Freight Rail’s Anti-Trust Exemption
An alert industry observer brought to my attention legislation by Senator Herb Kohl (D-WI) aimed at revoking the anti-trust exemption the freight rail industry currently enjoys. I don’t want to claim to be an expert on all the ins-and-outs of this but my understanding is that this would be a mistake and that it’s good that Jay Rockefeller (D-WV) has switched sides and is now joining Sens. Kay Bailey Hutchison, Frank Lautenberg, and John Thune in opposing this.
One of the reasons the rail situation in the United States has gotten so bad is because of a lot of infighting between the freight rail people and the passenger rail and transit people. More recently, however, the OneRail coalition has come together, which recognizes that rail advocates of all kinds have a great deal in common and can best advance their goals working together. A strong freight rail industry can and should be an important part of America’s transportation network, both because of its own intrinsic benefits (this is a very energy efficient way of moving stuff) and also as part of building a rail system that’s robust enough to also support viable passenger traffic. The fact that rail shipping rates are rising reflects the fact that rail is an appealing option under present conditions. It looks to me like an argument for increasing freight rail capacity not for harsher regulations.
32 Responses to “Freight Rail’s Anti-Trust Exemption”
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May 29th, 2009 at 4:06 pm
Not that I disagree with the content on this post in any way, but I find it interesting the Matt seems to think we need more regulation in every industry other than rail, which is of course a great personal interest of his. This seems a lot like regulate industries I don’t like and let the industries I like go untouched.
May 29th, 2009 at 4:15 pm
Um, the chief form that antitrust harm takes is reduced output. The monopolist or cartel prices above marginal cost. This leads to maximizing profits, but also less output, and the difference between the potential output and the output under monopoly/cartel pricing creates a deadweight loss. See here (particularly the deadweight loss graph):
http://en.wikipedia.org/wiki/Monopoly
Now it is true some forms of industry cooperation can increase output. However, antitrust law already makes exceptions for such cases, so there is a good chance that a general antitrust exemption is creating some sort of output reduction.
May 29th, 2009 at 4:16 pm
That second paragraph by MY is just awful. It reads like corporate propaganda (”have a great deal in common and can best advance their goals working together”).
How does the fact that freight rail rates are rising support the argument against removing the anti-trust exemption?
May 29th, 2009 at 4:25 pm
How does the fact that freight rail rates are rising support the argument against removing the anti-trust exemption?
Indeed, the fact that rates for this very efficient way of moving things are increasing is a classic red flag when it comes to antitrust.
By the way, I don’t have a firm opinion on the overall issue. I just think it is clear that Matt doesn’t really understand why there are antitrust laws in the first place.
May 29th, 2009 at 4:39 pm
I am not sure that the freight rail companies are making any real effort to increase systemic capacity, with a few minor exceptions a choke points (e.g., around the port of Los Angeles).
More importantly, they have not, at least in the recent past, seriously encouraged the joint use of their railways for passenger and freight. They have been willing to get Amtrak to pay for major upgrades, but this isn’t sharing. This is getting Amtrak to help subsidize their core business while keeping their passenger ticket prices so high they they will never really compete for your track space.
If we want to encourage the development and upgrade of railways, the government should develop policies that do that. Protecting the freight companies from competition is an inefficient way to achieve that goal, since there is no way to insure that the additional profits achieved will go to that purpose (rather than being distributed to shareholders).
May 29th, 2009 at 4:40 pm
I’m unclear on why you think rail companies should get the exemption. Is the idea that rail companies won’t build a larger and better network unless they can engages in business practices that would normally subject them to antitrust liability? If so, what, specifically, are those practices?
May 29th, 2009 at 4:41 pm
While Matt’s gut reaction is nice, I would like some more information about this matter before I draw the conclusion that freight monopolies are the best thing ever. What does a real expert like Phillip Longman say?
The Selfridge Merrys & DTM:
At a time when trucking companies are hurting (mostly because of rising/unstable fuel prices) an increase in rail freight prices is probably inevitable, but monopoly protection doesn’t make it any better.
May 29th, 2009 at 4:44 pm
Well, Matt may not have explained it very well, but the reason for not eliminating the anti-trust exemption is to increase rail capacity. Rail is heavily regulated, with considerable required expenditures on track replacement (among other safety measures), so expanding track both costs money today and costs money tomorrow. If rail services were purely competitively priced, there is a risk that either rail companies would either be unable to meet these required expenses (and go out of business, like they did in the 1970s), or that they would successfully lobby to be relieved of regulation (leading to less safety). So its not at all clear at the moment that the current regulatory regime for rail lacks sufficient competition to keep prices at the level required to meet regulatorily imposed safety standards, but no higher.
May 29th, 2009 at 4:50 pm
My understanding of the anti-trust exemption is that it allows mainly for two anti-competitive practices. First railroads can rent cars from each other at pre-determined rates that are not really subject to competition. This allows one railroad to transfer a full car to another railroad, which can then return it filled with something else at a latter date. This prevents lots of empty cars from running around, or from the railroads negotiating preferential rates with some partners and punitive ones with others. The exemption also allows a consortium of railroads to own a rail car leasing company (TTX)that provides cars back to those same railroads. This is supposed to reduce the overall amount of rolling stock, keep all of the railroads supplied with adequate cars, and balance the risk of buying too much or too little capacity among all the big players. This portion it seems to me could be handled by a companies that were separated financially from the railroads. How passenger rail fits into the exemption, I’m not sure.
May 29th, 2009 at 4:55 pm
It’s not clear to me how you can be so certain, Matt, that rising rates do not reflect a large amount of oligopoly power. The truly massive consolidation of the industry over the last decade or so certainly suggests this possibility.
May 29th, 2009 at 5:25 pm
I just wanted to clarify my earlier comment…
While I think that (a) freight companies are not really pushing for systemic increases in capacity, and (b) the anti-trust exemption in question does not promote passenger rail capacity, I am not really against the exemption.
Most of the comments to date seem to assume that this exemption allows these companies to engage in some sort of price-fixing on the rates charged to shippers. I don’t think this is true. The comments don’t seem to realize that, with few exceptions, these companies are not in direct competition with each other for a given shipment. They “compete” with one another in the same way that Interstates 95 and 80 compete with one another for autos. While both roads carry cars, these cars are not fully fungible, since they are going to/from different locations.
May 29th, 2009 at 5:33 pm
Railroads, like electric power, water, etc. is a natural monopoly/oligopoly.
There should be a commission, similar to the old CAB, to oversee these types of public goods.
The deluge of neoliberal propaganda over the last 30 years has been very successful in burying what was once accepted knowledge among economists.
May 29th, 2009 at 7:09 pm
I think that despite Matt’s best effort, we’re unlikely to see an upwelling of sympathy for freight railroads among the urbanist left. Their vast land-holdings were mostly given to them for free in the 19th century, in the misguided but eternal view that handouts to private enterprise were the only way to stimulate competition and investment. Many of them have made a fortune developing this land, not to mention driving hard deals with the taxpayers for passenger use of their lines.
May 29th, 2009 at 7:37 pm
What a laff riot! And let me just say, I appreciate your willingness to comment even though you clearly know nothing at all about the subject.
Feeling no particular inclination to enlighten you on the past 150 years of efforts to untangle this Gordian knot, let’s do the short form-
The railroads are not competing with other railroads, they are competing with trucks, planes, and barges.
Now, you might notice that trucks, planes and barges all use facilities built by the government. Presumably, just as the railroads paid the government for the land that was ‘given’ to them, these other transportation modes have also paid for the roads, airfields, locks, and dams they use.
I do feel a little bad about interrupting this orgy of confabulation with any actual facts. Please, ignore me and continue with your highly amusing fantasies.
May 29th, 2009 at 7:56 pm
Though it wasn’t so bad travelling across the northern part of the country, when I took Amtrack from Oregon to Texas, we were forever pulling over for freight trains, always off schedule, and even had to deboard to catch a bus to catch another train in L.A. Amtrak does seem to me to be the red-headed step-child of the railways.
May 29th, 2009 at 8:35 pm
TLS,
If what Captured Shadow wrote is correct, then this is actually more a oligopsony pricing issue than a oligopoly pricing issue, meaning it appears in various ways the railroads are collaborating to set the prices at which they will rent cars from each other or lease cars from this leasing company. In general, however, the antitrust harm caused by oligopsony pricing ends up being the same: output reductions and deadweight loss. But it appears there is some argument about why limiting output (of cars to rent and cars to lease) is a good thing in this specific case.
Which it may well be, although I find it somewhat ironic that Matt just posted elsewhere about his awareness of the general problems with price caps.
May 29th, 2009 at 8:45 pm
The idea that rail lines have a monopoly or trust is silly. They compete with trucks. I know this, I see freight trucks every day.
To whit: once upon a time there were privately owned passenger rail lines in this country. They tried to conglomerate into a single passenger rail service in order to compete with busses, cars, and planes. The government would not, citing anti-trust measures, and privately owned passenger rail folded. Then the government stepped in and started a government owned passenger rail system (Amtrak) that is inefficient because politicians in the hinterland mandate that it go through their state.
The lesson: if there is competition, it isn’t really a monopoly. Therefore, freight rail isn’t a monopoly. Especially when they have to pay for their own rail, whereas freight trucking gets a de-facto subsidy via highways.
May 29th, 2009 at 9:03 pm
The idea that rail lines have a monopoly or trust is silly. They compete with trucks. I know this, I see freight trucks every day.
As an aside, modern antitrust doctrine recognizes that many products compete with many imperfect substitutes (or many other products with which there is a positive but not infinite cross elasticity of demand, if you want to get technical). The question then becomes whether the presence of these imperfect substitutes is sufficient to prevent a hypothetical monopolist from profitably increasing prices. In the U.S., this notion is operationalized by the Small but Significant and Non-transitory Increase in Price (or SSNIP) test:
http://en.wikipedia.org/wiki/Small_but_Significant_and_Non-transitory_Increase_in_Price
I note this because that means the fact that freight trains compete to some extent with freight trucks doesn’t automatically imply that freight train companies could not violate U.S. antitrust law by forming a cartel to fix prices–that would depend on this SSNIP test.
But that is all an aside, because as I noted above, it appears this is actually a oligopsony issue, not a oligopoly issue, meaning the cartel is forming on the buying side (of freight rail cars) not the selling side (of freight carrying services). And I am pretty sure that freight train companies collectively make up the vast bulk of the buying side of the market for freight rail cars in a perfectly intuitive fashion, even before we get to the SSNIP test.
May 29th, 2009 at 10:35 pm
Operationalized? That isn’t a real word.
You probably don’t know this, but freight rail cars are multi-modal. Meaning they will fit on freight rail trains, freight rail trucks, and ocean going cargo vessels.
http://en.wikipedia.org/wiki/Containerization
Your theory about freight rail’s buying cartel is bunk. There are plenty of non-rail buyers; trucks, planes, and ships. Rail has some advantages and disadvantages. Rail is more fuel efficient, but has less government subsidies. From this, one might intuitively think libertarians would champion freight rails because they don’t live off government largess, but strangely that is not the case.
May 29th, 2009 at 11:09 pm
Operationalized? That isn’t a real word.
http://en.wikipedia.org/wiki/Operationalization
That is exactly the intent of the SSNIP test–to take the notion I described (”whether the presence of these imperfect substitutes is sufficient to prevent a hypothetical monopolist from profitably increasing prices”) and turn it into a concept (a market definition for antitrust purposes) measurable in the form of variables consisting of specific observations (e.g., observations about actual prices increases for the relevant products and their effects).
You probably don’t know this, but freight rail cars are multi-modal. Meaning they will fit on freight rail trains, freight rail trucks, and ocean going cargo vessels.
I am aware of containers. But Captured Shadow above reported this:
So I looked up TTX, and their website is here:
http://www.ttx.com/
Looking around their website, I don’t believe they actually lease containers, although they do appear to lease some rolling stock specifically designed to be used with containers. In any event, they also have all sorts of non-intermodal products: autoracks, general use cars, boxcars, gondolas, and so forth. All of that appears to be train-specific.
By the way, I might note this from your own wikipedia link:
One might think that definition should have suggested to you that containers and railroad cars are not the same thing, insofar as containers are things that can be loaded onto railroad cars.
Rail is more fuel efficient, but has less government subsidies. From this, one might intuitively think libertarians would champion freight rails because they don’t live off government largess, but strangely that is not the case.
This largely seems like a non sequitur (were we discussing libertarianism?), but I would again point out that this entire area of antitrust law is actually based on the idea of preventing reduced output which would lead in turn to deadweight loss. So if standard antitrust doctrine was applied to this case (and as I noted above, there may be good reason not to), the idea would actually be to increase the use of freight trains by eliminating the relevant anti-competitive behavior.
In that sense, antitrust law is not about hostility to the products to which it is applied. Just the opposite, it is founded on the idea that competition tends to maximize the beneficial use of such products.
May 29th, 2009 at 11:13 pm
Benny, the word “operationalize” appears in Webster’s New Millennium Dictionary from 2003 onward. Why not look this up before unleashing invective?
Despite all the digressions, I still haven’t seen a clear articulation of how allowing collusion (usually bad) in this case might generate more rail service at more affordable prices, rather than less service at less affordable prices as is typical with cartels.
It seems Matt may have slipped into the elementary error of assuming that whatever is good for businesses must be good for business and the customers who depend on them. This is an error he usually avoids when dealing with industries that he disapproves of.
May 30th, 2009 at 12:26 am
There is pretty good PBS report at the One Rail Coalition site, in case anyone missed it. The video is quite peaceful. Lots of trains moving real slow. A calm voice reminding us that trains can’t move much faster unless we as a country make a collective decision to move beyond the 19th century.
I love trains. Even when they are creeping past a crossing and impeding my progress. Clickity-click, clickity-clack, clickity-click, clickity-clack.
http://www.pbs.org/newshour/video/module.html?mod=0&pkg=21042009&seg=4
May 30th, 2009 at 12:39 am
For those who like old trains and interesting excursions I recommend the trip to Nikko in Japan, the trip to Chamonix in France and the trip along the New River in West Virginia.
May 30th, 2009 at 3:03 am
I just got home and read this piece. However, since I’ve been drinking, I will comment only briefly.
Anyone vaguely familiar with freight rail should understand that the captive ship routes they operate are highly lucrative. And further, the notion of infrastructure development is pretty silly. First, it suggests that freight rail really invests in rail infrastructure that is beneficial beyond its immediate needs and that the industry, rather than the government, is necessarily more adequate at the job. Issues to ponder…
May 30th, 2009 at 7:51 am
Regarding comment # 22 by MAX424
MR MAX424, Thank you for the interesting link.It was defintly appreciatted.
Whenever high speed rail is discussed , you rarely hear about freight.I know that it would be impossible to haul coal at 200 mph. But it would seem to me that things like UPS packages or other types of light freight should be able to use high speed rail.
I think too often high speed rail is just talked about in terms of getting people to drive less.A noble goal in itself.But I think that if we discussed high speed rail in terms of economic infrastructure, and how it could help us compete with other countries. Then I think that more people would support high speed rail.
Thanks again to MAX424 For the link to the PBS segment on freight trains.
May 30th, 2009 at 9:16 am
This is truly a generation that has grown to a sort of adulthood and only seen trains on tv and in the movies.
There are also libraries and books. You may have heard of these from your parents. Still useful for certain types of learning.
May 30th, 2009 at 9:20 am
Really, why don’t we just get rid of all antitrust laws? And while we’re at it, all those other pesky Progressive Era regulations. Child labor laws, for example, make America less competitive.
And certainly Matt is justified in trusting such stalwart advocates for the national interest as John Thune, Kay Baily Hutchison, and Frank Lautenberg.
Senator Kohl and his co-sponsor Senator Feingold, however, are communists who hate business.
I hope in the future we’ll see more CAP employees lauding the good work of John Thune.
May 30th, 2009 at 11:07 am
Hey serial catowner, why not stop being such a complete jerk, and spend half that energy sharing your knowledge? The idea that you know things about ONE topic that others doesn’t make you brilliant or everyone else an ignorant moron.
Miraculously, I know all about libraries and books in teh internets, but just happen to not know much about freight trains. One of the attractions of Matt’s site is that intelligent, informed people show up to correct him (like your tiny history above). So grow up.
May 30th, 2009 at 5:06 pm
Where to begin. Before railroads, land that was more than ten miles from water was of almost no value, because of the cost of transportation. The government granted land of almost no value to railroads to sell to settlers who would ship produce over new rail lines. The railroads paid for much of the land outright, and the rest was paid for (as provided for in the original land grant laws) by reduced shipping rates to the government in WW I.
When railroads were the only practical way to travel, they competed with each other. However, it turned out that Rockefeller could force every other railroad and oil producer out of business by charging extremely low rates for his own oil on the railroads he controlled. In fact, it turned out that low rates awarded preferentially cost other shippers a lot more in high rates to make up the difference. This was a known and major problem from about 1870-1910 when the ICC was formed and regulated rates and services. The problem was also dealt with (ineffectually) by state railroad commissions and rail industry “pool” agreements.
Because of savings in operating expenses and through mergers, railroads dealt with the problems of competition from trucks and barges until the mid-70s, at which time it became apparent that the federal regulations could not preserve a viable rail industry. During this period the industry shed about 100,000 miles of track that had become or perhaps always been redundant.
In the early 80s the Stagger Rail Act was passed, deregulating the rail industry. Since then, about 30 major railroads have agglomerated into four or five major transcontinental or regional lines. In some cases these lines also serve as trunk lines for fiberoptic communication systems. The US freight railroads remain the single most efficient, and probably the largest in terms of tonnage, set of railroads in the world.
In my own opinion, the core of the railroad problem is that the capital investment required is too large to ever return more than 2-3% on the investment. Other nations, of course, simply nationalize this investment, but that’s not how we do things here. I think we should, but my opinion doesn’t matter.
Obviously, this huge subject is poorly addressed as a comment on Matts blog. For further readings I especially recommend Charles Francis Adams and his Some Chapters from the Erie and The Railroad Question. You will not find these to be boring books, and CF Adams himself (who, IIRC was one of the first Union cavalry officers to enter Richmond in 1865) was not a boring person.
Reading on the internet is one way to learn more. Other ways might include actually watching trains, which will provide time for contemplation and show the watcher the environment in which trains operate. Your city has a history that at one time revolved around the railroad stations. There may even be a historical railroad or museum near you, which will probably have other resources. Basically it’s a subject that at one time was as big as America, so how you go about learning more can be up to you.
May 31st, 2009 at 12:20 pm
Now, this morning I will revisit this thread occasionally to see if even one intelligent question or comment is made in response to my post above. Not to worry, I won’t be deeply disappointed or surprised if this does not happen.
May 31st, 2009 at 6:47 pm
“Now, this morning I will revisit this thread occasionally to see if even one intelligent question or comment is made in response to my post above. Not to worry, I won’t be deeply disappointed or surprised if this does not happen.”
I’ll bite.
“Because of savings in operating expenses and through mergers, railroads dealt with the problems of competition from trucks and barges until the mid-70s”
The early mergers didn’t so much as produce many common cost savings. Erie-Lakawana, PC, Seaboard Coast Line didn’t deliver the cost savings they promised, only the N&W-Wabash-NKP merger really delivered since it was an end-to-end merger.
Others were simply a matter of getting rid of redundant trackage. I can’t see anyone arguing that the Northwestern taking over M&St.L and CGW and then abandoning much of their trackage benefited the Northwestern beside eliminating competitors. For all of this read Saunders “Merging Lines”
And what kind of government ownership are you advocating? Open Access? That has been such a disaster in Britain, I think that idea is DOA.
I think DTM is making a mountain out of a molehill over TTX. Others here have simply no idea the extent that railroad compete with trucks and other alternative modes. In other areas, railroads do have a monopoly over what are called captive shippers like coal mines and grain shippers, but the government regulates that pretty well (though not well enough, but it’s still not lasse fare as many imagine).
Besides coal mines and grain shippers would whine about shipping rates until the railroads offered to haul their goods for free, and then complain that they’re too slow. Those industries don’t seem to get that railroads are a business, not a public service for farmers and energy conglomerates.
May 31st, 2009 at 8:06 pm
Mergers and joint ownerships go back way past the 70s of the last century. The Pennsy and the NYC both had controlling interests in many lines, some paralleling their main lines, some crossing, some feeding. Jay Cooke was known for a wide network of lines he rapaciously acquired and looted, then connected loosely to threaten the other major lines.
In terms of the modern period, the shakeout of the lines became more pronounced with standardized designs for locomotives used by subsidiary lines of the NYC and the Pennsy, an increasing concentration on heavily signalled high-capacity main lines replacing a larger number of slower lines arranged more in a network fashion, and an increasing emphasis on speed and tonnage. Because the railroads were regulated and not allowed to simply discontinue services that were no longer profitable, maps and timetables do not really show the inroads of automobile and truck traffic. However, it would be safe to say that many stations that saw 10-15 trains a day in 1910 were only seeing 2-4 trains a day in 1940.
Other savings might be like one line I read about which cut their maintenance of way force by 90% between 1950 and 1970 while actually performing more work and paying each employee more by using machines.
Whoa, get me started….
As for government ownership, a good way to learn about this is to find a British book with a title like “History of the World Railroads” or “Modern Railroads Today”. G Freeman Allen is a well-known British author who has written a number of good generalist books suitable for lay readers. Suffice it to say, there is more than one way for a government to support a national rail network. In a sense, we do that ourselves today, by providing an environment where our freight railroads have prospered.