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In Air or on Rails, Taxpayers Deserve Smarter Regulation

by Pete Sepp / /


President Trump’s first address to a joint session of Congress provided only a few new details about where he might take fiscal policy in the coming year. According to an analysis from National Taxpayers Union Foundation, the President outlined specific proposals whose net impact would increase federal spending by a net of $894 million – a minor amount compared to his predecessors. Taxpayers wondering how much they might have to shell out for President Trump’s promise of a “$1 trillion investment in the infrastructure of the United States – financed through both public and private capital,” learned a bit more from the release today of the Administration's general outline for what was largely the discretionary portion of the federal budget. The White House proposes to reduce, by 13 percent, the Department of Transportation's discretionary budget, where many (but certainly not all) infrastructure programs reside. 

Other clues have indicated that not all of the President's trillion-dollar infrastructure plan will come from government spending. The top priority in the DOT section of today's budget blueprint calls for a "multiyear reauthorization proposal" that would transform the nation’s air traffic control system into a better-managed, user-funded nongovernmental entity. President Trump’s meeting with airline executives last month yielded some encouraging words for taxpayers as well.

NTU has long supported splitting the business of air traffic control from the bureaucracy, thereby allowing the Federal Aviation Administration to concentrate solely on the issue of passenger and aircraft safety. In so doing, the traveling public would see relief from one of the worst federal tax burdens (often exceeding 20 percent) on any activity in our economy.

And while Trump’s comments that current aviation policy is“out of whack,” “obsolete,” and “a disaster” seem a little more like hyperbole than hard-headed analysis, they do underlie the importance of constant vigilance on the part of limited government advocates. After all, some 40 years ago freight and passenger airline fare structures were allowed to greater reflect market-based pricing, touching off a revolution of affordable air travel. By 1985, in one of the few examples of a bureaucracy ending its intrusive role, the Civil Aeronautics Board had been phased out and its few important regulatory functions spun off to other agencies. Yet, the job of allowing the private sector to more fully modernize and streamline travel in the skies rarely touched the air traffic control apparatus – leaving the U.S. far behind most other industrialized nations.

Such examples of incomplete policy work extend across our infrastructure, as recent hearings in the House and Senate demonstrated. Railroads offer an important illustration of how free-market solutions can restore a vital part of our transportation network – and, a cautionary tale against complacency.

The Staggers Act of 1980, which among other steps provided greater latitude for railroads and their customers to negotiate freight-hauling rates, was along with airline and trucking regulatory reform a sweeping effort to remove government’s stranglehold on infrastructure innovation. Following the Staggers Act in 1981 was legislation to provide for the sale of Conrail, a Northeast regional railroad that ran largely on tax dollars. It took until 1986 to arrange for Conrail’s transfer to private ownership, leading NTU’s then-Chairman Jim Davidson to comment at the time, “not only is the government singularly unsuited to running a railroad, but privatization of [entities] the government has no business in – like Conrail – is a very sensible way to reduce the budget deficit.” By the time Conrail’s federal apron strings were cut, taxpayers had shelled out $7 billion.

Yet despite a few fits and starts, freight rail’s post-federal comeback has been widely acknowledged as one of the exemplary economic transitions from government control in the modern era. According to a Federal Railroad Administration overview from 2011:

Return on investment has averaged nearly 8 percent between 1990 and 2009, up from a 2 percent average in the 1970s. And with the industry’s improved financial condition, railroads have invested over $6 billion a year in roadway, structures, and equipment since the mid-1990s. Between 1981 and 2009, the railroads have expended $511 billion in capital improvements and maintenance of track and equipment. Prior to 1980, the rail plant was in poor repair. The industry also showed remarkable safety improvements since Staggers with train accident rates declining by 65 percent (1981—2009).

The ability of private actors rather than public agencies to set most service prices has been, and remains key to freight rail’s vitality. Interestingly, this appeared to be a consensus view among many advocates for railroads and shippers until recently. A 2011 Cato Institute retrospective, authored by a team of analysts representing both “sides” of the rail-shipper issue, concluded that:

Our guardedly optimistic forecast for the railroads under the provisions of the Staggers Act turned out to be quite an understatement. … Most shippers and railroads have shared in the benefits from improved performance. Consequently, until rail rates began rising in the last few years, there has not been much political pressure for policy change. … This is not to say that there have not been contentious rate cases, controversial merger approvals, and attempts at legislating rail “reform.” … If the proposed reform legislation would pass, we believe that some of the enacted provisions would work against the railroad industry’s economies of density such that shipper benefits would be less than what shippers expect, and one shipper’s gain would be accomplished largely at a cost to other shippers.

Besides railroads themselves and their customers, other carriers have benefitted from market-based reforms. As Dr. Brian Slack wrote in the 2017 edition of “The Geography of Transport Systems”:

With the release of regulatory control over rates, the railroads could begin charging market rates, and because they were allowed to enter into confidential contracts they had greater flexibility in negotiating with large volume shippers. This introduced more competition between the modes and led to lower rates overall. … [T]he restrictions on intermodal ownership and operation has led to a revitalization of the general freight business with alliances with trucking companies to carry their long distance cargo.

Railroads have, as a result of a prudent andmoderate regulatory touch, been able to invest even more into systemic improvements since the 2011 FRA study … without constant infusions of government cash. By the industry’s estimate the total investment had exceeded $630 billion by last year. NTU alum and investigative reporter Drew Johnson concurred with this assessment in an article last year, noting that “the industry – not taxpayers – foots the bill to maintain the nation’s 140,000 miles of rails that carry freight trains. …[W]hen government is in the cockpit manipulating the levers of supply and demand, bad things happen. And when people are free to make their own choices, innovation, market stability, and improved efficiency and productivity soon follow.”

But even as NTU and its allies continue to press forward on long overdue changes to numerous areas of infrastructure, taxpayer advocates can’t neglect to maintain the sound foundation upon which freight rail has been rebuilt. Recently the U.S. Surface Transportation Board (STB) proposed several regulations that couldreverse the progress of the past four decades, even as the industry continues to voluntarily upgrade both safety and capacity. These include instituting rate caps on shipping, re-designating various commodities carried by rail as non-competitive, and under certain circumstances requiring (at the government’s behest) anincumbent railroad to serve a rival’s customers on its own facilities with the non-incumbent railroad paying compensation. The latter is an expansion of reciprocal switching, a practice that generally occurs through private market negotiations. Under new federal proposals shippers would no longer be required to prove anticompetitive behavior, but instead could petition the STB for switching to prove their request was either “practicable and in the public interest” or “necessary to provide competitive rail service.” Under this relaxed burden of proof, it is likelier that more such petitions would be filed – and some would be granted. Regulators would effectively arrange the access even in some cases where the market does not appear to be actually malfunctioning.

Advocates of these proposals would argue that rail mergers and other business activities have reduced competition and will, unchecked, lead to inflated shipping prices that pad the bottom line of freight railroads. Evaluating the validity of claims that railroads are artificially receiving an earnings windfall is admittedly a complex matter. Yet, the burden of proof for increasing federal oversight on rail-shipper business transactions should, like any other area of the economy, be on those proposing the oversight. A 2015 study by analysts from Georgetown University and the University of Florida helps to demonstrate that re-jiggering the current regulatory arrangement (where, incidentally, roughly 20 percent of all freight routes remain under government price controls) is not without risk. They warned:

We found that earnings regulation in either a comprehensive or focused form introduces distortions that limit economic efficiency. In principle, price regulation could conceivably eliminate these distortions. However, even under what is nominally introduced as price regulation, regulated prices typically are linked to realized earnings in practice, and the associated distortions arise. ...

In closing, we note that any potential gains an additional layer of regulation might engender in the rail industry should be weighed carefully against the associated costs. The relatively light-touch approach to regulation in the post-Staggers era produced substantial gains in the rail industry. These gains suggest it may well be difficult, if not impossible, todesign expanded regulation that will deliver benefits in excess of the corresponding costs.

Unfortunately, these cautions have not stopped federal officials from attempting such designs. Government regulations must of course adapt to evolving economic circumstances and the relationships between providers and customers in freight rail or any other activity. Yet, it is equally vital to proceed with care in cataloging and evaluating calls for altering those relationships. A new spate of rulemaking or Congressional intervention could create unforeseen headaches for railroads and shippers alike.

The House and Senate hearings on infrastructure provided many sectors with the opportunity to identify key concerns as well as opportunities in the new political environment to expand market-based policymaking. A standout here was a regulatory framework articulated by the freight rail industry that ought to apply to all rulemakings – whether from the FAA, EPA, IRS, or any of the agencies in the federal “alphabet soup.” Elements include:

  • New rules must respond to a carefully defined need that is grounded in hard evidence of harms rather than ill-defined “risks.” A recent NTU paper on the Federal Trade Commission examined this problem in-depth.
  • Cost-benefit analysis, including the interaction with other existing or proposed regulations, should be a prerequisite to any rulemaking. Benefits must ultimately outweigh costs. The federal government has routinely underestimated such costs, as NTU’s analysis of the Treasury’s Section 385 rule on inversions elucidated.
  • Transparency and opportunities for public comment must be augmented and encouraged. (NTU understands this problem from experience; public discussions for contentious rules are all too rare, such as with December’s IRS hearing on potentially destructive death tax valuation rules).
  • Articulating an end result, rather than the methods to achieve that result, can encourage innovative private-sector responses to problems identified by the public sector.
  • By limiting vague “guidance” and employing pilot programs and waivers from standard regulatory mandates, the expertise of affected industries can be harnessed toward finding regulatory solutions that are more effective, efficient, and timely.

NTU will continue to stress these and other pro-taxpayer tenets as public officials attempt to update our infrastructure policy. There is a great deal of work to do in all areas besides those outlined here, such as fostering competition in procurement for water and sewer construction, increasing private sector cost discipline for government facilities, safely expanding truck capacity on the nation’s highways, and removing roadblocks to future telecommunications advances.

If the legislative, executive, and judicial branches were to embrace the philosophy embodied in principles such as those above, our health, wealth, and safety could all be enhanced. Our infrastructure could likewise be made more productive by orders of magnitude without embarking on a trillion-dollar government spending spree. Here’s hoping that Washington will not only listen, but act upon, this sensible guidance. Airlines aren’t the only service providers who can fly faster, farther, and less expensively by doing so. Rails, roads, pipes, waterways, fibers, and airwaves can soar to a brighter future too.