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Professor Delivers Congressional Testimony About Freight Rail Regulation

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On Wednesday, May 13, 2015, John Mayo, professor of economics, business, and public policy at Georgetown University’s McDonough School of Business, delivered the following testimony before the U.S. House of Representatives Subcommittee on Railroads, Pipelines, and Hazardous Materials, on the topic of “The 35th Anniversary of the Staggers Rail Act: Railroad Deregulation Past, Present, and Future.” To view a recording of the full hearing, visit http://transportation.house.gov/calendar/eventsingle.aspx?EventID=398877.

 

Chairman Denham, Ranking Member Capuano and members of the Subcommittee:

My name is John Mayo. I am a Professor of Economics, Business, and Public Policy at Georgetown University’s McDonough School of Business. I am also the Executive Director of the Georgetown Center for Business and Public Policy.

For 30 years I have studied the economics of regulation and deregulation in the American economy in a variety of industries including electricity, telecommunications, cable television, pharmaceuticals, the Internet, as well as the domestic freight rail industry. A summary of my research publications and relevant experience is included as an attachment to this testimony.

In 1980, the Staggers Act passed Congress in an overwhelming bi-partisan fashion. It was also signed and enthusiastically endorsed by President Carter. This Act fundamentally altered the governance structure of the rail industry, shifting from a highly granular model of regulation to a model in which markets, rather than regulators and rate bureaus, are largely responsible for establishing prices and investment.

Importantly, this legislation was not driven by simple ideology. It did not embrace deregulation out of a belief that markets are always superior to government. Neither at the time of the passage of the Act did ideologues argue that steps to free railroads from regulatory constraints should be halted out of a fear that large railroads would necessarily act against the public interest. Rather, the deregulatory measures adopted in Staggers were embraced for a simple and profound reason. Deregulatory steps in the industry were as a practical – not ideological – matter being revealed to produce superior economic outcomes for the industry and for the economy more generally. Legislators from both political parties, economists, and industry observers at the time were all optimistic about the potential for improved rail performance with the Staggers Act. Of course, optimism on the front end of any legislation is normal. The real question is how have economic outcomes evolved for consumers, for producers, and for the American economy in the wake of Staggers.

Fortunately, we now have 35 years of experience with the Staggers, and I can tell you with considerable confidence that the governance structure of the Act has been significantly successful.

This was recognized by Congress as early as 1995, when the Senate Commerce Committee declared, “The Staggers Act is considered the most successful rail transportation legislation ever produced, resulting in the restoration of financial health to the rail industry.” Consequently, with President Clinton’s support, Congress took the additional step of further easing regulatory constraints by eliminating the Interstate Commerce Commission, replacing it with the current Surface Transportation Board. Importantly, the bill transferring authority to the STB “carefully avoided alteration of the fundamental premises of the Staggers Act.”

With the benefits of an additional 20 years of observation since the 1995 Congressional blessing of the Staggers Act, it is now possible to look afresh at whether the Act is succeeding in promoting “a safe and efficient rail transportation system” as called for in the Act.

Economic signals of efficiency include increased output, increases in the breadth and utility of service offerings (manifested by increased modal market share for rail), reduced costs, and indications of consumer value (favorable raw prices, prices after accounting for cost changes, and quality of service). As with all transportation modes, safety is principally gauged by the frequency and severity of casualties.

While a detailed discussion of these retail economic metrics is beyond the time permitted by my oral testimony, I am taking the liberty of attaching a recent study that I co-authored with Professors Jeffrey Macher and Lee Pinkowitz, also of Georgetown University’s McDonough School of Business, that examines the economic metrics associated with the industry. We find, as have numerous other scholars, that the liberalizations introduced by Staggers and their subsequent implementation have produced a variety of positive economic consequences for the industry, for consumers, and for the economy as a whole.

We also identify areas of vulnerability as future rail policymaking unfolds. Of particular concern is the prospect that the emerging successes in the industry may be coopted by the imposition of earnings regulation in the industry. These concerns are discussed in detail in the research article that is appended to my written testimony.

Thank you very much for your time and attention today, and I look forward to any questions that you might have.