Too Big to Fail?

A few years ago the Federal Government took over the operation of all railroad passenger service. Amtrak, we were told, was not intended as a prelude to nationalization and would not be a drain on the taxpayers; indeed, its purpose was to restore profitability to rail passenger service. Now, several billion dollars of deficits later, we are told that Amtrak will have to be subsidized indefinitely, and that the government is going to have to nationalize the roadbeds…to ensure the survival of the railroads. At this rate, it should only be a few more years until complete nationalization of the railroads is upon us.

The rationale for railroad nationalization has already begun cropping up in the media. It was first applied to Lockheed Aircraft in 1970 to justify the government's $250 million loan guarantee, and more recently it was applied to the Penn Central Railroad. John Cobbs recently applied the argument to the auto industry, in a Business Week essay entitled "When Companies Get Too Big to Fail." And that, in a nutshell, is the argument. "The huge U.S. corporations have become such important centers of jobs and incomes," Cobb informed his readers, that the government "dare not let one of them shut down or go out of business."

Since we're likely to be hearing this simplistic line repeated in the months and years ahead, it may be worthwhile to examine its implications. To say that the government should prop up (or nationalize) failing industrial giants is to argue that every taxpayer in the country be forced to pay for the incompetence of one particular enterprise, so that its customers can continue to receive inefficiently produced goods or services. Such a policy robs the many for the benefit of a few. Further, it destroys the normal incentives of profit and loss by telling corporate managers not to worry if they foul up, because they can count on Big Brother in Washington to come to the rescue. Thus, companies which get so big and hidebound as to be inefficient and unwieldy have no incentive to change their ways.

In addition, when the government prevents an unprofitable company from liquidating, it is forcibly interfering in a contractual relationship between the company and its creditors. At this moment, for example, the trustee of the bankrupt New Haven Railroad (now incorporated into the Penn Central) is contending in court that the continued operation of the Penn Central's properties, by government order, constitutes taking the private property of the New Haven's creditors for public use, and is therefore unconstitutional under the Fifth Amendment.

There seems to be a common misunderstanding, probably fostered by news media treatment of the subject, that liquidation of a failing company is somehow unthinkable—almost as if it meant that the physical assets of the company were literally going to be liquidated, never to be seen again. But the assets of a company are just that: they are resources, things of value—at least to a more competent management. When a company is liquidated, its assets are sold to satisfy its creditors, and somebody who wants them buys the assets. In the case of a railroad, while the former management and organizational structure may cease to exist, the locomotives, cars, tracks, yards, stations, rights-of-way, etc. all remain, to be utilized more productively by someone else.

Those who bemoan the demise of the Penn Central and paint frightening pictures of a Northeastern U.S. bereft of rail service are closing their eyes to what happens in bankruptcies every day. As this is written, for example, the Rock Island Line has just declared bankruptcy, and the Federal Government, for once, has not come galloping to the rescue. Instead, one of three alternative reorganizations appears likely: merger of the line into a larger road (e.g. the Union Pacific), dividing up the profitable portions among several competing roads, or purchase of the line by a group of employees and shippers.

But the final obstacle to any kind of rational liquidation of the Penn Central is the political pull of rural and smalltown politicians who demand the continuation of service on many low-traffic branch lines—lines which a large railroad (constrained by government-enforced union work rules and numerous ICC regulations) finds unprofitable. Normally (i.e., in the absence of political constraints), such branch lines would be sold, leaving a new, slimmed-down trunk line that could operate profitably. But what would become of the branch lines? To be sure, some would probably be torn up and sold for scrap, but many others would be turned into profit-making short lines, as has been happening across the country in recent years: e.g., the Great Plains Railway (Nebraska), the East Camden and Highland (Arkansas), the Central Iowa, the Louisiana Midland, and the Oklahoma Western (see "Trends," REASON, March 1974). The secret of profitability? Lean, nonbureaucratic, profit-oriented managements and cooperative unions with realistic work rules. Even in New England this phenomenon has been taking place, right under the politicians' noses. The tiny Providence and Worcester Railroad in Rhode Island, formerly a New Haven subsidiary, began independent operations in 1973 and is already in the black; so are the Bangor and Aroostook and the Maine Central. The B and A's owner, Frederic Dumaine, would like to merge that line with the Maine Central and the bankrupt Boston and Maine, Delaware and Hudson, and New Haven lines to form a profitable, stockholder-owned system.

In short, the liquidation of a fallen industrial giant does not mean the destruction of its assets. On the contrary, it means the return of those assets to productive, competent hands. The argument that a company is "too big to fail" is nothing more than a defense of incompetence and inefficiency. You can be sure that those who make this argument aren't really interested in production; their concern is with power—Federal power over yet another area of the economy. It is long past time that they stopped getting away with this kind of obfuscation.

"Too big to fail"? Don't you believe it!