How deregulation saved the freight rail industry

On an otherwise uneventful Sunday in June, leaders in Washington, D.C. began to panic. The sixth-largest company in the nation had slipped into bankruptcy. Its collapse threatened the stability of an entire industry and the health of the nation’s economy.

Looking back to the financial crisis of 2008, such a scenario sounds eerily familiar. Yet the events described above refer to another crisis almost 50 years prior: the bankruptcy of Penn Central railroad.

Penn Central’s declaration of bankruptcy on June 21, 1970 was the largest in the nation’s history. For government officials, it was also a wake-up call about the dangers of unchecked government regulation. As the government scrambled to keep trains running, lawmakers began to realize the harm that a century of crippling regulations had caused.

The origins of railroad regulation
Railroad regulation began in the late 19th century, when the rail industry faced virtually no competition from other modes of transportation. Over time, the regulations became far-reaching and greatly limited the ability of railroads to determine services, set prices and even build new rail lines.

As technology improved, competition increased and the economic landscape changed, the regulations became overly stringent and outdated. Railroads and shippers alike began to feel the pain.

A downward spiral
By the mid-20th century, the construction of the interstate highway system and heavy subsidization of trucks and barges led to increased competition for railroads. In a balanced regulatory environment, railroads would have had freedom to respond to this changing landscape, but strict government oversight prevented commonsense changes to pricing and services.

In one telling example, the construction of new and bigger hoppers (rail cars designed to carry grain) provided Southern Railway with the opportunity to lower shipping rates. Yet for five years, federal regulators prevented the company from doing just that.

As a result of this inflexible system, railroads continued to lose market share. Because railroads could not easily adjust the price or nature of their services, they were forced to forego or delay investments, knowing that such an approach would prove disastrous in the long run.

Maintenance and infrastructure suffered, too, under this draconian regulatory environment. Railroads were often forced to defer maintenance and extend the life of equipment and infrastructure until it simply fell apart. The consequences of this approach became glaringly obvious by the 1970s when, during a single month, one railroad experienced 649 derailments. In some cases, stationary freight cars simply fell off worn-out tracks.

As America’s freight rail network crumbled, Washington finally decided to act.

An unsung story of success
“America has the greatest economic system in the world. Let’s reduce government interference and give it a chance to work.” President Jimmy Carter used this line during his 1979 State of the Union address to demand that Congress deregulate the freight rail industry.

Through a series of legislative changes culminating in the passage of the Staggers Rail Act of 1980, Congress did just that.

In the 35 years since, freight railroads have roared back to life. Free from artificial controls, railroads are once again profitable and investing billions of dollars each year into growing and modernizing America’s privately owned rail network. At the same time, shippers have seen a dramatic decrease in rates. Between 1981 and 2013, average rail rates fell 43 percent, adjusted for inflation.

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Today, railroads haul approximately one-third of all U.S. exports, employ about 185,000 workers and sustain millions of jobs in industries that are more competitive in today’s global economy thanks to the efficiency of freight railroads. Together, railroads now account for approximately 40 percent of intercity freight and operate the most efficient and reliable freight rail system in the world.

By any measure, the regulatory reforms passed in 1980 have benefited railroads, shippers and the greater economy.

History lessons like these are useful, especially if they keep us from repeating the painful mistakes of our past.

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