Lessons from setting the freight railroads free

If Obama Had Carter's Courage . . . By HOLMAN W. JENKINS, JR.
Lessons from setting the freight railroads free.
WSJ, Jun 03, 2009

Barack Obama is no Jimmy Carter. The latter really did face the unraveling of an indispensable industry. Mr. Obama faces not a collapse of the domestic auto industry, but collapse of two companies miserable enough to have been extant in the 1930s when the Wagner Act was foisted upon the industry.

We have a second auto industry, founded after the political and legal system had thought better of mandatory unionization, born of foreign parents, mostly in the South. It's surviving the recession without extraordinary help.

In Mr. Carter's day, bankruptcies were scything through the railroad sector, hurtling toward a rendezvous with nationalization. Conrail, an amalgam of failed Northeastern lines, had already been taken over and analysts foresaw a $300 billion bill (in today's dollars) in the likely prospect that Washington would soon have to operate the rest of the nation's freight railroads.
A disaster must be truly sizable before Congress will correct its own errors -- and the railroads were such a case.

Rail executives and economists had been arguing since the 1920s, when competition from trucks and planes began to emerge, that comprehensive federal regulation had only distorted the industry's pricing, driven away investment, and made competitive adaptation impossible. But the argument had a new ring now that Washington would have to bear the political risk of operating and subsidizing the nation's rail services.

It still took some doing on Mr. Carter's part. When the bill stalled, a hundred phone calls went from the White House to congressmen, including 10 by Mr. Carter in a single evening. The bill essentially no longer required railroads to provide services at a loss to please certain constituencies. It meant going up against farmers, labor, utilities, mining interests, and even some railroads -- whereas Mr. Obama's auto bailout tries to appease key lobbies like labor and greens, which is why it can't work.

In his message to Congress, Mr. Carter warned of a "catastrophic series of bankruptcies" and "massive federal expenditure" unless deregulation was allowed to "overhaul our nation's rail system, leading to higher labor productivity and more efficient use of plant and equipment."
Involving Congress meant the plan had to be explained and rationally coherent -- features missing from Mr. Obama's contradictory auto policies.

In 1980, Congress passed the Staggers Act, ending a century of federal regulation and leading to the railroad industry's renaissance. Leo Mullin, then a young Conrail veep, would later look back and praise all involved for having the fortitude to recognize that salvaging the taxpayer's investment in Conrail meant more than fixing a single broken company -- it meant fixing a defective regulatory environment.

That fortitude is exactly what's missing today, as it was missing from Mr. Obama's statement on Monday, which attributed GM's failure to sins by everyone but Washington.

We're still waiting for the brave, original thinking that we were told Mr. Obama represented. Like Washington circa 1978, he has landed for once in a situation where something more than symbolism is required of him. He has finally glided into the land of the real, where the key measurable outcome is no longer whether an audience is glowing with self-approval when he leaves the room.

To wit, will GM become self-sustaining and profitable, as he promises, or a bottomless drain for taxpayer subsidies? (The same question applies to Chrysler and, likely, Ford, which may have only prolonged the Ford family's run at the top by mortgaging the company to the hilt just before the lending markets closed down.)

Nothing really will be solved, even by GM's bankruptcy, until Washington recognizes its own policy incoherence -- namely the impossibility of reconciling stiff fuel mileage mandates with gasoline prices set by the market, with a domestic labor monopoly, with a high degree of openness to international trade. (You can have three, but not four.)

It took 103 years after the Interstate Commerce Act for Congress to junk the regulatory apparatus that destroyed the railroads. To get rid of CAFE after only 34 years would be some kind of record -- if Mr. Obama had Mr. Carter's courage.

Let's face it: CAFE has done nothing to reduce gasoline usage or oil imports (car owners just end up driving more miles). In 34 years, not a whisper of testimony has come from any quarter that the policy actually works. It only causes U.S. manufacturers to make small cars and dump them at a loss on the public, subsidized with the profits of pickups and SUVs.

Detroit doesn't have to match the transplants in wages and benefits, but CAFE distorted what would have been the Big Three's natural path of adaptation to the natural fact of growing diversity in the marketplace with the arrival of foreign manufacturers. Detroit would have focused on market segments where it could compete profitably even with its higher labor cost -- on bigger, pricier vehicles where labor cost is a lower share of value added.

Unfortunately, Mr. Obama, that freethinker, took to the CAFE fraud like a bat to a belfry. He signaled his arrival on the presidential stage by sternly demanding higher mileage standards early in his campaign. The "change" candidate who might have broken with a generation of political cant about CAFE instead appropriated the fraud for his own careerist purposes.

That tangled web now catches him in a fatal contradiction as he pours tens of billions of taxpayer dollars into the failed business model that CAFE foisted on Detroit.