Carter on the rails vs. Obama on the skids: failing industries and deregulation
An article headlined “If Obama Had Carter’s Courage…” is bound to get my attention.
Just the other day I compared Carter favorably to Obama in the arena of hypocrisy about promises not to live high on the public’s dime. Now Holman W. Jenkins offers another shining moment from the Carter past (one of which I was not previously aware): when our system of freight railroads was threatened with multiple bankruptcies and faced the grim prospect of nationalization, Carter showed courage in resisting that call, as well as in confronting the special interest groups to which politicians are ordinarily beholden:
Rail executives and economists had been arguing since the 1920s, when competition from trucks and planes began to emerge, that comprehensive federal regulation had only distorted the industry’s pricing, driven away investment, and made competitive adaptation impossible…it still took some doing on Mr. Carter’s part. When the bill stalled, a hundred phone calls went from the White House to congressmen, including 10 by Mr. Carter in a single evening. The bill essentially no longer required railroads to provide services at a loss to please certain constituencies. It meant going up against farmers, labor, utilities, mining interests, and even some railroads—whereas Mr. Obama’s auto bailout tries to appease key lobbies like labor and greens, which is why it can’t work…
In 1980 [during the Carter administration], Congress passed the Staggers Act, ending a century of federal regulation and leading to the railroad industry’s renaissance. Leo Mullin, then a young Conrail veep, would later look back and praise all involved for having the fortitude to recognize that salvaging the taxpayer’s investment in Conrail meant more than fixing a single broken company—it meant fixing a defective regulatory environment.
That fortitude is exactly what’s missing today, as it was missing from Mr. Obama’s statement on Monday, which attributed GM’s failure to sins by everyone but Washington.
I’m extremely unfamiliar with the history of the railroads (passenger or freight) in this country—except for the usual random facts every child used to be forced to learn in school, such as the golden spike at Promontory Point; as well as a trip to Chicago I took when very young on the Twentieth Century Limited, which included sleeping berths a few inches from the ceiling for my brother and me as the old train rattled along on through the night; and then later the obligatory jokes about Amtrak coupled with several rather frustrating trips between Boston and New York on said line.
Alas, it would take me far more time than I have available at the moment to catch up on all I don’t know (which is almost everything) about the history of the US railroad system. But a very quick skimming of the Wiki entry on Amtrak and one on Conrail (the freight system Jenkins is referring to, the one with which Carter dealt) indicates it’s an intriguing story as well as a relevant one.
For example, I always thought the cause of the decline in the passenger rail system was obvious. Whoever would prefer a train ride to a car ride given the choice, except for commuters in cities with traffic so bad that driving has become an exercise in hair-tearing frustration and futility? And it’s certainly true that passenger railroads probably would have declined when faced with stiff auto competition no matter what they’d tried to do to compete.
But they never really had a chance; even before autos represented especially keen competition, the hands of the passenger rail industry were tied—by the federal government:
The first interruption in passenger rail’s vibrancy coincided with government intervention. From approximately 1910 to 1921, the Federal government introduced a populist rate-setting scheme, followed by nationalization of the rail industry for World War I. Ample railroad profits were erased, growth of the rail system was reversed, and railroads massively underinvested in passenger rail facilities during this time. Meanwhile, labor costs advanced, and with them passenger fares, which discouraged passenger traffic just as automobiles gained a foothold.
Compare and contrast to Conrail (I’ve excerpted only a small portion of its lengthy history, in which Carter was only one player of many) [emphasis mine]:
In the years leading to 1973, the freight railroad system of the U.S. was collapsing…
Conrail was incorporated in Pennsylvania on October 25, 1974, and operations began April 1, 1976. The theory was that if the service was improved through increased capital investment, the economic basis of the railroad would be improved. During its first seven years, Conrail proved to be highly unprofitable, despite receiving billions of dollars of assistance from Congress. The corporation declared enormous losses on its federal income tax returns from 1976 through 1982…Congress once again reacted with support by passing the Northeast Rail Service Act of 1981 (45 U.S. Sec. 1101 et seq.), which amended portions of the Regional Rail Reorganization Act by exempting Conrail from liability for any state taxes (45 U.S.C. 727(c)) and requiring the Secretary of Transportation to make arrangements for the sale of the government’s interest in Conrail (45 U.S.C. 761). After NERSA was implemented, Conrail began to improve and reported taxable income between $2 million and $314 million each year from 1983 through 1986.
Although Conrail’s government-funded rebuilding of the heavily run-down railroad infrastructure and rolling stock it inherited from its six bankrupt predecessors succeeded by the end of the 1970s in improving the physical condition of tracks, locomotives, and freight cars, the fundamental economic regulatory issues remained, and Conrail continued to post losses of as much as $1 million a day. Conrail management, recognizing the need for more regulatory freedoms to address the economic issues, were among the parties lobbying for what became the Staggers Act of 1980 [this is the act passed when Carter was president], which significantly loosened the Interstate Commerce Commission’s rigid economic control of the rail industry. This allowed Conrail and other carriers the opportunity to become profitable and strengthen their finances.
The Staggers Act allowed the setting of rates that would recover capital and operating cost (fully allocated cost recovery) by each and every route mile the railroad operated. There would be no more cross-subsidization of costs between route-miles (i.e., rates on profitable route segments were not set higher to subsidize routes where rates were set at intermodal parity, yet still did recover fully allocated costs). Finally where current and/or future traffic projections showed that profitable volumes of traffic would not return, the railroads were allowed to abandon those routes, shippers and passengers to other modes of transportation. With the Staggers Act, the railroads, including Conrail, were freed from the requirement to operate services with open ended losses for the public convenience and necessity of those who simply chose rail services as their mode of transportation.
Seems to me there are a number of lessons here, the first of which is that government bailouts without significant government deregulation of unreasonable mandates and taxes hampering a failing industry are doomed to fail themselves, and all such bailouts will therefore be a waste of taxpayer money. In addition, keeping an industry in private hands is better at turning a profit than nationalization—as long as the government doesn’t tie those hands unreasonably in order to favor other special interest groups.
Obama seems to be on a course to disobey all those lessons. Carter, to his credit, was not.
-perhaps you could give us a railroad song clip to compensate for your lack of historical knowledge…
An insightful juxt. Thanks.
Hey Goesh — here’s one:
http://www.youtube.com/watch?v=SfXCkoCudEY
Neo : Seems to me there are a number of lessons here, the first of which is that government bailouts without significant government deregulation of unreasonable mandates and taxes hampering a failing industry are doomed to fail themselves, and all such bailouts will therefore be a waste of taxpayer money.
Yes! There is no point in handing money out to GM and Chrysler if it goes to all the union mandates. Sorry guys, the gravy train has to end. One way or another it will end: either with the collapse of the auto companies or with the auto companies surviving with greatly reduced union mandates.
Neo,
I couldn’t agree more. I believe, however that while focusing on Jenkins’ excellent analysis, you should have quoted the most important observation in the article where he explains incoherent govt policy as:
“. . . the impossibility of reconciling stiff fuel mileage mandates with gasoline prices set by the market, with a domestic labor monopoly, with a high degree of openness to international trade. (You can have three, but not four.)”
I believe that this point is the real key to both Jenkins’ article and to understanding why Obama’s policies will ultimately fail.
Hey Neo…
…as it turns out, they lied to you about the Golden Spike as well.
See also.
Ike: another illusion shattered.
Neo: It’s my nature. 😉
There have been calls for rate re-regulation from major rail shippers–I picture the CEOs of large agribusiness and chemical companies marching arm-in-arm, while singing old Grange songs about the iniquities of the railroads. The danger, of course, is that such re-regulation will again bring railroad profitability below cost of capital and inhibit further investment.
BTW, an excellent book about railroad life circa 1980 is Linda Niemann’s “On the Rails” (my review here.) The author got a PhD in Engish before taking a job as a railroad brakeman, and she writes wonderfully well.
Thank you for pointing out this positive information about President Carter. Now I feel slightly less guilty for having voted for him.
Ozyripus: Hey, I voted for him too—twice. So it’s my duty to point out any good thing the man may have done.
Even a stopped clock is right twice a day.
(analog clock, with hands, those of you who may never have seen such a thing)
wow ike
In 1980 [during the Carter administration], Congress passed the Staggers Act
Cool. Why don’t we call all their bills that?
Years ago there was a Game called Tycoon wherein you built yourself a railroad.
The included booklet gave the histories of many of the old American RR tycoons, and I noted that the only one who avoided bankruptcy was the one (Hill) who didn’t take any help from the federal government.
Also, everybody didn’t take passenger trains all the time.
Everybody used phones so when the feds took over the phones it lasted until the next election, proving that congressmen are occasionally trainable.
And blue lights came through little holes in the overhead of the sleeper berth and looked like stars. A gentle rocking, a long, low train whistle, and stars.
Plus a friendly porter who joshed with a six tear old.
Boy! I’m glad THAT’s over!
Good grief! That may or not be a Freudian slip.
Nolanimrod Says: Years ago there was a Game called Tycoon wherein you built yourself a railroad.
the game was Railroad tycoon. by sid meier..
and guess what?
the company that made it made later ones that people dont like as much..
but, they put the old one on their website and updated it for new windows, and you can play i now for free… yes FREE..
but dont play too much, I like commentary 🙂
oh, and if those guys didnt build the railroads and such the way they did, what would the greenies have to lambast us for not using?