Administration rightly focused on democratizing the benefits of freight rail and air transport networks to help address some of these challenges. The signing of the Staggers Rail Act in 1980 laid important groundwork for the greening of the transportation industry today.

Making Freight Rail Work for Americans, not Bureaucrats

American folklore alludes to the 19th century railroads as justification for regulatory agencies, but the creation of Interstate Commerce Commission (ICC) in 1887 was partially a product of rent seeking, reflecting the political prioritization of powerful agricultural interests over transport providers, not consumers. Shippers of the time desired political power to ensure preferred rates rather than a competitive bidding process. The subsequent decades saw the decay of America’s railroads, so much so that they were unfit to deliver some supplies to ports during World War II. Many went out of business as the government subsidized highway travel and trucking. It reached a crisis point by the 1970 bankruptcy of the Penn Central railroad, threatening to bring Goldman Sachs down with it. 

After long last, the Staggers Act of 1980, named for Harley Staggers (D-WV), who chaired the House Committee on Energy and Commerce, enabled freight railroads to offer prices based upon real world supply and demand, instead of the bureaucrat’s decree. Shippers themselves came to realize that they could negotiate better deals for themselves instead of the collective rate proposed by the ICC. The Act also significantly downsized the ICC, which at the time had 11 commissioners and more than 2000 employees. It was later retired and replaced with a small agency known as the Surface Transportation Board.

The resulting 40 years have been a total transformation for the freight rail industry. Their traffic has doubled. Shipping rates are down 40% adjusted for inflation. Their safety record is the best yet. With a few exceptions, the 600 freight railroads in the US today are fully private.  The seven Class 1 freight railroads have invested $680 billion in improved infrastructure since 1980. Without government requirements, they have “greened up” by acquiring fuel efficient locomotives, new car design which improves load, distributed power (positioning locomotives in the middle of trains) to reduce the total horsepower required for train movements, and advanced software and computers for smart routing, speed, and timing stop-start systems to save engine fuel.

As I describe in US Networks Behavior Under Crisis: Reflections on Telecommunications, Transportation and Energy Regulation during COVID-19, shipping by freight rail instead of traditional trucking reduces greenhouse gas emissions by as much as 75 percent. For example, a train can move a ton of freight at an average of 472 miles per gallon of fuel and save several hundred trucks on the road, leaving road space for motorists, reducing road repair costs, and saving billions of dollars in auto fuel (3.3 billion gallons) and hours of motorists’ time (8.8 billion hours wotth $166 billion). Freight railroads account for just 0.6% of total U.S. greenhouse gas emissions, according to data from the Environmental Protection Agency, and just 2.1% of transportation-related greenhouse gas emissions. A truck may have to be switched out every 3 years whereas a rail car can last almost 30 years before replacement.

Democratization of Air Travel

Prior to 1980, few traveled by air as it was expensive, had limited destinations, and only a handful of aircraft. This was the result of the regulatory boot imposed by the Civil Aeronautics Board (CAB) established in 1938 which enshrined a commercial airline oligopoly that lasted for half a century. It selected the routes, set the prices, and prevented competition by controlling market entry. 

The Airline Deregulation Act of 1978 dismantled this regime. Alfred Kahn, a Democrat and regulatory economist, was appointed Chair of the CAB and oversaw its decommissioning. These efforts are associated with a 45 percent decline in consumer airline ticket prices from 1978-2008, a major increase in productivity, the emergence of low-cost carriers, and increased safety both from improved aeronautics and reduced driving.

Today’s most Democrats don’t take credit for this success, content to let the GOP to brand themselves as the deregulatory party. The fact remains that investment in transportation has continued under both Republican and Democrat administrations thanks to wise decisions in 1980. Transportation deregulation has been an unambiguous success and continues to deliver social goals such as greening infrastructure and maintaining quality performance under pandemic conditions.

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