(The following column by Edward Lotterman appeared on the Idaho Statesman website on January 15.)
BOISE, Idaho — Dow Chemical, Idaho barley farmers and myriad electric utilities might not seem to have much in common, but all are “captive shippers.” All depend on rail transport for shipping key raw materials or products yet can get service from only one railroad. For them, monopoly power in a deregulated industry is a major headache.
Economic policies often follow pendulum swings. Societies perceive a problem and get government to take some action. But over time, the perceived solution does not work as well as anticipated. Or it introduces other harmful but unanticipated side effects. A political reaction sets in, the now-troublesome policy is reversed and the pendulum begins to swing the other way.
This is certainly true in the railroad industry. As railroading mushroomed after the Civil War, railroads had great monopoly power, and they abused it. Economic theory demonstrates that a monopoly will not only charge higher prices than would prevail under competition, but also will provide less of its good or service than is optimal for society.
Railroads abused the public. In response to outrage, the federal government established the Interstate Commerce Commission in 1887 to regulate railroad rates and service.
Over time, regulation grew more and more complex. The industry became sluggish. Innovation vanished. Returns on investment were low. Service often was poor.
The Carter administration introduced deregulation of transportation rates and routes. In 1980, the Staggers Act, named for Rep. Harley Staggers of West Virginia, abolished most federal economic regulation of railroads. The commerce commission eventually was transformed into a Surface Transportation Board.
Overall, the Staggers Act seems a success. Railroad service improved for many. Railroads invested in new locomotives and infrastructure. Management improved, as did returns on equity.
But for many shippers, railroads retained great monopoly power. That power grew as the industry consolidated into a handful of large railroads.
The Staggers Act recognized this danger. The Surface Transportation Board has authority to act when a shipper feels it suffers abusive freight rates, but some now wonder whether the board is using that authority properly. Many shippers feel the board is tilted far too heavily in favor of the railroads.
Railroad advocates retort that their industry also faces financial pressures. For years their cost of capital exceeded any real return they might get from new locomotives, switching yards or tracks.
To economists, it seems obvious that monopoly power is causing damage. They don’t agree, however, on a solution.
Many in Congress, including Sen. Larry Craig, R-Idaho, have supported thoughtful compromise measures in 2007 rail competition reforms bills. These are opposed by the Bush administration, in which railroad advocates have a major voice.
The public ultimately bears the cost of monopoly power. This is an issue that is not going to go away, but there is no clear solution on the horizon.
(Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at ed@edlotterman.com.)