Regulating Rail Prices Would Be A Recipe For Disaster

Ike Brannon Contributor for

There are numerous ways to transport goods across the United States. When a good leaves the manufacturer it could go in a plane, a truck, a boat, or a train. 

The government maintains and finances the infrastructure used for the first three modes (albeit insufficiently), but railroads finance their own infrastructure needs themselves, with little government help. 

However, their ability to do so may soon be curtailed by the federal government: a recent proposal put forth by the Surface Transportation Board (STB) would allow the government to cap the profits earned by railroads at a “reasonable” level. In essence, this would constitute the return of some version of railroad price controls akin to what was in place prior to deregulation in the late 1970s. 

For those who don’t recall those halcyon years, price controls were an unmitigated disaster for railroads and the country. Price controls deterred railroads from making significant capital investments, because their ability to make sure these investments would pay off was largely out of their control. The same thing would happen today if we were to reinstate them in some form—even if we describe them as being “reasonable” ones. 

The methodology the government would use to measure the financial performance of the railroads is actually a separate, but obviously related, debate before the Surface Transportation Board. Several railroads filed a petition asking for the STB to use a methodology that would incorporate the present value of deferred taxes and compare railroad revenue adequacy determinations to other companies in the S&P 500 for their financial performance gauge. 

If the government feels compelled to impose some sort of regulation on railroad shipping prices it should at the very least strive to get the measure of prices and costs correct. 

Given the different filings and economic arguments being offered, it is clear that railroad pricing can be fiendishly complex and it depends on a lot of different factors, but one overarching rule is to never let a rail car move anywhere without having anything in it, which is easier said than done. For instance, there is always robust demand for rail cars to ship goods that arrive by boat into California ports and are destined for the midwest, but fewer goods need to be shipped from Chicago to Los Angeles. 

As a result, it generally costs more to ship to Chicago from Los Angeles than from Chicago to Los Angeles.

Railroads also cognizant of competition. For instance, in places where it is easy to put things on a barge, railroads have little pricing power and have to meet their competitors’ prices, but where they have little competition—such as with commodities like lumber and coal, as well as other commodities that can be costly to ship—they charge more. These producers are—unsurprisingly—the driving force behind the reregulation efforts.

But capping prices so that railroads earn only “reasonable” profits will render these pricing calculations moot, since the government will oversee many of them. And when a vague notion of “reasonableness” governs those decisions, it’s elementary that less money will go into rail.

Should that happen it will also mean that railroads will reduce their investments in infrastructure, and the carrying capacity of our railroads will come to grow more slowly. 

In turn, that would result in less goods being shipped by rail, and more by truck or plane, at a time when our public infrastructure investments are lagging. Putting more freight on our roads will necessitate even more government infrastructure investment to accommodate the additional traffic or—failing that—we will have to live with more congestion on our roads, as more goods will travel by truck. The increased congestion will add to carbon emissions and also make our roads slightly less safe as well.

Such an outcome would also make our economy less productive: in a study I wrote with Mike Gorman, a professor at the University of Dayton, we estimated that the congestion on our nation’s roads and highways in the years after the Great Recession reduced GDP by a total of $500 billion and reduced employment by 350,000 because unpredictable delays reduced productivity. 

Building and maintaining a railroad requires enormous capital expenditures to maintain and improve. Last year railroads invested over $25 billion in plant and equipment: to put that in perspective, that’s roughly the same amount of money the federal government collects in gasoline taxes to fund our roads. 

Merely maintaining a railroad is costly: railroad ties have to be regularly replaced, rails have to be constantly checked to ensure they are safe, and weather emergencies such as hurricanes or massive snow melts are doing an increasing amount of damage via erosion.

Most U.S. railroads have also been investing to increase capacity to allow them to transport more goods along their tracks. Railroads are willing to make these investments as long as they can be reasonably sure that they will get a return on that investment.   

If the federal government returns to a pre-1980s era regulatory model where it implicitly sets prices by capping profits for railroads, railroads will naturally respond by reducing their investment, given the uncertainty engendered. 

Treating railroads as if they were unfettered monopolists makes little sense these days. There are few if any places where railroads are the only option for companies transporting goods long distances. And in an economy where prices are stagnant it’s ludicrous to point to railroads as a source of higher prices. 

Our government has underfunded our nation’s roads, bridges, and airports for years, and now it is contemplating imposing price controls on privately owned and operated railroads that would serve to reduce investment in private infrastructure as well. Such an endeavor represents the ultimate example of a solution in search of a problem.

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December 2023