October 14 marks an important day for proponents of free markets, competition, innovation and limited market intervention by the federal government: The Staggers Rail Act – signed into law by President Jimmy Carter – turns 40 years old.
The Staggers Act partially deregulated privately owned freight railroads in terms of setting prices for services and setting rail rates, making decisions regarding what routes to use, and establishing shipper contracts, which allows freight railroads to make decisions based on market conditions.
For sectors like railroads, pipelines or even broadband that pay for their own infrastructure, possessing the freedom and flexibility on these type of decisions are essential to operations, resiliency and survival. Investors put their financial capital in companies and industries where there is a sound possibility of returns. When government limits activity and returns via intrusive regulation, an industry begins to crumble.
The Staggers Act helped to revitalize and modernize the railroad industry, which also drives economic activity for companies large and small. In the coronavirus era, railroads are playing an integral role in growing e-commerce, an increasingly vital lifeline for U.S. small businesses. As lawmakers continue to wrestle with big policy questions related to markets and competition across sectors, especially with regard to policy that will drive economic recovery and growth, they need to look at rail deregulation for important lessons.
During much of the 20th century, intrusive federal regulations drove price-setting and other major decisions over railroad operations. Reacting to a time when railroads were abusing market power, the federal government enacted many changes that reigned in influence, including creation of the Interstate Commerce Commission.
Yet, as many years passed by, and with the creation of the highway system on top of decades of cumulative bureaucratic pile-on, the regulatory burden and costs became untenable for the railroads. Invasive price controls depressed private investment, which in turn hurt service and safety.
Thankfully President Carter and Congress chose the right decision of the two they faced: nationalize the railroads or unleash market forces to let carriers sink or swim. They chose the latter, which has had an extraordinary impact on railroad profitability while helping the industry become a key cog in the nation’s transportation network.
With the Staggers Act, Congress struck a unique balance that would be especially novel in today’s polarized times. The law generally got the government out of the business of overt rate making, and installed a comprehensive backstop for businesses captive to railroads lacking competitive shipping options.
The outcome for railroads was positive and dramatic in improving efficiency and productivity, capital investment, maintenance and safety, market share, profitability, and reduced costs and enhanced service for customers.
The impact that remains today is worth noting, as most lawmakers let alone the public probably do not think much about railroads or the regulatory structure underpinning them: A 2018 study found that Class I railroads supported more than 1.1 million jobs, $219.5 billion in output and $71.3 billion in wages.
Downstream, based on recent analysis from our organization, the Small Business & Entrepreneurship Council, there is a direct and positive impact on American small businesses. Of the 13 major industries directly and indirectly impacted by railroads, most employer firms are small businesses with fewer than 20 employees – ranging from 51 percent of firms in the warehousing and storage sector to 93 percent in the agricultural sector. In all 13 sectors, firms with fewer than 100 employees make up at least 69 percent of employer firms, all the way to 99 percent in construction.
Looking ahead, especially as our economy needs to dig out of a deep economic hole from the pandemic, small businesses – indeed, all businesses - and their employees need a public policy environment that promotes investment and innovation in all sectors, including rail. Intrusive and knee-jerk regulation can undermine such goals and harm the critical sectors that have become increasingly important in the COVID economy. Lawmakers and regulators must separate discussion of health and public safety from economic matters – including rate regulation.
The Staggers Rail Act turning 40 is a good news-story at a time when we need it. Let’s hope it can be preserved and serve as a lesson for regulation writ large. Markets are almost always more efficient and effective than government.