SUMMARY The main themes of this discussion are derived from history, from economic analysis, and from the institutional features of the everyday world of transporting goods by rail or road. The historical discussion begins by emphasizing the extent to which original regulatory policy in the United States was established by the characteristics of the railroad industry and of public opinion with respect to that industry in the 1880s. It continues by examining the extent to which the major regulatory changes introduced in 1920 were still related almost solely to the idea of "railroad monopoly." It concludes by pointing out the extent to which the Motor Carrier Act of 1935 was designed to protect the railroads, and based on the irrelevant assumption that, since trucks compete with railroads, they must be regulated to the greatest extent possible as if they were railroads. The conclusion of the historical section is that regulation of railroads had ample economic as well as political justification when it was first attempted, but that neither the law nor the Interstate Commerce Commission has really come to terms with the internal combustion engine. The next section, which is devoted to the characteristics of current regulation, begins with a discussion of what current transport regulation is not. Unlike public utility regulation, it is not regulation of rates of return. In the railroad case, this is true in large part because of doubts on all sides as to whether anything close to a "normal" return is obtainable, and in the motor carrier case because an industry containing so many firms, and so much route duplication, is not an industry in which administrative standards for rate of return can be applied with any degree of nicety. In spite of Interstate Commerce Commission control over both financial investment, in the form of new capital issues, and real disinvestment, in the form of railroad branchline abandonments, regulation also has only tangential influence on the amount and direction of new investment. Further, on the I.C.C.'s own showing, regulatory control over rates is practically effective with respect to a very small fraction (less than one percent) of proposed rate changes. When attention is shifted from the depth to the breadth of control, it becomes evident that traffic has steadily moved from the only transport mode which is 100 percent common carrier and 100 percent regulated (the railroads) to unregulated trucking, or to barge lines and pipelines which are subjected to very little control of the thoroughgoing form applied at least since 1920 to railroads. This section could easily lead to the conclusion that regulation is neither good nor bad, but simply superfluous. However, this would sion fication. For one thing, the Interstate Commerce Commis sion claims to have saved the public very large sums of money by reducing railroad requests for rate increases. And with respect to rates, the Interstate Commerce Commission's casting itself in the role of the innocent bystander is overdrawn in several respects. The number of rates on which the Commission takes affirmative action is ob (1) viously a minimal test of the cumulative importance of these rates. Moreover, the Interstate Commerce Commission is an integral part of the apparatus by means of which new rate proposals by individual carriers are finally transmuted into effective rates. The Interstate Commerce Commission also has important control over institutional structure, in the motor carrier industry, due to its controls over entry. Its control over service standards has been concentrated on piecemeal rearguard actions with respect to railroad abandonment. Înterstate Commerce Commission controls over freight cars have fallen well short of success for reasons largely beyond regulatory control, notably those stemming from managerial fragmentation of the American railroad industry. This is not a very inspiring picture. But the economics profession has probably managed to caricature it. Specifically: (1) Economists tend to exaggerate the importance, for good or ill, of transport regulation. (2) Economists tend to quantify the qualitative. Regulation does have costs, and regulation does have benefits; but neither of these can be measured by the pound. (3) Economists tend to cater to the greatest weakness of regulation: the attempt to penetrate the future by burrowing deeper into the past. Published estimates of the "costs of regulation" (or the "benefits" thereof) should be heavily discounted, if not disregarded entirely. Once one peers beneath the numbers to find out what is really happening, the basic defect of regulation would appear to be not its imposition of huge extra costs but its failure to contribute to identifiable benefits. What has this to suggest about regulatory policy? As to railroads, the basic issues have already been recognized in two ways. The first has been the appearance of government financial assistance, as exemplified by Amtrak, by government participation in the establishment of ConRail, and by other provisions for governmental financial assistance. The second has been the passage of new regulatory legislation which has culminated in the so-called "4-R" Act of 1976. This Act will increase the regulatory burden for a long time to come. But it does represent a modernized approach to railroad regulation in so far as it pays more attention to the need for railroad profitability, the need for government assistance if this profitability cannot be attained on what are deemed to be important public services, and the need for more managerial discretion. As to motor carriers, the situation still appears to be one of stalemate, although this stalemate may be broken by changes now before congressional committees. Part of this stalemate may reflect the practical application of an economist's theoretical notion: if the economic and technical characteristics of an industry are such that competition is bound to work, then, even in the face of regulation, many aspects of competition probably will work. The trouble is that the part without the whole may produce perverse results. Regulation of motor carriage was first introduced to protect the railroads. Its present contribution to this objective is probably minimal. Meanwhile, it is in fact protecting all kinds of other people. A general loosening of motor carrier regulation would not only yield direct economic benefits; it would also help to reveal who these protected interests are, what they are doing, and what they might be doing with less or no regulation. ABSTRACT OF REGULATION OF OVERLAND (By JAMES R. NELSON, Amherst College) The major purposes of this paper are as follows: (1) To describe the main events in the history of Federal regulation of rail and motor carriers of freight. (2) To relate the main stages of this historical development to the economic environment in which they occurred, and to examine the question of the extent to which an economic institution, like any other facet of the economic system, may become functionally obsolete while retaining its technical efficiency. (3) To prepare the way for a discussion of regulation in its present economic environment by sorting out as carefully as possible the costs and benefits of present regulatory laws and practices, and of any feasible regulatory laws and practices. (4) To present alternative suggestions as to directions in which. regulation might move-when, in what order, and how much. FEDERAL REGULATORY HISTORY IN THE UNITED STATES THE ACT TO REGULATE COMMERCE (1887) The growth of the American railroad system, coincident with the abrupt check to more extreme states' rights positions which occurred in 1865, produced strong Congressional concern with respect to railroad rates, earnings, investment, and service. The first result was the Windom Report, "Report of the Select Committee on Transportation-Routes to the Seaboard" (43d Congress, 1st session, Senate Report 307; Washington, G.P.O., 1874). The Select Committee devoted thirteen pages (pp. 109-122) to the consideration of "Competition between Railways, and Its Promotion by the Construction of Additional Lines," and eighteen more pages (pp. 122-140) to "Direct Regulation by Congress," before opting for its favorite: "Indirect Regulation and Reduction of Charges, through the Agency of One or More Railway Lines To Be Owned, or Controlled, by the Government" (ibid., pp. 140-161). The Cullom Committee Report,' the immediate precursor of the Act to Regulate Commerce, appeared only a dozen years after the Windom Report. But it seems to belong in a different world. Commission regulation was to be found throughout the country; but it was concentrated, significantly, in a Granger belt consisting of Illinois, Wisconsin, Minnesota, Dakota Territory, Nebraska, Kansas, Missouri, and Iowa.2 Report of the Senate Select Committee on Interstate Commerce, 49th Congress, 1st sess., Senate Report 46, Washington, D.C., G.P.O., 1886. Ibid., p. 65. The Cullom Committee sums up "The Causes of Complaint against the Railroad System" under eighteen headings, and then concludes: 3 the most important, and in fact nearly all, of the foregoing complaints are based upon the practice of discrimination in one form or another." A further theme, stressed by railroad officials but embraced by other witnesses with "unanimity," was "construction of unnecessary railroads for speculative purposes."5 Part of the light-density branch line problem was already there on the day the line first opened. The kind of competition favored by the witnesses before the Cullom Committee-including most of the witnesses who represented state railroad commissions-was "yes, but" competition, or competition without complete freedom to discriminate. The paradox in this position lay in the fact that the essence of railroad competition in the 1880s was its differential character, and the essential product of differential competition is discriminatory pricing. If Senator Cullom lent his name to the most famous of Congressional reports on the subject of railroad regulation, Representative John Reagan of Texas was at least as influential in helping to determine the final form of the Act to Regulate Commerce. In May 1878, without much experience in rail or regulatory matters, he introduced his first bill, providing that: ... freight rates and facilities would be made equal for all shippers, rebates and drawbacks would be prohibited, "pools" or combinations formed to eliminate competition and to pool earnings would be forbidden, and charges for a short haul of goods (if as large as a carload) would not be greater than for a long haul . . . railroads would have to post freight rates and schedules. . . The first idea is ambiguous, but it can nevertheless be traced through into Sections 1, 2, and 3 of the Act to Regulate Commerce. The other ideas have become the common currency of railroad regulation—in qualification, as well as in application-since 1887. And, on a very critical issue which arose eight years later: The Reagan Bill explicitly forbade pooling; the Cullom Bill said nothing on the matter. Reagan, when in conference with the Senators to reconcile the two bills in December 1886, conceded on virtually every point of disagreement save pooling. . . . 7 For this and other reasons (e.g., no control over entry into the industry, no powers of rate setting for the Commission), one must agree with the Hilton verdict that, "as an effort at stabilization of the railroad cartels of the late nineteenth century," the Act to Regulate Commerce was "grossly inadequate." But one need not agree with either procompetitive economists, like George Hilton, or Marxist historians, like Gabriel Kolko, that the only or even main point to the Act to Regulate Commerce was to stabilize cartels. Many of the most important sections of the original Act to Regulate Commerce were altered beyond recognition, or destroyed, by subse a Ibid., pp. 180-181. Ibid., p. 182. 5 Thid.. p. 48. Ben H. Procter, "Not Without Honor: The Life of John H. Reagan," University of Texas Press, Austin, Tex., 1962, p. 226. 7 Gabriel Kolko, "Railroads and Regulation: 1887-1916," Princeton University Press, Princeton, N.Y., 1965, p. 43. "Pooling" could take one or both of two forms: division of traffic in agreed proportions; and divisions of gross or net revenues in agreed proportions, independently of the original flow of traffic. 8 George W. Hilton, "The Transportation Act of 1958: A Decade of Experience," Indiana University Press, Bloomington, Ind., 1969, p. 4. quent Supreme Court decisions and had to be restored in their original or in altered form by later legislation. But the first four provisions survived, in principle, and are still very much in existence in practice. Section 1 generalized by requiring all rates to be "just and reasonable" and declaring that "every unjust and unreasonable charge" is unlawful. Section 2 prohibited personal discrimination "in the transportation of passengers or property" (which did not, of course, discourage elaborate systems of classification of commodities and passengers). Section 3 prohibited "... undue or unreasonable preference or advantage or any undue or unreasonable prejudice or disadvantage.. And Section 4, the Long-and-Short Haul Clause, attempted to be more specific about one supposed form of this discrimination by (as its popular description indicates) forbidding higher rates for shorter than for longer hauls "under substantially similar circumstances and conditions." Finally, Section 5, which was in effect repealed in 1920, prohibits pooling. What, then, were the main features of the economic landscape when the Act to Regulate Commerce was passed, in 1887, which have since disappeared? And what principal features have remained? Economic obsolescence: Railroads then and now (1) It was not universally true in 1887 that "the railroads had a monopoly." They faced intense competition from water carriers on some rivers and on the Great Lakes and along the coasts. At the time the Cullom Committee submitted its report, even the Erie Canal was sufficiently important to influence railroad rates on grain as well as other bulk commodities. Both the Windom and the Cullom Committees placed a stress on waterways which would have pleased the devotees of internal improvements in the 1830s. A perplexing question for the late nineteenth century was: how can one reconcile maximizing water competition and minimizing railroad rate discrimination? One could not then, and one cannot now. Both the geography and the economics of water carriage practically force railroads to discriminate if they are to compete. 9 (2) It was true in 1887 that the railroads had a unique position as common carriers which cannot be duplicated today by any one mode of transportation-or perhaps even by all modes taken together. First, as to passenger service: railroad passenger revenue in 1890 was $261 million, as compared with $714 million for freight traffic. Thus passenger service created over one-quarter of all railroad revenues. Railroads not only dominated passenger service; they also dominated the movement of mail, express, and baggage. So, with respect to movements other than freight, the history of railroad regulation can be traced back not only to the cost characteristics of railroads themselves, but to doctrines emanating from stagecoach and turnpike days when rates were separated from tolls, and passenger service standards were of great relative importance. (3) Railroads not only had a great deal to do with the location of production, and to a lesser degree of consumption, but also with the location of various intermediate functions. Wholesalers were some of the most eloquent witnesses before the Cullom Committee. And rail U.S. Department of Commerce, Bureau of the Census, "Historical Statistics of the United States," Bicentennial Edition, G.P.O., Washington, D.C., 1975, Part 2, pp. 730 and 83-944-78- -2 |