Friday, January 24, 2014

How the Government Kills Industries

Growing up in a small midwestern town in the 1950’s, I had two fantasies: traveling the country someday as member of the saxophone section of a big band and traveling to far away places on sleek, swift passenger trains. At some point in my adolescence I came to the considerably disappointing realization that both industries were dying, if not already halfway in the ground. As a result, I felt compelled to switch interests to other areas.

The government played no small part in destroying both the big bands and railroads, especially the passenger trains.

As for the big bands, the conventional wisdom about why they declined is often reported in such gems of economic analysis as “cultural shift,” “changing tastes,” and “the kids needed their own music.” 

The real reason for their decline was a 30% cabaret tax on any venue that allowed dancing. Eric Felten, writing in the Wall Street Journal, succinctly describes the effect of the 1944 tax: “By 1949, the hotel dine-and-dance-room trade was a third of what it had been three years earlier. The Swing Era was over.” Venues exhibiting instrumental music for which there was no dancing were not taxed; this gave rise to the bebop era of small jazz combos. In 1960 the tax was reduced to 10% and in 1965 eliminated. Felten concludes, “By then, the Swing Era ballrooms and other ‘terperies’ were long gone, and public dancing was done in front of stages where young men wielded electric guitars.”

Taxes have consequences. So do price controls.

The railroad industry, of course, is said to have succumbed to plain old capitalistic competition from other modes of transport. Nothing could be further from the truth.

From its beginning to the present, the American railroad industry has been promoted, manipulated, and shackled by government interference.

The “meetup” at Promontory Point, Utah, between the Union Pacific and Central Pacific railroads in 1869, occurred only after each of the political entrepreneurs involved had graded 250 miles of earth, parallel to each other, in some cases separated only by a hill, with no track ever laid. Why did this occur? Because they both were after the government subsidies. Almost immediately after the meetup, the shabbily laid track that was installed for the famous photograph was torn up and redone.

The worst interference in railroading prior to World War I was the price controls on freight rates, imposed by the Interstate Commerce Commission (ICC). The story is told in Throttling the Railroads by Clarence B. Carson. As with most government regulatory lingo, the ICC said rates had to be “just and reasonable,” which in practice meant that railroads could not charge different rates for the same distances traveled. Thus, grapefruit, as Carson illustrates it (p. 58), can be shipped to Baltimore from Florida, Texas, or California. To be competitive, the California railroad must match the prices of the other two. This was not allowed.

This and many other instances of restrictive price controls leading up to the first world war produced earnings and service declines. As a result of the economics of railroading—high fixed costs dictating long trains pulled over long distances with few stops (the western roads) and the pooling of resources to support shorter lines with more stops (the eastern roads)—an effective transcontinental railroad system was prevented from developing. From 1917 to 1920, the US government nationalized the railroads, insuring that they would not develop further. In fact, miles of track laid in the country peaked in 1920.

After 1920 regulation continued to hobble and eventually destroy railroading. Increasingly tightened regulation and rising competition from highways, waterways, airports, and airlines—all subsidized—continued to hurt the railroads, but the killer was featherbedding. Firemen who stoked the fires on steam locomotives continued by law to work well into the 1980s on the efficient and safer diesel-powered engines. The railroads faced great difficulty in attempting to fire or lay off anyone.

The passenger lines in this environment could not survive. The once proud 20th Century Limited all-Pullman passenger train of the New York Central used to make its non-stop run from New York to Chicago in sixteen hours. With a change of train station, one could then hop on the equally proud Super Chief of the Santa Fe and be in Los Angeles thirty-seven hours later. In 1971 nearly all privately-owned passenger service in the United States came to an end.

The railroad goose was cooked by 1920. The feeding frenzy then took over. Today there is hardly a carcass left.

Granted that in the absence of government interference competition from other modes of transport, especially air, would have changed the landscape of travel. There is no reason, however, to think that there would not be sleek, profitable passenger trains operating on specialized routes, most likely high-speed lines in well-traveled corridors that government bureaucrats in the current political climate think should be run by them.

In Florida private entrepreneurs have a better idea. “We just ask that government get out of the way,” so said a VP of All Aboard Florida, soon to be launched three-hour passenger rail service between Miami and Orlando, with planned extensions to Tampa and Jacksonville.

Perhaps there is hope for the railroads.

The big bands of the swing era, unfortunately, along with their dine-and-dance-room trade sponsors, seem nearly completely gone.

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