Sunday, July 27, 2008

No. 2 - Regulation

We shall reach back a little further in time for the second item on our list of things we, the United States, should have done to foster a vital Passenger Rail system over time.

Regulation of the rail transportation system, in general, should have ended after the Robber Baron era. We are sure that the public of the late nineteenth century saw abuses by the railroads. The system of regulation that continued without mercy into the third quarter of the twentieth century abused the so-called private-sector railroads far more.

In today's economy, we are having a healthy discussion about the relative merits of free markets v. regulation. Movements are afoot to re-regulate rail and big oil and big drug and big any other business that is seen as making a buck off the Little Guy. But every dollar made in this country originates with the Little Guy.

By regulating the health out of the railroads, Government deprived the Little Guy of a vital form of transportation. The Little Guy no longer had the choice of taking a passenger train from Point A to Point B. Indirectly, Little Guy and Girl were deprived of truck-free highways good for a Sunday afternoon spin. We were deprived of the clean environment that trains foster and trucks do not. We were deprived of all of the potential advancements in rail service that many other parts of the world have or will have. Because even while regulating rail, and with the exception of national emergency (read World War), Government refused to run the trains. Via ridiculous yearly Congressional debates over funding Amtrak, Government still refuses to run the very corporate entity it set up to be the trains.

Would we have done better without regulation? You bet. First, the railroads that ran the passenger trains would have had a fairer chance to remain solvent. Though solvency in railroad terms is an interesting accounting theory probably served more by a whole book than by this blog, suffice it to say that a fully solvent corporation, one making money for its investors, is less likely to have to cut off marginal parts of the business.

Did we say marginal? Yes, because although Passenger Rail does not make money on a fully allocated cost basis, there was a time when it did make money on an avoidable cost basis. Basically that means that, if freight is solvent and paying all fixed and avoidable costs (trains, track and infrastructure), then Passenger Rail has only to pay avoidable costs to make money. What once was an accounting ploy by the railroads to show regulators how badly they needed to raise the rates became common practice and had everybody convinced that passengers were dragging freight down. (They were - but only because freight rates were regulated too heavily to make a profit from the combination of both freight and passenger service.)

Without regulation, passenger rates would also have risen with the economy. The railroad that wanted to lure pasengers from airlines and automobiles would have been free to hold the bargain-basement sale (at the expense of freight, which would have been paying its way in any case). Without regulation, freight would have been able to maintain its competitive edge with truck and barge, and been able to "do a deal" on rates where needed to snag the business. (As opposed to going to the government hat in hand to ask mother-may-I when a rate change seemed appropriate.)

In its own way, and with the help of the NIMBYs and environmentalists, Government still regulates the rails. Freight has been free to flow at market rates for decades, but building more infrastructure is a daunting task. So you won't see new rail routes blazed out of virgin territory any sooner than you will see new oil refineries in cities that never had them, or new oil rigs off the coast of California.

We are a nation of contortionists, my friends. Because we have been screwing ourselves for years.

©2008 - C. A. Turek -
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