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Rail Consolidation Is A False Bogeyman

By News Creatives Authors , in Business , at July 15, 2021



Last year CSX Transportation, the fourth biggest railroad in the U.S., announced that it would acquire PanAm railways, a regional railroad that operates in New England. The merger would allow CSX to connect its current system that spreads across the Eastern United States and the Midwest. 

However, it’s not clear that the government is ready to sign off on the transaction. The Surface Transportation Board has indicated that the transaction will get heightened scrutiny to ensure that it would not reduce competition or drive up prices. 

Amtrak has also expressed its opposition to the transaction, which it says may hurt its current and future service in Massachusetts and Vermont. The Vermont Rail System, which is a small regional line that uses some of PanAm’s lines for its own business, has also registered its objection, on the grounds that they believe it could reduce competition in certain sections of the state. 

What’s more, last week Biden called on regulators to pause consolidation in the shipping and railroad industry, which he blames for the chronic supply chain problems that have faced U.S. manufacturing in 2021. 

While this list of hurdles may suggest this transaction may meet vigorous opposition from the government, it is hard to find a legitimate reason to scuttle it. An expanded CSX that takes on Pan Am’s New England-based network would result in more goods moving via rail than by truck, which would be an unmitigated good for our nation’s roads, the economy, and the environment. 

While the first objection to the transaction is that it will leave some Vermont shippers with access to only one railroad, it makes little sense to conceptualize a railroad as a product distinct from other modes of shipping goods: The vast majority of goods transported across North America currently travel by truck. Rail constitutes just over 1/4 of all goods transported.

The government effectively subsidizes the trucking industry; the gasoline tax does not come close to paying for our nation’s roads, and the disproportionate damage that semi-trailer trucks and other heavy transport vehicles do to roads are in no way accounted for in those taxes. 

The increased traffic abetted by these implicit subsidies serve to increase congestion and make roads less safe. 

Transporting goods by truck rather than rail also contributes to global warming. The U.S. Department of Transportation estimates that goods traveling in trucks generate nearly three times as much carbon dioxide as goods that go by rail. 

It was the potential to reduce traffic that led neighboring Governor Chris Sununu of New Hampshire to support the transaction’s approval in his letter to the Surface Transportation Board, stating that the deal “will bring financial resources to the table for much-needed infrastructure improvements throughout Pan Am’s rail network.”

Unlike trucks, railroads largely pay for their privately owned infrastructure. The Congressional Budget Office estimates that the unpriced external costs of transporting goods by truck is eight times that of rail, and that it constitutes roughly twenty percent of the total cost of moving goods by truck.

However, despite the fact that the Democratic Congress and the Biden Administration have said repeatedly that tackling climate change is their highest priority, it seems to be more concerned with putting railroads in their place than in enlisting their help in the effort. For instance, Congress has expressed its frustration with the industry for trying to increase productivity via the implementation of precision scheduled railroads, which effectively increases railroads’ capacity without any additional capital investment. 

While the ultimate result of this would be to make rail more competitive with trucking and move more goods by rail, it would also reduce the number of union crew jobs, and since these unions support the Democratic Party, their interests come first for many in Congress. 

The Surface Transportation Board has also proposed capping the profits of railroads at a “reasonable” level, a vague standard that can mean whatever the regulator wants it to mean. 

Given that railroads have widely varying prices—there’s typically much greater demand to ship goods from the California ports to the Midwest than vice-versa, so eastbound prices tend to be higher than westbound prices—it would almost assuredly minimize these price differentials in the name of “reasonableness” and leave railroads unable to earn adequate returns on the tens of billions of dollars of investment they undertake on their tracks each year. 

The increasing protests about railroads obtaining “monopolies” is a farce: it rarely makes economic sense for two competing railroads to lay separate tracks to serve a single shipper, and nearly all such duplicative routes disappeared long ago. In today’s economy, railroads compete against the trucking industry, which is dirtier, more dangerous, and receives billions in implicit and explicit subsidies from the government each year. 

And the idea that some notional expansion of Amtrak beyond the Northeast Corridor should take precedence over a merger that would improve the productivity and competitiveness of a railroad is insane. People in rural Vermont (which constitutes most of the state) aren’t dying to pay more for the privilege of traveling on some mythical Amtrak route. An infrequent train from Burlington to Boston that’s slower than driving is not going to improve the environment or anyone’s life in a measurable way. Having it supersede this merger with all of the broader regional benefits that would come from the increased capital investment in Pan Am’s footprint is tantamount to making a fetish out of passenger rail. 

For reasons that are difficult to fathom, the Biden Administration appears determined to stick it to the railroads, which are making enormous investments to improve their productivity, and in doing so are doing more than almost any other company to reduce carbon emissions. Impeding a merger of PanAm and CSX would produce purely illusory benefits while harming the ostensible goals of this administration and Congress.


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