Getting supply chains moving is critical to the Biden administration’s plan to generate sustained and inclusive economic growth.
Yet while the administration seeks to improve supply chain efficiency, it simultaneously threatens to impede the freight rail network through new regulations.
In early 2021, President Biden introduced a sweeping Executive Order (EO) on Promoting Competition in the American Economy. A subsection of the order targets rail by seeking to implement “forced switching” regulations, which would significantly burden an industry that keeps goods moving across the country. Forcing railroads to carry traffic for competitors would inject huge inefficiencies into rail transportation and undermine rail investment because if a railroad had to use infrastructure it pays for on behalf of a competitor, its incentive to install the infrastructure in the first place would be sharply reduced. Many of the premises underpinning the EO are mistaken or misleading in the rail context. The Surface Transportation Board (STB) should not turn these false assumptions into misguided regulations.
Consolidation & Competition: Freight Rail’s Strength Lies in Economies of Scale
Section 1 of the EO asserts, “over the last several decades, as industries have consolidated, competition has weakened in too many markets … with workers, farmers, small businesses, and consumers paying the price.” Therefore, the order is based on the idea that consolidation within an industry can reduce competition and decreases consumer welfare. Yet, the rail industry’s strength lies in economies of scale: The ability to haul larger loads and longer distances with fewer interruptions than other modes leads to greater efficiencies (e.g., on average, rail is three to four times more fuel-efficient than trucks) and a more productive, cost-effective and reliable industry that’s better able to meet our nation’s transportation needs.
Moreover, as Hoover Institution scholar David Henderson outlined, the EO is a gross oversimplification of competition. “There are only seven major railways in America and, on some routes, only two railways,” says Henderson. “Yet competition is intense. How else can one explain the drop in rail rates paid by shippers?”
This focus on creating more efficient networks that can capitalize on greater economies of scale, improve safety and improve network fluidity (providing better value to customers) is the economic rationale underpinning the changes in the rail industry over the last several decades — not a desire to reduce competition.
In fact, railroads face intense competition from each other, from other transportation modes (especially trucks) and from other competitive forces. The competition between larger, more efficient railroads has led rail rates to decline by 44% (on average) since 1980 as railroads fought for market share and innovated to deliver improved service. Furthermore, railroads continue to face competition from other modes of freight transportation (such as ubiquitous trucks) across geographic regions and within product segments that the industry hauls. Therefore, the generalizations offered as the main basis of the EO bear little resemblance to the environment fueling growth in the railroad industry over the last several decades.
Good-Paying Jobs: Freight Rail’s Resilience Lies in its Dedicated Workers
The EO also argues generally: “Consolidation has increased the power of corporate employers, making it harder for workers to bargain for higher wages and better work conditions.” Yet this hardly applies to the railroad industry, where 84% of workers on the large “Class I” railroads are union members and subject to collective bargaining. Likewise, rail worker wages and benefits are significantly higher than the average U.S. employee, totaling $135,700 vs. $87,000, respectively.
What’s more, rail employee wages have grown significantly over the last decade, increasing by nearly 40% between 2009 and 2019, almost double the rate of inflation. Railroads invest significant resources in training their workers to ensure safe and efficient performance on the job. In stark contrast to claims made in the EO, rail continues to build on its foundation of good-paying jobs and invest further in its workforce to meet current supply chain challenges.
Freight Rail is Adapting to Meet the Challenges of Today & Tomorrow
Perhaps most misleading in the case of rail, the EO argues that consolidation threatens economic recovery, “endangering our ability to rebuild and emerge from the coronavirus disease 2019 (COVID-19) pandemic with a vibrant, innovative, and growing economy.” Yet this assertion ignores the railroads’ role as an “essential component of pandemic resilience,” as found by Northwestern University — a role enabled by the flexibility the current regulatory framework allows.
Despite what the July 2021 EO argues and problematic regulations it encourages at the STB, the rail industry remains competitive, employee-focused and resilient. Forcing railroads to dramatically change their operations in the misguided name of enhancing competition would actually reduce rail competitiveness and hurt the administration’s goals of supply chain resilience and improved environmental outcomes. A more thoughtful approach to freight rail regulation would build on the current framework’s decades of success and keep American rail vibrant and competitive well into the future.