Imposing regulations on railroad industry will harm small business

March 7 is Railroad Day on Capitol Hill. Entrepreneurs, executives and workers from across railway industries will communicate to members of Congress how important railroads are to the U.S. economy. Make no mistake, the story of America’s freight railroads also is a small business story. The U.S. economy is an entrepreneurial, small business economy, with smaller firms being the majority in most industries. That’s no different in the sectors directly and indirectly impacted by freight railroads.

In terms of industry background, after decades of decline, the U.S. railroad industry was revitalized by a major federal policy change nearly 40 years ago, when Congress passed and President Jimmy Carter signed into law the Staggers Rail Act of 1980. That law partially deregulated railroads in terms of setting prices for services and setting rail rates, making decisions regarding what routes to use, and establishing shipper contracts, that is, allowing freight railroads to make decisions based on market conditions.

{mosads}The benefits from this major deregulatory measure are recognized across the board in terms of vast improvements in industry efficiency and productivity, capital investment, maintenance and safety, market share, profitability, and reduced costs and enhanced service for customers.

Today, freight railroads, with 140,000 rail miles operated by seven Class I railroads and more than 500 regional and local railroads, stand out as an essential bloodline for the U.S. economy. For example, according to a Towson University study, in terms of total impact, Class I railroad operations and capital investment supported approximately 1.5 million jobs, $273.6 billion in output and $88.4 billion in wages in the United States. And these estimates do not include the entire freight railroad industry.

The Association of American Railroads has also noted that freight railroads spent more than $635 billion “on capital expenditures and maintenance expenses related to locomotives, freight cars, tracks, bridges, tunnels and other infrastructure and equipment” from 1980 to 2016.

In terms of this being a small business story, a wide variety of the industries directly and indirectly affected by U.S. railroads are about small firms, that is, smaller enterprises in the railroad business, and as both customers and suppliers. In terms of direct impact, sectors include the railroad rolling stock manufacturing industry, which makes or rebuilds locomotives, railroad cars and equipment, and other railway equipment, as well as the support activities for rail transportation industry, which features a wide array of transportation, cargo switching, maintenance and repair, safety, goods handling, renting and resale services.

In a new report that I authored for the Small Business & Entrepreneurship Council, we looked at 13 major industries directly and indirectly impacted by railroads. It turns out that in all but one of these industries, the majority of employer firms are small businesses with fewer than 20 employees, ranging from 51 percent of firms in the warehousing and storage sector to 93 percent in the agricultural sector. In all 13 sectors, firms with fewer than 100 employees make up at least 69 percent of employer firms, all the way to 99 percent in construction.

Specifically, in the support activities for rail transportation sector, 63 percent of firms have fewer than 20 workers and 81 percent fewer than 100 workers, and in the railroad rolling stock manufacturing industry, 43 percent have fewer than 50 workers and more than 69 percent fewer than 100 workers.

For good measure, many short line railroads are small businesses. According to American Short Line and Railroad Association, “Operating 47,500 route miles, or 29 percent of freight rail in the U.S., these small business railroad entities play a vital role in the hub-and-spoke transportation network, providing the connection between farmers, manufacturers and other industries, and ultimately, the consumer.” Short line railroads, like their larger peers, are also capital intensive, investing a quarter of revenue in capital and maintenance.

As the American economy grows, U.S. freight shipments are expected to grow by more than 40 percent from 2015 and 2040. So, it’s important that the best policy environment be established to incentivize the entrepreneurship, investment and innovation.

Therefore, any relapses into a regime of over-regulation — such as that prevailing before partial economic deregulation — would bode ill for railroads in terms of their ability and incentive for investment, for rail maintenance and safety, and for their ability to compete in the freight transportation marketplace with, for example, trucking. Over-regulation would generate assorted negatives, such as higher costs and reduced service for the small businesses in the broader railroad sector, in sectors serving railroads, in the many sectors served by railroads, and for consumers in general.

Unfortunately, certain interests have long been pushing the Surface Transportation Board to, in effect, reimpose price controls on the railroad industry and inflict “forced access” whereby railroads would be forced to open up their rail lines to competitors. If imposed, such measures would undermine profitability, investment and service. Specifically, such government controls would hinder the ability and incentive to invest in rail capacity, maintenance and innovation, generate additional costs, and strike blows against reliability, speed, efficiency and safety.

Clearly, policymakers need to stay focused on the fact that a healthy freight railroad industry, disciplined and encouraged to invest thanks to competition and deregulation, has been beneficial to countless small businesses throughout the economy.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council, whose members include firms in the railroad industry. He is the author of a new report “All Aboard! Entrepreneurs and Small Businesses Power Freight Railroads.”