By: Ian Jefferies, AAR President & CEO
A version of this article originally appeared on TheHill.com
The fourth quarter brought more than a chill in the air for the business community.
Across several measures, including an October survey that found executive confidence to be at its lowest level in a decade, U.S. business remain under a cloud of uncertainty.
What is at play goes beyond softness in the economy. Rather, there is a sense of uneasiness at the heart of the American economic consciousness, driven by multiple factors.
Looming large – even with the ratification of the U.S.-Mexico-Canada Agreement (USMCA) and the signing of Phase 1 of the China trade deal – are prolonged trade tensions. Tariffs with China have taken a toll on countless supply chains, reshaping how goods are moved. New data from the National Retail Federation show that the continued spat threatens nearly 1.47 million U.S. jobs.
Businesses want to move product and invest for the long term but require greater predictability.
At the same time, distrust in market outcomes and anti-corporate sentiment from some corners has led to a broader question about private enterprise. Some 40 percent of Americans say they would embrace socialism over capitalism, and the figure is even higher among millennials.
In response, some policymakers regardless of political affiliation seem swayed to react, more eager to pull the levers of government to affect outcomes. The industry I represent – privately owned freight railroads – also stands in the crosshairs, albeit less in plain sight.
Late last year, the U.S. Surface Transportation Board held a hearing on a complicated regulatory concept known as “revenue adequacy.” Congress introduced the concept for sound reasons: government should not regulate in a way that does not allow railroads to earn enough revenue to invest in their networks to ensure safe and efficient operations now and in the future.
The application of that policy, essentially monitoring the industry’s financial health, has been a resounding success. Railroads have invested $25 billion annually in recent years, or more than $68 million daily.
The current framework benefits shippers too. Average U.S. freight rail rates were 44 percent lower in 2018 than in 1981, meaning the average rail shipper can move almost double the freight for about the same price it paid 38 years ago. And, the train accident rate in 2018 was down 36 percent from 2000.
Yet there is a concern the STB might be moved by the swell of activist policymaking, perhaps nudged by a select group of powerful shippers seeking to take advantage. The concern is that they could – due directly to corporate rent seeking – turn today’s earnings floor into tomorrow’s ceiling, using annual determinations of a railroad’s financial health to cap rates, regardless of market conditions.
In other words, the STB could opt to firmly fix what a railroad can charge customers – harkening back to Interstate Commerce Commission ratemaking that once decimated the sector.
Regulation based on overall earnings in non-utility industries like railroads is widely discredited, deservedly so. There is no rational way to connect firm-wide earnings with a determination of whether a single rate for a customer is reasonable.
What’s more, railroads compete in a highly competitive environment. The largest segment of rail business today is intermodal – the combination of movements with trucks. One of the largest single customers across the network is UPS, a logistics titan at the heart of the U.S. e-commerce boom.
Indeed, there is no evidence of a widespread market failure to justify such egregious government intervention. Plus, rail customers already have myriad avenues at the STB to which they can petition rates they deem excessive.
Importantly, railroads are critical to the economy, moving roughly 40 percent of intercity ton-miles of freight, shipping a third of U.S. exports and supporting more than one million jobs across the nation. In the process, they take trucks off roads, reduce emissions and make the U.S. more competitive.
Unlike other freight transportation modes, they fully cover the costs of their privately-owned infrastructure. This stands in stark contrast to our ailing highway system, which lawmakers are again focused on in Congress. STB policies should encourage investment, not deter it.
Yet the industry confronts a reality whereby activist policymaking threatens to unravel a healthy market.
Put simply, markets – be it in trade or elsewhere – generally work better than government in producing optimal outcomes. The STB and policymakers everywhere should rediscover their power.