Rail regulators should continue 40 years of success, not return to failed policies

Over the last four decades, the railroad industry’s productivity has increased 159 percent and real prices of ship goods have plummeted 44 percent. Why? In large part thanks to reforms passed by a then Democratic-dominated House and Senate, and then signed into law by President Carter in 1980. Now, the Biden administration seeks reverse these successes. A new report by the American Consumer Institute shows how consumers stand to lose billions in annual economic benefits.

Consider how we got here. For most of the 20th century, America’s freight railroads were tightly controlled by the federal government. Bureaucrats dictated which routes could be discontinued or expanded, how private investments could be spent, and what shipping prices could be charged. The results were disastrous. By the 1970s, railroad operators were rapidly going out of business, inflicting harm on businesses that couldn’t move their goods and consumers who faced rising prices.

Finally, in 1980, Congress passed the Staggers Rail Act, greatly reducing federal regulatory control over virtually every aspect of freight rail operations and unleashing a period of unprecedented economic gains. Economists estimate that American consumers enjoy at least $10 billion in annual benefits because of these reforms, and perhaps close to $20 billion.

Now the Biden administration is pushing to roll back this progress and re-institute some of the same regulations that brought the railroad industry to the brink of collapse forty years ago.

In an executive order signed in July, President Biden urged the Surface Transportation Board (STB) — the agency responsible for overseeing economic regulation of railroads — to “strengthen regulations pertaining to reciprocal switching agreements.” 

Under mandatory reciprocal switching, a railroad with physical access to a specific shipping facility is forced to accept rail traffic to the facility for another railroad that lacks physical access. These regulations could lead to reduced rail traffic for the carrier, traffic congestion, gross inefficiencies, and underutilized infrastructure investments. The outcome would be higher shipping costs that undermine rail’s competitiveness against other modes of transportation, especially trucking.

To be clear, no one argues that reciprocal switching is never appropriate. In rare cases, railroads may abuse their market position to impose inflated prices on “captive shippers” that have no feasible alternatives. But the STB has had the authority to impose reciprocal switching to resolve this sort of market failure since 1985. In all the years since, regulators have not found a single incident of anticompetitive actions by railroads that justified mandatory reciprocal switching.

Yet the Biden administration is indicating that it wants to expand the practice, potentially resurrecting a 2016 order by the STB — which never took effect — that grants wide discretion to regulators to impose mandatory reciprocal switching even in the absence of concrete evidence of harm.

The case for reregulating freight railroads doesn’t stand up to scrutiny. Freight rail operators face intense intermodal competition from trucks and water transport. As a result, over the last twelve-five years, railroad prices have increased less than any other major mode of freight transportation, apart from trucking (which takes advantage on publicly-financed roads, while railroads invest about $19 billion annually to maintain their own infrastructure).

An in-depth independent report commissioned by the STB in 2008 concluded that railroad operators’ earnings “do not appear to be excessive from a financial market perspective” and warned against exactly the type of regulation that the Biden administration is pursuing: “Current market circumstances imply that providing significant rate relief to certain groups of shippers will likely result in rate increases for other shippers or threaten railroad financial viability.”

Some special interest groups stand to massively benefit from an expansion of reciprocal switching and have aggressively lobbied policymakers to secure favorable policies. Yet there’s no evidence that these shippers need financial relief — in fact, a recent analysis found these companies to be much more profitable than large rail operators.

History shows that ending onerous rail regulations was an indisputable success, proving

that railroads could thrive, and deliver sizable economic benefits to shippers and consumers, when allowed to operate in a competitive environment. Nothing about the current railroad industry challenges that conclusion.

As the U.S. supply chain faces unprecedented challenges and consumers see marked price increases for the goods and services they buy, the mistakes of the past have never been so clear. Now, the STB shouldn’t repeat them.

Steve Pociask is president and CEO of the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us @ConsumerPal.