This month commemorates an important economic milestone for the nation — the 40th anniversary of the Staggers Act, the railroad deregulation legislation signed into law by then-President Jimmy Carter.
The law might not be widely known outside a small circle of transportation experts, but it is safe to say that all Americans continue to benefit from it daily. The remarkable success of the law enabled the market to accomplish what regulators could not. It spared the U.S. railroads from bankruptcy, increased competition, dramatically dropped shipping costs and saved consumers billions of dollars annually in lower priced goods.
To get a fuller appreciation of the success of these regulatory reforms, it is necessary to step back a half century to understand the stark conditions of the rail sector.
In the decades leading up to deregulation, the rail sector was largely controlled by the now defunct Interstate Commerce Commission. Back then, prices were established by regulators in ways that discriminated between who the rail operator was, the type of commerce being transported, the routes and final destination, and the length of the haul — all baking in subsidies for routes that would not be financially viable in a competitive marketplace.
After construction of the interstate highway system during the 1950s and 60s, the heavily regulated railroad industry found itself competing with a trucking industry. The trucking industry wisely cherry-picked the rails’ most profitable lines, which were set by regulators at higher prices in order to subsidize unprofitable lines. Because railroads were unable to change their calcified and government-mandated prices or abandon unprofitable rail lines, they were unable to complete and earn reasonable returns on their investments. At that time, several major rail operators fell into bankruptcy, while many others stood on the brink of insolvency.
To put this financial calamity in perspective: in the decade before regulatory reforms, the rail industry’s 10-year profits averaged around 2 percent and was poised for extinction, as operators began to falter. Congress pondered two disparate options: a government takeover of the rail or deregulation. In the end, Congress took a gamble and chose deregulation.
Railroad regulatory reforms permitted pricing flexibility, which increased intermodal rivalry. In the years to follow, this led to a 44 percent decrease in transportation costs and $10 billion in annual savings for consumers.
The deregulation of the railroads was part of a broader trend that swept the U.S. in the 1970s and 1980s, which led to pricing competition in the airlines, railroads, long distance telecommunications and brokerage trading. In every case, regulatory reforms produced lower consumer prices. For example:
- While it used to cost hundreds of dollars for each stock trade in the 1970s, it costs about $10 today;
- Back then, Ma Bell’s average long distance revenue per minute was 35 cents or about 91 cents per minute in today’s dollars, while it is virtually free now with Voice-over-Internet services and bucket pricing plans;
- Pre-deregulation, interstate commerce rules required a 45-mile truck delivery from Northern Virginia to Baltimore to return empty, while deregulation allowed truck operators to save costs and fill empty backhauls, which saved consumers shipping costs; and
- The deregulation of airlines allowed average Americans for the first time to afford commercial flights.
None of this would have been possible without ending onerous price regulations. All in all, when totaling the effects from the deregulation of the airlines, railroads, long distance telecommunications, and securities trading, consumers receive about $100 billion in annual benefits.
If we have learned anything from this economic history, it is that the nation should never go back the dark days of excessive price and earnings regulations. As the Staggers Act demonstrated four decades later, deregulation when done correctly can provide huge benefits to the nation in general and to consumers in particular.
Steve Pociask is president and CEO of the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.