For much of the 20th century, crippling regulations prevented the American freight rail industry from operating at anything more than substantial losses. By 1980, the entire industry was on the brink of bankruptcy, and consumers were forced to absorb higher prices. But since then, regulatory reform has paved the way for a booming rail industry, which has produced major benefits for California consumers and the state’s economy.
The regulation of freight rail dates back to the creation of the Interstate Commerce Commission in 1887, implemented to ensure that fair rail rates were in place. Over the following decades, however, regulations increased dramatically, eventually turning into a web of dated, convoluted rules which severely limited railroads’ ability to compete with other modes of transportation.
One study found freight rail’s return on investment between 1962-1978 to be a paltry 2.42 percent, far below that of similarly regulated industries. As a result, by the late 1970s, the American freight rail industry was nearing collapse.
After debating whether to initiate a federal bailout or nationalize the industry, policymakers in Washington, D.C., decided to proceed down a deregulatory path. In 1980, Congress passed the Staggers Act, which loosened the regulatory burden on railroads in an attempt to boost economic production.
The effects of deregulation were felt almost immediately. As noted in a recent analysis by the American Consumer Institute, rail productivity increased three-fold while costs fell dramatically: 4 percent in the first two years, 20 percent in the first five years, and 44 percent in the first decade following partial deregulation. In turn, the prices of economic goods dropped 65 percent for shippers, savings passed onto consumers in the form of $10 billion in annual economic benefits.
The benefits of freight rail’s revolution are perhaps felt nowhere better than California. More than 150 million tons of cargo are moved through the state each year by the 25 railroads operating in the state, which employ more than 9,000 rail workers. Moving goods by rail also has environmental benefits; the recent Colton Crossing project in San Bernardino, for example, has been estimated to reduce greenhouse gases by 31,000 tons annually.
And with the Los Angeles freight rail system anchoring the movement of goods on the West Coast, the ports of Los Angeles and Long Beach have grown into America’s largest port complex, moving $287 million worth of freight annually and serving as a bedrock of international trade.
In spite of these widespread benefits, the Surface Transportation Board, the federal agency overseeing railroads, has offered a multitude of new regulations concerning the use of rail facilities and assets, including those which could force railroads to grant their lines to competitors at below-market rates. These directives would harm competition and discourage investment, leading to inefficiencies, delays and higher costs ultimately, once again, absorbed by consumers.
In the four decades since the Staggers Act was signed into law, the benefits of a smart regulatory environment have been made abundantly clear: these reforms have emboldened a better rail business model, supported the environment, created jobs and lowered costs for consumers. As policymakers consider new rail regulations, they must remember the era before 1980 to avoid making the same mistakes again and spare California’s economy and consumers from unnecessary harm.
Steve Pociask is president of the American Consumer Institute Center for Citizen Research, a nonprofit educational and research organization.