Deregulating Freight Transportation: Delivering the Goods

Paul Teske, Samuel Best, and Michael Mintrom

American Enterprise Institute for Public Policy Research

January 1997

 

Summary

This book examines the effects of government intervention on the operations of the freight transportation industry. Mr. Teske is an associate professor of political science at the State University of New York, Stony Brook. Mr. Best is an assistant professor of political science at the University of Notre Dame. Mr. Mintrom is an assistant professor of political science at Michigan State University. A summary of the book follows.

To the surprise of many analysts, federal legislation was enacted in 1994 to preempt remaining state economic regulation over intrastate trucking rates and routes and to reduce the remaining role of the Interstate Commerce Commission (ICC) in regulation of interstate trucking. These two actions largely completed the deregulation of freight transportation—an industry that represents more than 6 percent of America's gross national product—that had begun nearly two decades earlier.

With this decrease in regulation and ensuing market changes, the United States is developing a competitive, safe, multimodal freight transportation sector that is responsive to the changing needs of shippers. Overnight package delivery, just-in-time inventory, containerization, and hub-and-spoke networks have all been impressive technological or organizational adaptations to the new competitive transportation environment.

Freight Transportation Regulation

Freight transportation performs a critical linkage function in the American economy. Virtually every product consumed by the public originates away from its final marketplace and requires shipment by some means. Today, freight moves by rail, road, air, and water, and it increasingly involves some combination of these modes.

Historically, American governments engaged in three overlapping policies related to freight transportation. The first was promotion, in which the federal government and some states subsidized the development of nascent infrastructural industries. Second, as such industries grew and became more complex, the federal and state governments regulated them, both directly and indirectly. Third, recognizing that these industries had changed and that the regulation was no longer productive, the federal government and some states deregulated large parts of them.

As the states began to regulate the intrastate segments of this industry, the public policy model utilized was regulatory federalism, with the federal government later regulating the interstate portions. Disputes arose about these jurisdictional boundaries, especially as shippers sent more freight across state borders. The U.S. Commission on Intergovernmental Relations outlined the following theoretical justifications for federal preemption of state authority: (1) conflicting state policies create a burden for interstate commerce; (2) one state's policies inflict (external) problems on other states; (3) there is a pressing need for one national policy, perhaps because of international security or trade concerns; and (4) states lack the resources to carry out policy. In reality, direct political influence by affected trucking and shipping groups influenced bureaucratic, congressional, and judicial decisions about the extent of federal preemption as much or more than these theoretical conditions.

As preemption was not pursued in trucking regulation until 1995, regulatory federalism in the transportation sector ultimately proved costly to the American economy. Transportation carriers largely "captured" their regulators, especially at the state level, gaining favorable policies at the expense of actual and potential competitors and, ultimately, the American consumers.

In the late 1970s and early 1980s, a series of presidential, bureaucratic, and congressional actions deregulated large segments of these transportation industries. In particular, airlines, railroads, buses, and interstate trucking were deregulated, with a greater reliance on the market to produce good service and reasonable prices.

Of these, trucking is by far the most important sector, generating nearly 80 percent of the revenues of the freight transport industry, or about 5 percent of GNP. Approximately half of this trucking activity takes place within the states and was therefore potentially subject to state regulation. Until 1995, state economic regulation of trucking was the last bastion of 1930s-style entry and rate controls that had long been discredited across the entire spectrum of transportation.

Interestingly, the impetus in Congress in 1994 to preempt state regulation of intrastate trucking came from air package carriers as a result of several years of political pressure applied by this growing industry. As these modes are increasingly interrelated, it was fitting that the effective end of state-level economic regulation of trucking came through the activity of air cargo carriers. These changes completed a large part of the deregulatory agenda and the historical cycle in all transportation industries of promotion, which leads to regulation, which later leads to deregulation and preemption.

The Political Economy of Regulatory Federalism

For most of this century, oversight of the transportation industry was shared by the federal and state governments. Over this time span, however, the federal government showed an increasing reluctance to allow states to supervise segments of the transportation industry. Generally, as markets became more nationalized, the federal government limited the role of the state governments because of the increasing difficulty in distinguishing between interstate and intrastate commerce. The federal government eventually decided to end its supervision of various modes within the industry, foreshadowing the end of state intervention.

The choice of regulatory solutions at both levels was the result of political processes. The objectives of policy makers were complex, but these usually included both public and private interest rationales. On the one hand, governments sought to protect consumers (who were often themselves businesses) from high rates or poor services. On the other hand, some of this regulation was demanded by industry participants, such as the transportation firms themselves, who sought to protect their markets and cartelize the industry, and shippers, who desired favorable cross-subsidization.

The most egregious regulations favoring private interests occurred on the state level. While a few states, such as Florida and Arizona, followed the federal lead of deregulation soon after 1980, most did not. Several large states, such as Texas and Michigan, maintained laws and regulations that limited competitive entry and allowed trucking firms to raise prices in excess of competitive rates. Even strong assaults by shippers on these regulations did not muster enough political support to overturn them.

Congress tried but failed to preempt state regulation several times after 1980. After 1985, the momentum of state deregulation had clearly stalled, sparking an increase in federal preemption efforts, including several new congressional bills, aggressive ICC redefinitions of intrastate commerce—designed to turn it into (deregulated) interstate commerce—and, finally, the successful 1994 effort to preempt state trucking regulation based on federal airline law.

While more attention was paid to state economic regulation of trucking, other state regulations and operating restrictions, such as operating taxes, vehicle size limits, and safety regulations, are also important. While taxes and safety regulations are quite reasonable uses of state police power, those regulations have been imposed in a highly inefficient and often inequitable manner. Lack of coordination among the states led to high compliance costs for truckers. Recently, substantial gains have been made either through explicit federal preemption or through coordination efforts by the National Governors Association and other groups.

In addition, two newer environmental issues have arisen to create cross-state coordination problems for the trucking industry and for the freight transportation industry more generally: hazardous materials transportation and the implications for truckers of the 1990 Clean Air Act Amendments. To some extent, these can be addressed through the flexible federalism mechanism of state planning and enforcement of federal goals, but some form of preemption or coordination may be required to handle those emerging issues in a balanced manner.

Implications for Broader Theories of Regulation

The three major theories of regulatory change that have been advanced by political economists—the economic theory, institutionalism, and the politics of ideas—have largely been developed using evidence from federal regulation. An important issue is how well these theories apply to joint federal and state level regulation of trucking.

The extreme version of the economic theory holds that regulated interests capture the regulatory process to gain private benefits. More sophisticated versions of this theory involve several groups trying to gain private benefits at the same time. There is considerable evidence in trucking to support this theory. Quantitative and qualitative studies show the power of trucking firms and unionized trucking labor to extract benefits from regulation at both the state and federal level. After this power was greatly reduced at the federal level in 1980, it still continued in a number of states until 1995. There is also considerable evidence of other interested parties, particularly organized shipping groups, railroad interests, and agricultural interests, influencing trucking regulation, although not as much as the trucking groups.

At the state level, the power of the trucking interests was even more pronounced. The interest group environment was usually less balanced than in Washington, D.C., allowing trucking interests to gain more protective regulation for a longer period of time. Clearly, strong interest groups in favor of a policy change, at either the federal or the state levels of government, are required to put regulatory issues on the political agenda. But interest groups typically battle on both sides of these regulatory issues. When the interest group environment is more balanced, which may be true more often at the federal level of government, choices favored by key institutional actors become more important.

It is not difficult to find evidence for institutional influence over trucking deregulation. At the federal level in the late 1970s, new presidential appointments to the ICC led the agency to start to deregulate. In 1980, Congress, in opposition to most versions of the economic theory, went against the dominant interest groups and enacted these ICC decisions and even more extreme deregulatory changes into law. The recent push to eliminate the rest of trucking regulation and the ICC itself has come largely from Congress, bolstered by the idea of cutting back government spending.

For state deregulation, we also find influence from some of these federal institutional actors. After 1985, the ICC attempted to preempt the states through the expansion of their own powers, by redefining intrastate commerce as interstate. Court decisions in the Federal Express air package cases provided the initial impetus that led to the successful congressional preemption of the states in 1994.

While differences in institutions and institutional actors are important, all are influenced to some extent by similar ideas about regulation and deregulation at the same time. When support for regulation was strongest in the 1920s and 1930s, state politicians expanded intrastate trucking regulation and federal politicians extended ICC regulation to the trucking industry and established airline regulation. By the 1970s, however, such regulation was seen as more damaging than beneficial, and deregulation was an idea whose time had come in all transportation sectors. In 1994, the idea of cutting back federal expenditures clearly influenced congressional efforts to eliminate the ICC and its role in trucking regulation.

Policy makers, at least federal ones, learn from the experiences in different sectors of the economy.

They do not always apply the same lessons at exactly the same time, but the late 1970s and early 1980s, when many barriers fell, were a remarkable time for transportation deregulation. Federal policy makers typically coupled such deregulation with preemption; when they did not, as in state trucking deregulation, their goals were frustrated for more than a decade. A second burst of deregulatory activity took place in 1994, as the application of state trucking regulation to air cargo carriers was challenged by the courts and as the political need to cut the federal budget, like the anti-inflation policies used to justify deregulation in the 1970s, combined to lead to more extensive trucking deregulation and preemption.

At the state level, although some states relaxed regulation, the idea of deregulation did not spread like wildfire across the states after 1980. There is no evidence of any particularly new idea emerging to promote the federal preemption of the states in 1994; instead, politicians accepted an older idea.

The trucking case shows clearly that successful policy experiments are not always imitated by all or even most of the states. The combination of airtight empirical evidence of the success of federal and some state trucking deregulation and the incentives states have to be attractive for economic development was insufficient to overcome powerful entrenched interests in many states. Evidence existed that some states had lost jobs as a direct result of their trucking regulations. This suggests that these economic incentives may not be as powerful as many analysts have suggested in encouraging states to adopt efficient policies.

Despite a number of such examples in recent years, policy experiments in a federalist system do not always percolate from the bottom up. In all these cases of deregulation, the federal government was clearly the policy leader, preempting the states in airline, railroad, and intercity bus regulation. By this preemption, federal policy makers must have recognized that the states would not necessarily deregulate themselves in these areas. And the trucking case, in which federal authorities did not initially preempt the states, proved them right. This cautionary note should temper the arguments of those who believe that market-like competition between the states will always push them toward rational policy choices.

This analysis of regulatory federalism in transportation answers many questions and suggests that a combination of these theories best explains recent events. But further questions are raised. Why are state regulatory bodies seemingly easier to capture than federal ones, even in large states like Texas? How will changing state institutions, such as developing more professional legislatures, affect their approaches to regulation? With a reduction in federal regulatory roles, how will states adapt?

Conclusions

With the current policies of freight transportation deregulation and preemption, it appears that an equilibrium has been reached that is satisfactory to most parties. Using conservative estimates, the American economy will gain at least $4 billion to $8 billion per year from recent deregulatory changes and should gain another $3 billion to $7 billion per year from following further recommendations for streamlining and coordinating regulations.

The transportation sector has shown several different patterns of government-business relationships, at both the federal and the state levels. As we head into the twenty-first century, the evidence is clear that primary reliance on the market as a regulator is appropriately the central American policy toward freight transportation.

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