Is it time to talk about re-nationalizing the railroads?

Newspapers this morning report that “Railroads warn of nationwide meltdown if extension not granted for safety requirements“.

This is a threat over PTC, positive train control, which the railroads were instructed to implement 8 years ago, but did not, and now the deadline is coming up.

If railroads cannot run their operations in compliance with federal law, they need to cease operations. However having a nation without railroads would be significantly disruptive to the economy (I am sure economists could estimate a GDP effect). The railroads are hoping this threat will persuade Congress to cave and extend the deadline.

The alternative, which is not much bandied about these days, is nationalization. Railroad nationalization has a vaguely European feel to it, and smells of socialism, but in fact, it is quite patriotic and all-American.

In The Transportation Experience, we write

By 1917, US railroads, the country’s largest industry, operated over 400,000 km (240,000 miles) of track and employed 1.8 million people. While the war was raging in Europe, war traffic was congesting America’s railroads, especially at East Coast ports; even before the American Expeditionary Force went “over there.” The American Railway Association tried to coordinate its member railroads to avoid car shortages. The Interstate Commerce Commission (ICC) was granted greater powers to ensure efficiency and that priority cargo received priority treatment. Yet the progress made by these organizations was insufficient.

On December 28 the Federal Government’s Director General of Railroads, William McAdoo, took control of the largest private railroads and placed them under the control of the United States Railroad Administration (USRA) — a creature of Congress. To this day railroads question the need for nationalization and its results; it is a sore point with them that the public might have thought that they were not doing their job. Note: A later USRA (The United States Railroad Association) acquired bankrupt railroads in the 1970s, and was eventually sold to Conrail.

Nationalization had more form than substance to it. Railroad employees were given military titles, and a few inter-railroad arrangements were forced on the properties. Some standardized locomotive designs were developed and engines were constructed. Labor arrangements were imposed that the railroads might not have agreed to under other circumstances. Railroads were granted compensation equal to their prewar profits. The shipping costs per ton-km rose however, in part due to a rise in wages.

While the railroad regulatory regime clearly collapsed with the onset of World War I, the regulation initiatives of the late 1800s and the early 1900s worked for their times. They managed the gross inequities that worried the public. Government served as a referee for among railroad ratemaking disputes, and government had begun to assert its power over who gets the location–transportation rents (via maximum rate prescriptions). The list of problems that regulation did not manage remained long, of course.

One of these was the vast difference in the economic fortunes of the different properties. This was not just a matter of concern to the managers, stockholders, and bondholders of the railroads that were not doing well. Shippers had interest in strong railroads, as did regional groups. They were worried about good, stable service.

Wikipedia writes:

After the United States entered World War I in 1917, the country’s railways proved inadequate to the task of supplying the nation’s war effort. On December 26, 1917, U.S. President Woodrow Wilson nationalized most American railways under the Federal Possession and Control Act, creating the United States Railroad Administration (USRA), which took control of the railways on December 28, 1917. The USRA introduced several reforms to increase efficiency and reduce costs, including standardizing rolling stock and steam locomotive designs. The war ended in 1918, and on March 1, 1920, the railways were handed back to their original owners.

Of course Amtrak and Conrail are other examples. Most local commuter railroads were taken over by states or cities.

Today the US could only justify it because of the potential collapse of the rail network being threatened by the large carriers if they don’t get their way. Nationalization of the railroads would follow nationalization of banks and the auto industry during the Great Recession, and would presumably be temporary while the appropriate safety systems were installed.

Seizing the railroads does provide an opportunity though. The Government could take rights-of-way for a potential high-speed passenger network before reselling the railroads back to the private sector. This would be far cheaper than negotiating one-on-one with the railroads. It would reduce the value of the freight network somewhat, but the public would be better off than if it tried to build the HSR network line by line.

2010 and 2015 Current market capitalizations for major US railroads are (from yahoo finance):

Railroad 2010 2015
CP $9.7B $24.9B
UNP $38B $82.2B
NSC $22B $24.23B
CSX $21B $28B
KSU $3.8B $10.6B

BNSF is held by Warren Buffet.

The total is still a surprisingly cheap $170B (excluding BNSF), though far more than in 2010. (As a point of reference, please compare this to the nominal value of Uber, and decide who is overvalued.)

Nationalization should be an option on the table. Certainly, railroads are competitive with trucks and each other in certain markets, but in other markets they possess characteristics of spatial monopoly. And collectively their presence is more important than any individual railroad. If the economic sector is essential for the rest of the economy, which freight railroads are (imagine this winter without coal for heating, imagine trying to ship that coal by truck), at least in the short run, they must keep operating.

In the long run, the economy should continue to seek alternatives to the Octopus.

2 thoughts on “Is it time to talk about re-nationalizing the railroads?

  1. One thing about your proposal bothers me: the argument that it’s an opportunity to acquire cheap ROW for high-speed rail. The issue here is that, unless the government makes sure to pay full price for the railroads it’s nationalizing (rather than using the PTC deadline to get a discount – “you’re not running service anyway”), it’s a backhanded way of acquiring private property without just compensation. This is similar to the way the US built the freeways, acquiring redlined urban neighborhoods cheaply and demolishing them to carve ROW.

    Another issue: what’s the public interest in acquiring the railroads? ROW is not terribly expensive – outside the NEC it’s easy and cheap to carve new ROW through farmland, or, if worse comes to worst, build near pre-impacted Interstate corridors. I’ll buy that in Chicago, coordination is required to reduce congestion, and this is likely to be true at a few other chokepoints such as Baltimore and Cajon Pass, but between for example Chicago and the West Coast, I don’t really see a reason why public operation would be any better than the current situation. I’d note that in some cases, even under private operation there’s coordination: in British Columbia, CN and CP use their separate single-track mainlines as a higher-capacity double-track line where they run next to each other.

    Last question: what are the profit margins of the Class I railroads? High profit margins indicate monopoly or duopoly rents, and those can justify nationalization, since the extreme capital requirements make free market competition difficult. But if the profit margins are low, then the railroads are only soaking branches where they have monopoly power in order to be able to pay for maintaining their entire systems.

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  2. 1. Assume the govt. pays full market price (say Stock Market Price on October 1 or something), this isn’t Venezuela.

    2. This is a counter-threat to “we won’t provide service” the RRs are saying now. In the end, either they provide service without PTC (making federal law unenforceable when an industry colludes not to comply, which is really bad precedent) or they don’t provide service and that would be a disaster. Something has to give.

    3. Government has less disincentive to not provide PTC since profit isn’t in the objective function. Obviously at first they would operate without PTC, but that would change over time as PTC was installed.

    4. I think the class I RRs today get “normal” profits, consistent with market averages for mature companies, overall. Clearly it depends on the service.

    5. The HSR is not the justification (I don’t think most of it is worthwhile), but any commuter or HSR line which has to negotiate with RRs, which do have the best RoW in general, is paying a premium, the RRs are good at extracting rents from local and state governments. Once you have taken them over, it is an opportunity to rationalize and reallocate and solve problems which the previous institutional structure did not.

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