Members of Congress are feeling the pressure from their constituents to do something about escalating inflation, which they (correctly) perceive is tied to various supply chain issues that are still hamstringing the U.S. economy.
While Congress’ decision to inject fiscal stimulus last year into a white-hot economy undoubtedly exacerbated the economy’s inflationary pressures, it can do little in the short-term to reduce inflationary pressures, absent inducing a recession. That reality has not prevented members from finding false culprits and proposing legislation that they allege will reduce price pressures.
After blaming tech companies, oil companies, car companies, and grocery stores for the recent runup in prices, Congress has turned its attention to the railroads and their alleged inflationary actions. 21 Senators recently sent a letter to the Surface Transportation Board urging it to take steps to ensure that shippers receive reliable rail service and reduce shipping costs, and Senator Tammy Baldwin (D-Wisconsin) has introduced the Rail Shippers Fairness Act.
The proposed legislation would greatly increase the government’s role in the rail industry, which its sponsors say would decrease shipping costs and improve service.
However, the legislation presents an empty promise. The bill’s prescription, if followed, would be disastrous for railroads and their customers.
The proposed legislation directs the Surface Transportation Board to take specific steps to achieve four broad goals: Improving rail service, increasing competition, improving rate standards and establishing protection from “unfair practices”. While each of these notions may appear unobjectionable, the reality is that each one would do damage to the industry.
- Improving Rail Service
The nation’s supply chain has been stretched to the breaking point in the last year, hastened by numerous factors: An increased demand for goods, Several pandemic-related shutdowns across China that closed their factories and ports, labor problems at U.S. ports, and labor shortages plaguing each of the transportation industries in the country.
The federal government has taken a few limited steps to help the trucking and shipping industry bottlenecks, mainly with limited interventions. However, it has proposed several laws and regulations to “fix” the rail sector that would effectively increase government control over the sector.
One provision in the legislation would grant the Surface Transportation Board broad powers to use at its discretion to implement “emergency” rail operations. What, precisely, the STB could do with its powers to improve bottlenecks is unclear. There is no one alleging that railroads are the cause of bottlenecks or are contributing to the ongoing supply chain snafu; they are merely hostages to the vicissitudes causing the economy-wide problem.
The notion that a government regulator could somehow intercede in a railroad and somehow improve its performance is absurd.
- Improving Rail Competition
Many shippers are serviced by a single railroad; the economics of rail are such that it makes sense for there to be a second set of tracks to a shipper only in limited circumstances.
Some shippers without multiple rail lines would like the government to inject a modicum of competition by requiring a railroad to, in essence, carry another railroad’s freight cars on its network. The industry refers to this as reciprocal shipping.
While this would inject a modicum of competition, it would come at a high cost: a railroad forced to accommodate other railroads would find it impossible to optimize the amount of freight transported on its network. The unpredictable requirements that reciprocal shipping would engender would slow its traffic and reduce its capacity, ultimately resulting in more goods needing to be transported via trucks.
It would also beget a litany of price hearings for bureaucrats to decide a “fair” rate for the host railroad to charge the competitor for this service, hearkening back to the pre-Staggers Act era when the government effectively dictated prices for the industry.
- Improving Reasonable Rate Standards
The Surface Transportation Board calculates a “reasonable rate” for shipping goods between two destinations, based on estimated rail costs and a reasonable profit margin. While negotiations between railroads and shippers determine the rate shippers pay these days, this provision would freeze any contested rate not at the proposed rate, but the prior rate, and while the rate is under review, that rate cannot be altered.
That means that if shippers were to anticipate an economic environment where their costs were to rise, they can merely contest their shipping rates and enjoy federally-mandated price controls for each contested rate until it is resolved.
Enacting such a provision would result in an onslaught of rate cases, with shippers earning deferred payment of the increase for years until the rate case is settled.
- Establishing Protections from Unreasonable Practices
Most contracts between a shipper and a railroad contain a clause that allows railroads to increase prices if fuel costs increase significantly. These contracts typically impose a surcharge when some index of fuel costs exceed a threshold–usually with a lag.
For instance, the price of diesel fuel was nearly 2½ times higher at the end of June, when prices reached an all-time high, than it had been in November 2020, and virtually every rail shipping contract had an active fuel surcharge imposed. Since then diesel prices have fallen eleven percent, but shippers have not seen a reduction in their costs because prices remain above the fuel surcharge threshold.
Some shippers complain because their contracts do not keep up with that rate of change, and would like to see an immediate reduction in costs. This proposal suggests that imposing fuel surcharges based on prices merely being above a certain threshold is “unreasonable” and that the STB should be able to financially penalize railroads for that mismatch.
However, it’s unclear why the STB should be compelled to intercede in anodyne contractual arrangements: Neither railroads nor shippers want to manage constantly changing contracts.
If railroads fear the possibility of their contracts being altered to acquiesce shippers, they’ll undoubtedly increase prices a priori to account for that contingency.
Conclusion
It is understandable why shippers and unions would advocate for such legislation, as in the short run it would reduce shipping costs and force railroads to hire more workers. However, the rest of us would suffer; in the long run railroads would reduce investment, since their investments would be less profitable, and more goods would inevitably travel via trucks, increasing congestion and CO2 emissions while forcing the government to spend more money to maintain and upgrade roads.
The post–WWII era, when the government strictly dictated most rail operations while trucking flourished with the new Interstate Highway System, nearly destroyed the industry. The last four decades have seen a surge in rail investment, dramatically increasing industry productivity. Today railroads ship twice as much as they did forty years ago on fewer miles of tracks.
Returning the industry to the dark days of heavy-handed government regulation makes little sense and would cause far more harm than good.