shkrobius (shkrobius) wrote,
shkrobius
shkrobius

American railroads

My friend is teaching economics at UCB. Back in December we debated a subject that cannot escape any overseas visitor: the decline of American railroads (RRs) relative to motorways. How did it happen that RRs lost so much ground after being the poster child of progress?

Her position was that RRs originated in the private domain, whereas the highways originated in the public domain; this difference was what did RRs in. This is not unreasonable. That the highways originated in the public domain was a reaction to abuses that originated in the private domain (see below). Ironically, this was the reaction to the abuses in the construction of waterways and canals in the public domain (it appears that every other generation believes that it knows better). It is much easier to share costs and concentrate capital in the public domain than in the private domain; the efficiency is lower, but the costs of inefficiency can be spread more widely. Trucking took advantage of this situation and monopolized more remunerative traffic; RRs were pushed into the areas of low-margin profits.

The problem with this rationale, of course, is that the history of European RRs is equally replete with abuse, excessive regulation, subsidies, botched deregulation, etc.

I believed that RRs fell victim to excessive regulation by the Interstate Commerce Commission (ICC) that was instituted in 1887 and abolished in our own time
http://en.wikipedia.org/wiki/Interstate_Commerce_Commission
http://www.pbs.org/wgbh/americanexperience/features/general-article/streamliners-commerce/
With so many price controls, RRs remained profitable mainly through passenger transportation; when this traffic became lost to highways, the decline was precipitous. The weakness of this argument is that the truck traffic is also heavily regulated. Furthermore, the deregulation revived the RRs only to a limited extent. The common wisdom is that the RRs lost so much ground that they could not become competitive even after being given the deregulation advantage.

That RRs became so strictly regulated in the golden age of capitalism is itself telling of the extent of graft. As local monopolists, RRs were universally loathed for abuse of their customers. Popular backlash against their arbitrary pricing caused the establishment of the ICC, and RRs largely lost the freedom of setting their own prices. That, however, only moved the locus of corruption right into the government.

...The Act states that rates charged by the railroads had to be "just and reasonable," but it did not set standards for reasonableness. Railroads were forbidden to give preference, advantage, special rates, or rebates to any person, company, location, city or type of traffic. Railroads were not allowed to charge more for a short haul than a long haul under the same circumstances when the short haul was a segment of a longer haul (e.g., a New York-Baltimore trip should not cost more than a New York-Washington, D.C. trip). The act prohibited pooling, which, in a railroad's case, was the sharing of revenue or freight. Railroads were required to publish rates and give advance notice of change.

The ICC was supposed to be an anti-monopoly regulator. By the 1920s, it was orchestrating mergers, establishing price fixing schemes, etc. By 1958 everyone realized that the ICC (that by that time was the revolving door for RR officials) presented a monopolistic threat that was greater than any RR company. Each administration starting from Kennedy’s increasingly deregulated RRs, but only in 1995 the ICC was abolished.

And so the argument went back and forth until we found an interesting paper by R. Levin
http://www.nber.org/chapters/c11432.pdf
which challenged both of these arguments. Levin claims (rather convincingly, in my opinion) that the problem was the excess capacity due to the obsolete geographical pattern of American railroads, which were built for another age:

...the existing railroad network was designed and built in response to the technological imperatives and locational patterns of the 19th-century economy. The advent of alternative technologies (trucking and intermodal) and dramatic shifts in the location
of industry and the consuming population have rendered much of the existing rail plant obsolete, despite traffic growth on other portions of the rail network. The longevity of railroad capital alone would be sufficient to create subnormal profits under such conditions, but the problem has been exacerbated by regulatory control over the exit of capital. The problem of excess capacity is exacerbated by rate regulation as well as by abandonment regulation.

...One of the oldest principles of ICC rate regulation is that shipments of comparable goods over comparable distances should be comparably priced. Since the cost of providing rail service over low-density lines is substantially higher than over high density lines, application of this principle has entailed cross-subsidization of low-density traffic by high-density traffic. It is possible that some low-density lines would remain viable if rates were allowed to rise to cover the variable costs of providing service, although in a great many cases remunerative rail rates would surely induce a shift to alternative modes.

... Analysis of recently compiled DOT line-segment data revealed that nearly two-thirds of the nation's class I railroad mileage is below or barely above the break-even level of traffic density at current rail rates, and a substantial fraction of these lines fail to produce revenues sufficient to cover variable costs. Interfirm profitability differences were found to depend upon the proportion of low-density lines in a firm's network, and our profitability model provided strong support for the hypothesis that losses on low-density lines are cross-subsidized by profits on lines of higher density.


U.S.A. is a large country. It is impossible to cover it all with roads with the same density as Europe; RR construction reflected this reality, connecting major agricultural and manufacturing centers. This system ossified in the 1930s; little construction occurred afterwards. As such, the network represents the industrial pattern of the 19th century. That pattern no longer exists, and many of the RRs that were constructed to support high-density traffic (and turning profit) presently support low-density traffic, whereas the maintenance and operation costs remain the same across the network. The problem is that the locomotives (unlike the trucks) profitably pull only large loads, so in low-density lines there is loss of profits that can only be compensated by cross-subsidization, which erodes overall profitability. This can be mitigated by higher pricing or elimination of the low-density lines. That was illegal under the ICC control. But even when it became legal, little has changed. Higher pricing is still uncompetitive with trucking, while abandoning the lines only shrinks the RR system further; the investment into new construction is very low. In Europe, there is little construction, too, but the railroad density at the moment when highway traffic became competitive with the rail was significantly higher than in America, and so these networks are more flexible in supporting regional shifts in production and consumption.

I do not think I’ve learned the answer, but I’ve learned to appreciate the difficulty of answering such “simple” questions. She was a good teacher!
Tags: economics
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  • Канадские загадки

    Гостил у сына в Монреале и увидел в местной газете неизвестную мне загадку (они ее binaire называют). Пишут, она возникла в Японии, оттуда…

  • Индийский желтый

    Мне нечего стыдиться: мои Тернеры висят в Лондоне, Нью-Йорке, Париже, Берлине, Вене. Я прочел все, написанное о его живописи, - а это сотни полотен…

  • Штуковина

    Спасибо, что зашли в лавку. Я Шмидт, слышали про такого? Всю жизнь строгал да клеил, теперь, увы, глаза не те. В мастерской хозяйничает сын, а я…