Forty Years After Surface Freight Deregulation

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The regulatory reforms of the railroad and trucking industries are models for evidence-based, bipartisan policymaking.

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COVID-19 and chaos will dominate 2020’s legacy.

But for regulatory scholars, 2020 also offered some milestones worth celebrating. This year marked the 40th anniversary of two landmark pieces of bipartisan legislation deregulating surface freight services: the Staggers Rail Act and the Motor Carrier Act. Both laws were motivated by evidence-based empirical analysis and both delivered significant consumer benefits.

President Jimmy Carter signed the Motor Carrier Act in 1980. The legislation removed federal entry controls in interstate trucking and made it easier for carriers to reduce rates. President Carter’s signing statement predicted gains for consumers, shippers, and the trucking industry.

President Carter also signed the Staggers Rail Act in 1980. The Staggers Act deregulated rail rates for some traffic, allowed the Interstate Commerce Commission (ICC) to deregulate rates for other traffic, permitted railroads and shippers to negotiate unregulated contract rates, and established criteria for regulating rates if a shipper has no cost-effective alternative to a single railroad. The legislation also made it easier for railroads to discontinue offering service on unprofitable routes, and it ended the practice of “open routing,” which allowed shippers to force a railroad to carry freight between virtually any two points on its system.

The regulators themselves were a positive force for change.

Presidents Richard Nixon, Gerald Ford, and Carter appointed ICC commissioners who favored competition and deregulation. For example, ICC chairmen Daniel O’Neal and Darius Gaskins both sought to reform regulation using the ICC’s existing legal authority, and they both supported deregulatory legislation.

Leading up to 1980, economic research had demonstrated that regulation created noticeable cost and price increases. Policy advocates and policymakers took note.

Pre-deregulation rail studies identified two sources of inefficiency: misallocation of resources associated with rate regulation (deadweight loss), and inflated costs created by route regulation and other restrictions on lower-cost technologies and business methods.

These inefficiencies corresponded to the economic distinction between allocative efficiency—created when prices more closely reflect costs—and productive efficiency—created when firms develop new products, new services, new sources of supply, or new methods of organizing production.

The effects of regulation on productive efficiency far exceeded its effects on allocative efficiency. Most empirical studies estimated annual deadweight losses somewhere between $175 million and $900 million in the 1970s. Studies also estimated that regulation inflated railroad costs by up to $6.7 billion annually. This figure came from an empirical assessment of the effects of regulation on U.S. railroads’ productivity—the broadest measure of technical progress. The researchers concluded that “losses from foregone productivity growth are much larger than losses from the misallocation of freight traffic.”

Regulation also frustrated railroads’ efforts to cut costs and attract new business.

In 1960, for example, the Southern Railway introduced its “Big John” covered hopper car for grain. Since these cars were larger and more efficient, Southern sought to cut its grain shipment rates by more than half. The ICC resisted these rate reductions, and Southern had to litigate its case up to the U.S. Supreme Court. Similarly, regulation frustrated railroads’ efforts to offer rate reductions for multi-car shipments or introduce unit trains of hopper cars that hauled coal.

Economic deregulation of railroads was motivated largely by the industry’s financial crisis and congressional unwillingness to commit to perpetual subsidies for freight rail service.

By the late 1970s, railroads’ return on equity averaged 2.5 percent, and railroads in bankruptcy ran 21 percent of U.S. trackage. The 1970 Penn Central Railroad bankruptcy was the largest corporate bankruptcy at that time. Penn Central was merged with five other northeastern carriers to create Conrail, which received more than $7 billion in federal subsidies before it was privatized through a public stock offering in the late 1980s.

In contrast, the interstate trucking industry was reasonably stable and profitable in the 1970s.

Federal regulation primarily affected for-hire interstate trucking companies that carried goods for others. Some shippers used their own trucking divisions instead. Such “private carriage” allowed shippers to avoid the inflated costs of for-hire carriers, but private carriage often involved wasteful empty backhauls because private carriers could not carry goods for others.

A key indicator that the for-hire trucking industry earned above-competitive profits was the fact that truckers’ operating certificates—which conveyed the ICC’s permission to operate—had a positive value. Thomas Gale Moore estimated that in the mid-1970s, interstate operating certificates were worth approximately 15 percent of trucking companies’ annual revenues, or $2 billion to $3 billion.

The trucking cartel shared its rents with unionized labor. During the 1970s, employees of regulated intercity trucking firms received compensation between about 40 percent to 55 percent greater than employees or owner-operators at comparable unregulated trucking firms. Moore estimated that members of the labor union International Brotherhood of Teamsters received approximately $1 billion in additional income due to regulation in 1972. Overall, Moore’s estimates suggest that trucking regulation transferred close to $3.3 billion annually from shippers and consumers to trucking companies and their employees.

After 1980, the actual results of surface freight deregulation exceeded economists’ expectations.

Between 1981 and 1996, real rail revenue per ton-mile fell by nearly 50 percent. At least one-third of this rate reduction can be attributed to the Staggers Act. Deregulated rates saved shippers up to $7 billion annually in 1987.

Rates dropped because the Staggers Act gave railroads greater flexibility to cut costs and improve productivity. Between 1980 and 1996, total operating expenses of the largest, class I railroads fell by half. By the late 1990s, miles of class I trackage fell by almost 30 percent, and class I railroad employment fell by about 60 percent. New short line railroads formed to operate some of the trackage shed by the largest railroads.

Class I railroads remained highly unionized, and their workers’ wages did not change appreciably. Labor cost savings came largely from reducing the number of employees.

The quality and safety of rail service improved noticeably, as the Staggers Act allowed railroads to negotiate service reliability guarantees. By the mid-1980s, railroad delivery time fell approximately 30 percent along with the variance of delivery time. Shippers saved between $5 billion and $10 billion annually due to improved rail service, which substantially reduced the amount of money tied up in inventories.

Railroads’ improved financial prospects gave companies the incentive to invest in maintenance, which improved both reliability of service and safety. Patrick McLaughlin and I estimated that the Staggers Act was responsible for nearly 90 percent of the reduction in the rail accident rate between 1978 and 2013.

For railroads, the primary remaining policy challenge involves rate complaint procedures for shippers who lack good transportation alternatives to a single railroad.

This residual regulatory responsibility of the ICC and its successor, the Surface Transportation Board (STB), has been contentious, particularly for cases involving smaller shippers. For example, a National Academy of Sciences committee recommended that the STB benchmark a complaining shipper’s rates against rates charged for similar shipments in markets where transportation alternatives exist. The committee also suggested that the STB submit the rate to arbitration if it exceeds a designated percentile in the distribution of competitive rates. This change would require legislation. In 2019, the STB proposed to employ final-offer arbitration to set rates when it determines that the shipper has no good transportation alternatives and the rate is unreasonable.

These kinds of railroad-shipper disputes largely raise distributional questions, not ones of overall economic efficiency. Because railroads and shippers can negotiate contract rates, railroads have strong incentives to avoid pricing a shipper or shipment out of the market if offering service is profitable. As a result, the economic deadweight loss associated with above-competitive pricing to shippers who lack transportation alternatives is less than $100 million annually.

For trucking services, the 1980 Motor Carrier Act led to large reductions in trucking rates and improvements in service.

By 1985, deregulation saved shippers $7.8 billion annually due to lower common carrier rates, $6 billion due to lower private carrier costs, and $1.6 billion annually due to more rapid service. By 1998, real operating costs per vehicle-mile fell by 75 percent for truckload carriers and by 35 percent for less-than-truckload carriers.

Open market entry reduced economic rents given to workers. New entry increased trucking employment from about one million in 1978 to two million in 1996. Many of these new workers were nonunion—union membership declined by almost 25 percent. Over that same time, real weekly earnings in the industry fell by about 30 percent.

Open market entry more than doubled the percentage of for-hire truckers who were owner-operators rather than employees. In addition, deregulation increased the proportion of Black truck drivers in the most lucrative market segment: the interstate for-hire segment. After deregulation, the proportion of Black drivers at for-hire trucking companies and the proportion of Black union members at for-hire trucking companies both increased by more than 50 percent. Deregulation virtually eliminated the Black-white wage differential in the for-hire industry by reducing white workers’ wages, implying that white workers had received most of the rents created by regulation.

The Staggers Act and the Motor Carrier Act are widely regarded as bipartisan policy successes. Forty years later, no one has seriously proposed to reverse them.

At the time of these laws’ adoption, scholarly research had well documented the actual effects of regulation, which helped motivate an ideologically diverse political coalition to pursue reform.

The broader lesson for today is that perhaps a renewed commitment to evidence-based analysis could help bridge partisan divisions that impede lasting progress on some of today’s pressing policy problems.

Jerry Ellig

Jerry Ellig is a research professor with The George Washington University Regulatory Studies Center.