The Market Institute President Charles Sauer has a new piece in the Washington Examiner looking at new, potential regulations on America’s freight railroads. Here is an excerpt:
“Now, America’s freight railroads are all in much stronger financial positions and offer the most competitive shipping rates in the world. Or, at least they are in a much stronger position right now. The Surface Transportation Board is considering a revenue ceiling. It is the equivalent of suggesting that Steven Spielberg go back to filming his movies on the equipment that was available 40 years ago instead of modernizing.
Price controls in any form are bad. They hurt innovation, they hurt investment, and they provide perverse incentives that disrupt and cause inefficiencies in markets that end up hurting everyone.
That said, with the proliferation of technology since 1887, if the government is intent on looking into regulating the rail industry, officials can at least update their methodology. Kevin Murphy and Mark Zmijewski, economic professors from the University of Chicago, recently released a paper outlining an updated methodology to modernize how the STB monitors the financial health of the freight rail industry. In a nutshell, their methodology compares the financial performance of the railroads to the financial performance of companies operating in competitive (i.e., unregulated) markets for purposes of assessing revenue adequacy. They argue persuasively that railroads are an integral part of the economy and that a redefinition of how the industry is measured would stem off constant efforts to increase utility-style regulation of the sector.
This is important because increased regulations and price controls make rail less attractive to investors. U.S. freight railroads, which are almost entirely privately owned, invest an average of $25 billion annually to maintain and modernize the network. And, with freight demand expected to rise by 35% in the United States by 2040, they are going to need every dollar of those investments. But, if price controls are implemented, and if investors can get higher returns by investing in other industries, it doesn’t take a financial wizard to figure out where the investments are going to go.
If investors can make more money by investing in social media apps, then that is where they will invest. At the same time, the lack of investment would put a stranglehold on the rail industry. That doesn’t benefit anyone in the long run.”