Senator LAUSCHE. To set the record straight, might I say that the chairman and the staff counsel just pointed out that there is one other phase that would not be generally applicable, and that is vesting the right in the Interstate Commerce Commission to fix intrastate rates when they have a burden on interstate commerce. Is that correct?

Senator SMATHERS. Yes.

Mr. BARTON. Yes.

Senator SMATHERS. All right, Mr. Weiss. You are the economist for the International Brotherhood of Teamsters; is that right, sir? Mr. WEISS. Yes, sir.

Senator SMATHERS. Fine. You go right ahead.

STATEMENT OF ABRAHAM WEISS, ECONOMIST FOR INTERNATIONAL BROTHERHOOD OF TEAMSTERS

Mr. WEISS. Thank you for according us the privilege of being present this afternoon, Mr. Chairman. I appear here as a representative of the International Brotherhood of Teamsters, which represents the largest block of working men and women in the trucking industry. I use the word "women" because in addition to the drivers we also represent, in many instances, the office force, the office girls. Anything that affects the working conditions of those men and women employed by the trucking industry is automatically of the greatest possible interest to our union. As a matter of fact, I should say it is axiomatic that the welfare of the men and women working in an industry depends on the vigor and prosperity of that industry. If the trucking industry's ability to grow and prosper is hindered, the way of life of those who depend upon this industry for a livelihood; namely, our members, will be changed for the worse and job opportunities will decline.

Our union cannot sit idly by while attempts are made to change the rules under which our people live and work.

This is our interest, and this explains our presence here before you today.

We recognize the present financial plight of the railroad industry. We believe that some of the suggestions contained in the Smathers committee report and embodied in S. 3778 are thoughtful and wellconceived and should help considerably to alleviate the present condition of the railroads. Some of the items proposed to aid the railroads, taken seaprately, the teamsters union would support.

But the sum total of all the proposals would, in effect, place the Federal Government in the position subsidizing a rate war between the railroads and other modes of transportation on the railroads? terms. They would create far greater problems for the entire transportation industry and for the Nation than they would solve.

In our judgment, the remedy may be far worse than the disease. In explanation, I should say that our opposition is directed to section 5 of S. 3778, which would strip the Interstate Commerce Commission of its powers to consider the effects of railroad proposed rates upon other modes of transportation.

This concept would be damaging to the entire transportation industry.

And from the point of view of our union, it would do immediate and terrible damage to the economic life of our membership. It

would affect their pay checks; their jobs; their way of life; and, consequently, we oppose such policy.

This one proposal, if carried out in conjunction with the other proposals contained in the bill, would bring on a Government-subsidized rate war. In the interest of helping the railroads during the present temporary recession period, it would turn back the clock to previous eras of cut-throat rate competition. It would tend to re-create those unfair and destructive competitive practices which originally led to regulation of this industry. It would ultimately result in lessened competition and tend to create monopoly in for-hire transportation. It would spawn all-out rate wars which would immeasurably weaken the presently existing independent trucking industry. It would make the trucking industry a pickup and delivery service, subservient to the railroads.

Why is this so?

A rate policy such as is proposed, which would permit the railroads to cut rates without reference to the effect of such cuts on other modes of transportation, is, in our view, little different from no regulation. Competing transportation agencies would have to meet such rates, and the tendency would be to reduce rates to an out-of-pocket basis during the rate-war phase; for any traffic carried at a rate which covers outof-pocket cost, and perhaps a little more, leaves the carrier better off than if it allowed the traffic to be carried by another mode of transport.

But this process cannot go on forever if a carrier is to meet all of its costs. This is the point between a compensatory rate and a fully distributed compensatory rate. In other words, unrestricted competition between the different modes of transportation, like unrestricted competition between railroads, is ruinous in character. In other words, unless the ICC could consider the effect of rate cutting on other modes of transportation, no part, no single part of the transportation industry, would be safe from destructive rate wars.

The railroads have long recognized this characteristic of unrestricted competition. They have repeatedly stated that they did not wish such competition between railroads. They do not want the I. C. C. to overlook this danger of ruinous competition between railroads. But they would seek to bar the I. C. C. from taking these very same factors into consideration in competition between differing modes of transportation.

Why?

Simply because unrestricted competition between railroads and the trucking industry, for example, would be under terms most favorable to the railroads. These favorable terms arise primarily from the nature of the cost structure of railroads as compared with motor carriers, under which the rails have a decided competitive advantage, ratewise, over trucking.

May I say, parenthetically, that there are other advantages, the size of the average railroad compared with the size of the average trucking firm or water carrier, the wide diversity of traffic which the railroads carry which the other modes of transportation do not. For instance, a lot of truck concerns carry only one or two commodities, driveaways, the autos, or the pipe or oil or similar commodities.

Another factor is the ratio of operating expense to operating revenue, which is far lower in the case of the railroads than in the case

of the truck lines or other competing forms of transportatin. For example, the ratio of operating expenses to operating revenue in the year 1956, the latest figures which I was able to obtain, for Class 1 railroads, was 76.9 percent; for trucks it was 95.8 percent.

Senator SMATHERS. Let me go back and ask you a question.
Mr. WEISS. Yes.

Senator SMATHERS. Is not the Commission now required by law in an application for a rate, to consider what effect that will have on some other mode of transportation?

Mr. WEISS. I say to you, sir, that in terms of what I know about the application of the law by the Commission, that the impact of a proposed rate upon other modes of transportation is considered. I may add here that I am no expert in I. C. C. procedures.

Senator SMATHERS. Yes. That is just what I wanted to get at. You know, in the New Automobiles case, which of course was a trucking case, carying new automobiles by trucks, the Commission said this:

As Congress enacted separately stated rate-making rules for each transport agency, it obviously intended that the rates of each such agency should be determined by us in each case according to the facts and circumstances attending the movement of the traffic by that agency. In other words, there appears no warrant for believing that rail rates, for example, should be held up to a particular level to preserve a motor rate structure, or vice versa.

In other words, according to what Senator Reed has always said, and what is amply clear from this and other cases, the Commission today has the authority to fix a rate only with respect to how it affects other applications in that same mode of transportation, and irrespecive of what effect it has on another mode of transportation.

Mr. WEISS. Mr. Smathers, subject to the qualification I said before, that I am not a transportation economist, and not an expert in the affairs of the ICC, I should think that the decision which you just read has application to that case. But there is nothing, as I understand it, which debars the Commission from taking into account the impact of a proposed rate upon other modes of transportation, which would be the effect of your proposal.

Senator SMATHERS. Well, that, again, leads us to consider whether or not you construe that by writing a change into the ratemaking section which we are doing in some fashion here and whether or not you then say that that limits the Commission in the consideration of what could be a destructive rate practices with respect to other modes of transportation.

Mr. WEISS. But, sir, destructive on whom? Certainly you have to take into account-let me step back a moment.

It seems to me you are looking at this from, shall I say an optomistic point of view. You are looking at a discreet railroad industry, a separate and discreet trucking industry, and other modes of transportation. I like to think in terms of a transportation system which operates in various guises, in which there is a public interest.

Senator SMATHERS. Right.

Mr. WEISS. Now, if you cannot gage or determine the character, ruinous or otherwise, of a proposed rate upon other segments of that very same transportation industry, it seems to me you are denying the Commission the opportunity to determine the ruinous or com

petitive character of that rate. You are looking solely within the railroad industry.

Senator SMATHERS. We may be narrowminded. Let me ask you this question on it: Do you think that if a motor carrier could carry from Washington, D. C., to Pittsburgh, Pa. a commodity at a lower rate than a railroad, and the motor carrier came in and made an application for a lower rate, saying "We can do it and it is compensatory", then would the Commission, under your concept, be required to say, "No, we will not give you that lower rate because to do so would be injurious to the railroad"?

Mr. WEISS. I would have to answer the question in this term, Mr. Chairman: First, I would want to know what you mean by compensatory. Then I would say to you that the Commission is a far better judge of whether or not to consider the impact of that proposal upon other modes of transportation. But it has that authority right now. The effect of the proposal in S. 3788 would be to deny it that opportunity.

Senator SMATHERS. Then what you say is the Commission should be set up as a giant allocator of business; it will say the trucks should have this much business, the railroads should have this much business, and irrespective of whether or not one mode of transportation can carry those goods at less expense and still be compensatory, giving the public whatever lower cost advantages it can, irrespective of that fact, they must allocate this business as a giant handicapper or an allocator?

Mr. WEISS. Mr. Chairman, I would defend as vigorously as I am doing before you now on your proposal the right of the Commission to do as you suggest. I would oppose it just as strongly. I don't think what I have said leads to the conclusion that you are making.

Senator SMATHERS. Do you agree the general public would be better off if one mode of transportation could carry an article at less expense than could another mode of transportation, that then the one that can carry it at less expense should undoubtedly get the business?

Mr. WEISS. In that narrow context, yes, but I want to qualify that immediately. The public interest is much broader than you have phrased it, sir. The public interest, it seems to me, is in a viable, dynamic broad-scale transportation system, and not in just one specific mode of transportation.

Senator SMATHERS. I agree. But

Mr. WEISS. I think what you are doing

Senator SMATHERS. Should we not then let the truckers do that which they can do best, and the railroads do that which they do best, without regard to whether or not the truckers can haul short hauls for less than carload lots and with great flexibility. We should not have the Commission say we are not going to let you do that for fear that you might injure the water carriers or you might injure the railroads, or something else? In order to have this viable, dynamic transportation system, is that not the way we should handle it, letting each handle that which they can do best?

Mr. WEISS. Let me say, honestly from a very short, narrow point of view, the answer to your question is yes.

Senator SMATHERS. Why is that a narrow point of view?

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Mr. WEISS. Because I think, and I want to develop this in the course of my statement, I think that you are opening the Pandora's box to a situation which will create competitive situations leading to monopolistic characteristics which would work to the detriment of a broad-scale transportation system.

Senator SMATHERS. How would you get a situation leading to a monopoly?

Mr. WEISS. Because the acme of competition is monopoly. You pick up any classic or any text book on transportation economics, no matter what the political or economic view of the author, and you will find this general statement throughout, that competition, run riot, leads to monopoly.

Senator SMATHERS. So then you are opposed to competition of this nature?

Mr. WEISS. I am opposed to unrestricted competition, because I think it will injure a broad-scale transportation system. Let's put it in analogy form.

Senator SMATHERS. Finish that sentence. You are opposed to competition because

Mr. WEISS. It will lead to monopoly, sir.

Senator SMATHERS. Competition leads to monopoly, all right, sir. Mr. WEISS. I think you are putting all your transportation eggs in one basket; namely, the railroad industry. I would like to say two things about such eggs.

Senator SMATHERS. We don't intend to do that. We don't want to do that. The effect of it may be, but I can tell you we don't intend to do it. But go ahead, we are interested in your views.

Mr. WEISS. All right. I am at the bottom of page 3 if you want to follow the text. Transportation costs fall into two categories; first, there are the out-of-pocket or direct expenses which vary with changes in traffic volume and may be assigned to commodities on a cost-of-service basis. In other words, out-of-pocket costs are those which would not be incurred if the traffic would not move. Second, there are fixed or constant costs, also known as overhead costs, which are generally independent of the volume of traffic carried. It is the sum of these two types of costs which determine the revenue needs of any business, including a return on investment or profit.

Recognition of the different nature and extent of these costs is vitally important if we are to understand the impact of the ratesetting recommendations in the bill before this committee of the Congress.

Railroads have high fixed or constant costs (between 20 and 30 percent) which do not vary with the volume of movement. Therefore, railroads must have volume, even if it means cutting competitors' rates. Railroads are willing to carry traffic at low, that is, out-ofpocket rates which make only a slight contribution toward meeting the overhead or fixed expenses. Competition, then, tends to reduce rates to variable, that is out-of-pocket costs, which are significantly lower in the case of railroads than for motor carriers.

Senator LAUSCHE. May I interrupt at this time? You say that railroads have high fixed or constant costs, between 20 and 30 percent, which do not vary with the volume of movement. By that you imply that other modes of transportation do not have that high fixed and constant cost.