Biden Executive Order on Markets Raises Big Concerns over Rail Competition

Less than two weeks ago President Biden, signed a sweeping executive order aimed at addressing corporate competition and fairness in the American economy. As NTU has noted in previous publications, the executive order could have wide reaching implications for consumers, businesses, and taxpayers in many different sections of the economy, like health care and technology. One provision of the order that has gotten less attention has been a potential openness towards more heavily regulating the American rail sector -- an endeavor that deserves very deep examination and caution.

Biden’s Executive Order puts American rail companies in the crosshairs of the federal regulators by pointing out that the number of Class I freight railroads has declined from thirty-three to seven over the past forty years. In an attempt to reverse this trend, President Biden will encourage the Surface Transportation Board (STB) to take up a longstanding proposed rule on so-called reciprocal or competitive switching, which requires an incumbent railroad to serve a rival’s customers on its own facilities with the non-incumbent railroad paying compensation. If regulators do indeed move forward with this proposal, it would mark a significant departure from the deregulatory framework enacted in 1980 that has created enormous benefits for shippers, carriers, and consumers. 

As NTU has long argued, a prerequisite to virtually any policymaking in the economic competition space is what former Federal Trade Commission (FTC) official Timothy J. Muris called “systematic projectable evidence.” As he noted in the case of FTC, one that is applicable to STB as well:

[A] proposal should not become a rule until systematic evidence has been collected to test its factual premises. Anecdotes, the Commission’s own expertise, and the testimony of experts rarely, if ever, provide the necessary confirmation. Such evidence may be consistent with the theory, but cannot test it. And an untested theory should not be imposed on society at large.

It is not known how far the Administration delved into the evidence that does exist about rail competition and economic welfare before drawing its conclusion about “thirty-three to seven”. After all, the White House  directive could, without considering all such evidence, actually  increase complexity and inefficiency in America’s vast rail networks, thereby raising costs and slowing the delivery of shipments. Nor is the Administration’s Executive Order taking place in a vacuum. The White House is proposing large business tax increases that will affect the financial viability of both rail providers and customers, has expressed support for train crew-size minimums, and seeks to further prioritize passenger traffic on routes that currently move countless tons of freight (a policy that would create huge financial headaches for shippers). The intermodal transportation networks that have served Americans so well during the pandemic would be seriously impacted.

The bottom line of all these actions: reduced investment into the rail network that could potentially threaten the financial viability of the entire industry and everyone who counts on its services. Further, more regulation and higher costs will not encourage new entrants into the marketplace but could promote even more consolidation -- which would run counter to the intended aim of the President’s Executive Order.

Note the spectacular difference between Biden’s approach and the Staggers Act, one of the most successful deregulatory reform bills ever signed into law. Prior to the Staggers Act, the federal government set prices for each commodity and each route served by the railroads, handled labor disputes that occurred within the scope of interstate transport, and determined mergers and which companies were allowed to enter the marketplace. Quite simply, it was government planners that were running this market and there was nothing “free” about it.

By the 1970s, this approach had a predictable effect on the industry. According to the Brookings Institution, “Rail’s share of freight traffic, which stood at nearly 70% of intercity ton-miles following World War II, fell to 37% by 1975. Moreover, following the bankruptcies of several Northeastern and Midwestern railroads in the 1970s, nearly every remaining railroad was earning a rate of return below that earned in the corporate sector as a whole.” By 1978, the industry was in disarray – derailments surged, investment plummeted, and consumers lost confidence. 

Whatever concerns they had with particular aspects of the 1980 Staggers Act, most policy experts in the rail field would acknowledge that the law had a vital role in saving the railroad sector from complete collapse. This landmark law removed government barriers to competition, eliminated price controls, and oriented route determination power away from the public sector (a stark contrast with passenger rail, where taxpayers continue to provide Amtrak with nearly $2 billion in subsidies every year).  A recent study by the American Action Forum found that rail shipping costs in 2016 were “45% lower than in 1981, the first full year of operation under the partial deregulatory structure.” They also found productivity to have risen by 150% over the same period. It’s clear Staggers not only saved rail businesses, but has proven to be a significant net positive for consumers, shippers, and indeed taxpayers.

All this is not to say that the railroad system is perfectly fine as-is. Extensive rulemaking comments from NTU over the past several years have noted that pricing dispute resolution procedures at STB (a separate but somewhat related issue to reciprocal switching) can be cumbersome and costly for all parties involved, and would benefit from carefully targeted, concerted reforms that are fair to all. 

However, mandating changes like reciprocal switching agreements through the STB will have unintended consequences that would harken back to the pre-Staggers days of burdensome heavy-handed government that threatened the viability of the entire sector. The best possible situation is one with genuine free market competition among many carriers, rather than a government-engineered outcome. In any case, saddling the entire private sector with new regulatory burdens, as the 74-part Executive Order issued earlier this month would do, will prove counterproductive in the long run.If the Biden administration is looking to “Promote Competition” in the American Economy, then the White House’s contradictory Executive Order encouraging independent agencies to flex their regulatory muscles should be worrisome to all Americans.