Why Reforming the ICC is Not Enough; W. Burt

90 over-investment in facilities. When direct Federal support began to recede in the 1870's, a day of reck oning loomed which could not be forestalled despite the industry's hapless attempts at cartelization. Rather than permit the weakest carri~rs to face the music, Con gress in 1887 created the Inter sta te Commerce Commission to regulate competition and pricing. Initially confounded by the mul tifarious forms of rebating with which companies had circumvented private pooling, the Act to Regu late Commerce needed several "perfecting" amendments. How ever, with the passage of the Mann-Elkins Act in 1910, the ICC began policing its price-fixing sys tem with relative effectiveness. The Transportation Act of 1920 formalized the Fede'ral govern1976 WHY REFORMING THE ICC IS NOT ENOUGH 91 ment's commitment to railroading as a public cartel. All this merely encouraged ship" pers to avoid rail transport. Reg ulation or no, this was bound .to occur. Trucking, barges, pipelines, and air transport all developed to some degree as the market's an swer to .attempted rail monopoly.

For instance, railroads· tended to set rates low on competitive routes (despite cartels) while holding up rates to places .they served alone ; hence, the short-haul trucker. But the growth of such alternatives through the 1920's and '30's hard ly implied an efficient free-market reallocation of traffic" for govern ment still meddled with all trans-: portation. Overbuilt trackage, shielded pricing, and the headlong leap into building public roads, waterways, and airports combined to initiate an exaggerated. shift of business to the railroads' new com petitors. Despite such distortion, the grip of. the rail cartels was so loosened that Congress was persuaded to bring the newcomers under regu lation: trucks and buses iill 1935, and water carriers in 1940. This time, "fairness" and "equality" did not cloak the intent to cartel ize the competitors, and shipper groups almost unanimously op posed extending regulation. Shak en by the depression, trucking firms pleaded for it.

Today, exemptions mean that the' ICC· regulates. alIld sustains a cartel made up of one-tenth of barge traffic, one-third of trucking, and all of railroading. Airlines are similarly overseen by the Civil Aeronautics Board. Economists say that transportation policy amounts to an implicit tax of more than $10 billion a year .. This fig ure, derived mainly from the costs of idled resources and regulatory misallocation of traffic among transport modes, cannot begin to account for the awesome loss of opportunities. But the U.S. De partment of Transportation has found the case sufficiently convinc ing to press for regulatory re form: speeding up the ICC's rate making process, allowing. "zones of reasonableness" within' which rail roads and truckers may freely tinker with rates, and supervising , traffic associations (rate bureaus) to ensure that· these agents of the public c'artel do not act "anticom peti tively."

Instead of merely enumerating costs of regulation, a more logical approach would note these six ma jor features of regulation which have been the undoing of trans portation: Antitrust The major impetus for regula tory reform comes from those who would remodel transport regula92 THE FREEMAN February tion along the lines of antitrust policy. Envisioning "perfect com petition" - an economy where con sumers are so wooed by producers that all political complaints about "high prices" or "scarcity" have been stilled - they overlook. the certainty that antitrust policy will foster inefficiency by imposing ar tificial limits upon the size and functions of transport firms. Un reached economies of scale and pervasive misallocation of traffic to less able carriers can be the only result. Startling evidence of this has been unearthed recently in the case of trailer or container-on-flat car rail traffic, which., was once touted as the savior of transporta tion because it uses trucks for short-haul pickup and delivery of containers while availing itself of the rails' long-haul efficiency. "Pig gyback," as such shipments are called, now loses money for many railroads. Why? The idea is un tarnished; however, because rail roads are prevented from owning truck firms performing piggy back's "retail" services, and be cause the ICC requires railroads essentially to price their services "by the mile," incentives have been bent towards maximizing the per centage of each piggyback trip spent on the rails. Thus, low-vol ume piggyback and container ter minals have proliferated, suffocating the concept of efficient "whole sale" rail service. Antitrust guar antees such expensive mischief.

Egalitarianism In response to its recent critics, the ICC has returned to waving its most infamous bloody shirt: "unfair a:nd unequal treatment." That the would-be reformers have also bowed to this emotional ap peal is apparent in the fact that their proposals leave intact exten sive ICC powers compelling car riers to handle each other's equip ment "without prejudice," to co operate in any through route or inter-line rate "reasonably" pro posed by connecting carriers, and to peg freight charges to mileage ethe "long-haul/short-haul clause") so as not to favor shippers in any one location. But discrimination incurs no in justice. The only thing "binding" a customer to any product such as transportation is his continued judgment that, whatever its unde sirabilities, he is still better off buying it than not. In contrast, forcing carriers to sell their prod uct on terms other than their own is but slavery.

Ironically, price discrimination often benefits those who bewail it. For example, wherever several pro ducers of the same product who are located differently ship to the same destination, strict mileage 1976 WHY REFORMING THE ICC IS NOT ENOUGH 93 rates result in the nearest pro ducer's underselling all others. This, of course, reduces the num ber of comp.eting shippers, each of whom now bears a much higher proportion of the overall costs of the transportation company. On the other hand, reducing rates to more distant producers permits costs to be spread over many rather than few customers. This makes possible many kinds of transportation which could not be supported by Hnearest" shippers alone. Though discrimination si multaneously increases transport efficiency, and contributes to the pleni tude of goods "from all over" found in most marketplaces, it has occasioned such lasting envy among its imagined victims that its benefits seem permanently for gotten.

To the extent, then, that egali tarianism wastes transportation resources, it is responsible for the railroads' dismal return on invest ment. Despite the ICC, though, proscribed price discrimination often reappears as service discrim ination - by far a relatively inef ficient substitute. Consider the latest generation of "hy-cube" boxcars designed to han dle auto-parts. These emerged when railroads were prevented from cutting rates to the auto makers, or from bending ICC car service rules to assure GM and Ford a dependable supply of freight cars. By building the ca pacity of two older cars into one big new one, railroad managers cleverly improved their ability to assure car supply and do so at effectively discounted rates. How ever, costs were run up in ways that didn't show until later. When auto traffic slackens, hy-cube cars amount to little more than white elephants. As maintenance forces have discovered, the weight of the big cars crushes already-weak track structures. Adding insult to injury, hy-cubes are found to gen era te extreme lateral "waddling"

movements at slow speeds which figure in an increasing number of derailments. Common Carrier Obligations How would we fare if carriers weren't required to provide stable service for everybody? We'd be better off ... with more variety and improved transporta tion. Best 'Of all, most of us could quit footing the bill for those "dis advantaged" people who choose to do their business from relatively inaccessible corners of the world. The common carrier obligation, a queer but time-honored anomaly of common law requiring transport firms to serve all "reasonable" comers, underlies nearly every power of the ICC. It also accounts for the familiar behavior of trans94 THE FREEMAN February port employees toward· the public. As Clarence Carson observes, theirsis the enthusiasm of a serf. 1 Included in the category of "common carrier" ICC decisions are those governing railroad branchline abandonments, truck service to small communities, and the rail passenger-service discon-, tinuations of the 1960's. The CAB's requiring airlines to serve small airports is yet another ex ample. When carriers are required to serve all (or· when tax monies support Amtrak's passenger trains), unspirited, mediocre serv ice is "assured" to "disadvan taged" recipients at the expense of others. More importantly~ such re quirements abort better ideas by keeping their potential markets locked in the cold arms of the common carrier.

Railroads ran long-distance pas senger trains decades after it had become clear that such operations had been doomed· by union rules and government subsidy of inter state highways and airways. After Congress created Amtrak to per petuate the existing passenger train concept, the public agency shortly dropped over one hundred trains from its schedules. Such a quantum leap backwards for the 1 Clarence B. Carson, Throttling the. Railroa.ds (Irvington, New York: Foun dation for Economic Education, Inc., 19711, p. 44. common carrier triggered an en trepreneurial response which in corporated major technological in novation" today .lavishes . unheard of service on its patrons, and, for the first time in memory, runs full, happy trains. "Auto-Train" could never have been born had Amtrak or the railroads lived up to their common· carrier .obligation. Prohibitions agai,nst railroad branchline abandonments have forestalled another better idea: the independent feeder "shortline"

railroad which, without union rules and with personal attention to rural shippers,can make money out· of many previously uneconom ic branches. Similarly, it is evi dent that deregulation of trucking would encourage widespread entry of low-capital entrepreneurs into service-oriented pickup and deliv ery. Lastly, the experience with CAB-unregulated intrastate air carriers in the Southwest gives reason to expect that deregulation would not only increase the profit ability of national airlines concen trating on dense routes, but also increase travel between lightly populated points served by efficient small air carriers. All of this is the other side· of the coin: "common carriage" actu ally circumscribes the different means by which people may avail themselves of transportation. It does so by spreading the errone1976 WHY REFORMING THE ICC IS NOT ENOUGH 95 ous notion that most shippers will find it more advantageous to force their desires upon a common car rier.~ despite low probability of success~ than to pay their own way .. on the free market. Politi cally, this formula is dynamite, emphasizing emotional appeal and obscuring complex truths.

The Incentive to Proted To this point we have analyzed dogmas retained under "reformed" regulation which are, however, not essential to regulation per se. Even more pernicious are. the institu tional dynamics .of regulation. One of these is the ICC's histor ic (though hotly denied) .policy of holding one carrier's rates up to protect the traffic of another known as "umbrella ratemaking." Another means to the same end is the Commission's effort to sustain weak carriers at the expense of stronger competitors,· as when the Milwa ukee Road was given track age rights into Portland, Oregon and Louisville, Kentucky as condi tions for ICC approval of the Burl ington Northern and Louisville & Nashville/Monon Railroad merg ers. Such practices are rationalized in part by Congress' mandate in 1940 to "promote sound and eco nomic conditions" among regulat ed carriers. Despite a simultane ous directive (and another in 1958) to refrain from disturbing the "inherent advantages" of its subjects, the Commission has re peatedly seized upon the 1940 lan guage to excuse its sustaining weaker carriers by robbing strong er ones.

With good reason! All of the ICC's political incentives place a premium upon increasing the num ber of its constituents-at least as long as it can do so at the ex pense of strong carriers' finances or inelastic consumer demand. The excess capacity, lingering financial anemia, and. periodic bankruptcies can all.be blamed on "capitalism" or "mismanagement," and charged to the taxpayers eventually. Congress, too, would apparently prefer to "fly now and (let the other guy) pay later"; witness the current imbroglio over allowing the Lehigh Valley or Rock Island railroads to be abandoned. Um brella policy, then, is also conso nant with political shortsighted ness, and is therefore a permanent feature of economic regulation. The Threat of Intervention and Its Uses Recently, the ICC has stressed that only a small percentage of rates are suspended, and fewer still refused, because they are too low. Nonetheless, the cartel is alive and well. Inflation means that rate decreases take the form of rela96 THE FREEMAN February tively smaller rate increases . More over, most of the Commission's work· has already been done, for rates of various kinds do not go into effect until they have been ap proved by organizations of car riers known as "rate bureaus."

If confined to the innocuous data-gathering services they tout, rate bureaus' expenses would be minor. Instead, the approximately ninety rail, truck, and water traf fic associations each collect mil lions of dollars every year from member carriers, most of which is spent to maintain forces of potent legal and lobbyist talent used on behalf of cartel interests. Protests by well-funded and sophisticated rate bureaus routinely bring on ICC suspension of independent rate filings - what few there are and thus raise the probable costs of filing "cut rates." Combined with the ICC's casting railroads in the dual roles of competitors/co operators, the deterrent is usually sufficient to obviate any need for open Commission enforcement of cartel pricing. Indeed, rate bu reaus themselves seldom overtly request "minimum rate orders," so deep-rooted is their pervasive influence. As long as the power of suspen sion· and refusal over management decisions exists, there will be peo ple to exploit it and magnify its superficially minor impact. Amendments to the Interstate Commerce Act in 1948 assured "the free and unrestrained right to take inde pendent action" in filing rates.

Regulatory reform legislation would do no more than reaffirm this principle with similarly hol low words. The Destruction of Regulated Transport The recent remarkable upsurge in unregulated owner-serving "pri vate" trucking, "contract carriers" (trucking firms devoted to single customers), and illegal gypsy haul ers reminds us that the market is ever at work devising paths around government obstacles. Characteristically, regulation generates artificial monopoly gains in some economic sectors to dissi pate them elsewhere. Briefly, con sumers of the first product are trapped, enabling the regulators·to reap loot sufficient to support their beneficiaries. But the consumer victims rather quickly discover "next-best" substitutes for the regulated item. Though in trans portation the substitution process is made more difficult by immense . capital costs, even these will be overcome given enough incentive by cartel pricing.

Once this· occurs, three choices unfold to public policymakers: (1) extend regulation to the substi hItes, (2) initiate direct tax sub1976 WHY REFORMING THE ICC IS NOT ENOUGH 97 sidy of intended beneficiaries, or (3) give up the whole unsavory game. Again and again, Congress has chosen to extend· regulation most notably in 1935 when truck competition was beginning to dis lodge both the rail cartel and its rationale. Now, regulatory reform proposes permanent direct subsidy to railroads in the form of a "trust fund" financed by a tax on all (in cluding unregulated) carriers. Continuing diversion of business to unregulated carriers would like ly lead Congress to extend regu lation to them, also. One must question how long this can go on before the public recog nizes the dangers underlying con tinued regulation. Surely, many consumers will always find ways to avoid the regulatory cartel. Al ready we are seeing plant and inventory duplication to avoid trans port altogether - better known as economic Balkanization. As the gap keeps widening between orig inal free-market possibilities and remaining substitutes, however, we all become poorer. The only way the cartel can be made to work for its beneficiaries is by complete government control of the econ omy, at which point it should be evident just how much we have been impoverished.

But it will be too late then. Regulation's defenders claim that viable free-market transpor tation alternatives were never pos sible. But the truth is that gov ernment intervention put us on the path to where we are today. If jus tice and necessity are to prevail, transportation will be deregulated. Regulatory reform is not enough., IDEAS ON LIBERTY "Horse and Buggy" Principles THE IDEAS of our forefathers are now often called "horse and buggy" principles that might work in a frontier community but not in an industrial age of rapid transportation and communi cation. The fact remains, however, that it was those "horse and buggy" principles themselves that caused the development of the automobile and the countless other products and services that have made this earth a more pleasant place to live. Conversely, the worldwide situation that has been threatening for so many years to plunge us back into the barbat'ism of complete govern mental controls is due almost exclusively to a rejection of those principles and concepts - in all nations, including our own.

DEAN RUSSELL, "The Silent Partner"