In 1892, a mere five years after the creation of the Interstate Commerce Commission, a businessman wrote to Richard Olney, attorney general under President Grover Cleveland in Washington, D.C.: Dammit, couldn't something be done about those new bureaucrats in that newfangled "agency" that were trying to tell free businessmen how to run their businesses?
The answer that came back from Olney is instructive, as much so today as almost 100 years ago: "It satisfies the popular clamor for a government supervision of railroads, at the same time that that supervision is almost entirely nominal. Further, the older a commission gets to be, the more inclined it will be found to take the business and railroad view of things.…It thus becomes a sort of barrier between the railroad corporations and the people, and a sort of protection against hasty and crude legislation hostile to railroad interests. The part of wisdom is not to destroy the commission, but to utilize it."
Well, I'll be damned, the businessman may have thought to himself. Never thought of it that way.
Indeed, as every libertarian knows, virtually all "regulatory" agencies came into being with at least some prodding from business, upset at having to cope with the specter of competition. The businessman entreating Olney for relief was probably one of the last to get the word.
The people in the transportation industry learned their lesson well. The ICC was the very first of the regulatory agencies—though today it is by no means the biggest. It presides over more than 2,000 employees, spread among 78 offices throughout the United States. It operates on a yearly budget of around $34 million. It writes and distributes hundreds upon hundreds of rules, decisions, regulations and findings in the transportation industry yearly. Included in its bureaucratic grasp are all railroads, and parts of trucking, pipeline and interstate water carriers. It acts as a court—judge and jury—in numerous disputes each year, and makes decisions in those disputes which affect each and every American citizen.
And those decisions and directives operate to damage the American consumer in the yearly amount of not mere millions of dollars, but to the tune of billions. Former Federal Trade Commission chairman Lewis Engman, surprisingly, has said, "I have no way of knowing what the numerous regulatory measures cost the consumer each year. I have seen private estimates indicating that the annual cost in the transportation area alone may exceed $16 billion."
In fact, studies by Professor Thomas Gale Moore of Stanford University indicate that the ICC costs the consumer in excess of $10 billion per year in direct costs alone. The long-run costs are at least as staggering: resources are underutilized, "umbrella ratemaking" distorts the market among the various modes of transportation, innovation is stifled (since regulation imposes a bias in favor of existing technology), excessive costs bred by regulation create an incentive for shippers to avoid the use of common carriers, and obsolete services are kept on, often in monopoly positions, because of the ICC's normal regulatory-agency sensitivity to political pressure.
When all such costs are added up in the transportation industry, we find a real monetary burden placed on every American family of about $400 per year. The costs occur even though the ICC exempts many carriers from regulation. Large exemptions were granted by Congress in 1935 and 1940 when trucking and barge traffic were brought under control, the most notable exemption being for haulers of farm products. Thus, we have today what has been called an "incomplete cartel," with all rail traffic under ICC control, about one-third of all truck traffic and one-tenth of all barge traffic. This creates a situation with none of the normal advantages of either total cartelization or the free market.
Why is the cost so high for an agency that was allegedly designed to help the consumer? The answer is simple: the ICC, like many of the regulatory agencies, is a cartelizing instrument. And it was meant to be so, from the very beginning.
The impetus for creation of the ICC monster in the late 1800's was the railroad industry, which the ICC was designed to "regulate." In the two decades after the Civil War, young railroads began to burgeon and criss-cross the United States. This was a time of growing industrialization across the land, and rapid expansion of transportation was embodied in the railroads. Because of this hyperactivity there were wide swings in the market: rates were very unstable, giving rise to widespread dissatisfaction with railroad operations among both consumers and railroad management.
The result was the passage in 1887 of the Interstate Commerce Act, which established the Interstate Commerce Commission. The new agency was to set the tone and model for many similar structures which would follow within a century. To many who examine the historical roots of the ICC, it would seem the agency was a logical response to what has been seen as tremendous instability and growing monopoly power. Indeed, it has been pointed out even by advocates of the free market that some of the early railroads were monopolies. But the genesis of those monopolies—whether they were caused by the workings of the free market, or governmental interference in the free market—is still disputed.
The former chairman of the Council of Economic Advisors, Alan Greenspan, has written: "The western railroads were true monopolies in the textbook sense of the word. They could, and did, behave with an aura of arbitrary power. But that power was not derived from a free market. It stemmed from governmental subsidies and governmental restrictions.…To interpret the railroad history of the nineteenth century as 'proof' of the failure of a free market, is a disastrous error."
Professor George W. Hilton of the University of California at Los Angeles, another consumer champion and regulatory agency foe, has pointed out that, "As in the case of many statutes enacted beyond the memory of the present generation, there is a common tendency, even among writers hostile to the recent behavior of the [Interstate Commerce] Commission, to assume that the Interstate Commerce Act was an appropriate response to the conditions which brought it forth."
This, however, was not the case. Close inspection of the ICC's historical roots reveals that it was proposed and boosted by railroad interests in the government, notably in the United States Senate. The aim was to legalize, legitimize and enforce existing cartel arrangements among the railroads, which market forces were tearing asunder.
Hilton has point out in the Journal of Law and Economics (Vol. 9, Oct. 1966) that, "By the mid-1800's the railroad industry was in a mature state of cartelization, the symptoms of which were intolerable to much of the electorate. It was an industry in which the incentives to collusion were enormous.…The pattern was the usual one of cartels; the monopoly gain attracted resources to the industry; newly established firms engaged in aggressive behavior to secure favorable quotas; the percentages of total traffic carried by each railroad fell to levels at which marginal cost was markedly less than price."
But it was not high or low absolute rates that engendered the clamor for "stabilization" and legitimizing of the cartels, but rather the recurrent instability of rates. In fact, a number of observers have pointed out that absolute rates in general fell drastically from the end of the Civil War through the turn of the century. Thus, the instability of rates came to be too much, for both consumers of transportation services and for those in the industry themselves.
Dan Cordtz succinctly outlined in a Fortune article what happened to bring the ICC into existence: "Most of the railroads in the East and MidWest systematically practiced collusive rate making and even pooled traffic and revenue on some routes. These private cartels encouraged proliferation of railroad lines. Then, as the share of the traffic assigned to individual lines dwindled…the temptation grew to break out of the cartel.
"Rate wars were common, but to make up losses on service between points where heavy competition existed, railroads charged sharply higher rates to shippers in towns along their routes where they enjoyed a monopoly. This pattern brought about many situations in which short-haul shippers paid more than long-haul shippers over the same route, and engendered violent popular resentment against the railroads.
"To end the instability, railroad supporters in the Senate proposed a commission with broad discretionary power to enforce the cartels. But the House of Representatives, responding to shippers, preferred merely to outlaw the railroads' abusive practices. The unsatisfactory compromise that emerged in 1887 was a weak ICC. Dozens of amendments over the years strengthened the commission's powers until by 1920 it controlled entry into the industry, exit, capital formation, and minimum rates. Thus the ICC evolved from a body to facilitate private cartels into the operator of a compulsory railroad cartel."
Thus, the origins of the organization which has grown since 1887 to the giant it is today, controlling all or parts of four different types of transportation throughout the nation's system. As it turns out, it was railroad agitation again in the 1930's and 1940's that brought about the still further aggrandizement of the ICC's power, by bringing interstate trucking in 1935 and barge lines in 1940 under ICC control; later, pipeline systems were also brought under ICC authority. The ostensible reason for this agitation was to end "cut-throat competition" among those in the transportation industry. Thus, when the railroads found free market competition uncomfortable within their own shaky cartels of the late 1800's, they called for government control to legitimize their activities and enforce their cartel rules; history repeated itself in the 1930's and 1940's when the railroads again found it necessary to look to the government to bring other troublesome forms of competing transportation into the government-mandated cartel the ICC had become.
Finally, in 1948, Congress exempted transportation cartels from prosecution under the Sherman Act, and placed them under the ICC. This was the Reed-Bulwinkle Act, which finally legalized outright what the Commission had been set up to facilitate in the first place.
In looking back over the historical functions if the ICC, Hilton writes with a gasp when he says, "In the light of nearly 80 years of experience, complaints that the Interstate Commerce Act was an inadequate cartelizing device pale beside the observation that it was a cartelizing device at all. The Act is open to the most hostile criticism that one may lay against any statute: it perpetuated the problem with which it was designed to deal. In retrospect, the railroad problem of the 1880's was a temporary and self-limiting one.…Had Congress done nothing at all, America would have had an ordinarily competitive transportation industry, probably as early as the middle 1930's. The industry would probably have a small number of integrated transportation companies based upon a drastically reduced network of railroads, but offering service also by truck, barge and pipeline."
Today, the ICC keeps rates high and competition stifled by allowing the trucking industry to fix its own rates through the mechanism of "rate bureaus," 148 regional trucking organizations that meet and decide how high or low all truckers must charge for their services. The rates thus set are put into effect automatically unless someone takes the time, effort, energy and money to protest to the ICC. Needless to say, trucking firms who are beneficiaries of the artificially high prices have little incentive to protest to the ICC. Result: the trucking industry as a whole has a return of about 15 percent, twice that of most industries.
The ICC also restricts competition by dictating who may and may not enter the industry (remember the classical definition of "perfect competition"? Totally free entry into and egress from an industry?). In fact, each year hundreds of applications to enter the trucking industry are turned down by the ICC from qualified carriers. Many have done interstate trucking for years by paying a portion of their revenues to the companies which hold the relevant area licenses. The ICC's justification for this is that such policies foster, "a balanced, stable and responsive trucking system."
In order to overcome the heavy bias of the ICC bureaucracy, an applicant normally must establish that existing carriers do not have the capacity to serve their areas. Such small points as inefficient or overpriced existing service usually are not considered; nor are prospects of faster or better service, or lower costs through the proposed competition.
According to ICC Chairman George Stafford, the aim is to see that existing carriers, "will not have their profits drained by unwarranted or destructive competition." In ironic understatement, transportation specialist attorney Robert Gallagher says that, "The ICC has a disturbing tendency to be protective of the large carriers."
The ICC also specifies what articles or commodities a trucker may carry, what routes he must take, to what points and what stops on the way may be made. Then, "backhauls"—filling the empty truck with some other commodity and carrying it back to the home area—are restricted. This behavior on the part of the ICC has an historical basis: when the ICC took over "regulation" of the industry in 1935, the existing business was highly specialized and fragmented. "Grandfather rights" allowed existing truckers to continue handling whatever business they had specialized in in the past.
Thus, the industry continued to be fragmented and specialized, with the award of hauling certificates continuing to be tightly restricted, often to the point of bureaucratic insanity. Many carriers today may haul only a few specified commodities, between only certain specified points, often with stops specified only at certain points along the way, the haul to be made only in a single direction, over specifically designated roads.
The result of these kinds of restrictions, as found by a Highway Research Board study several years ago, is that only about 52 percent of carriers have full loads in both directions. According to a 1970 Ralph Nader report, entitled The Interstate Commerce Omission, regulated common carriers travel about 30 percent of their miles empty, which is three times the amount that unregulated carriers travel empty.
Many other restrictions are outright ludicrous: certificates allowing a trucker to carry only exposed film, while unexposed film must be carried by someone else; permission to enter a factory yard by one gate only, while separate ICC permission must be requested for trucks to enter a gate on the opposite side of the property; permission to carry plastic pipe but not metal pipe; a pizza-making firm's trucks allowed to carry tomato paste to the factory, but not to carry pizzas away when they leave, and so forth.
In addition to such regulations, the ICC burdens the regulated industries with mountains of paperwork. According to a Business Week article, "…the nitpicking scale of regulation creates a volume of detail work so great that it virtually guarantees inefficiency. In 1973, the ICC handled 373,215 tariffs requiring agency review, received an average of 3,850 pages of tariff material each working day, and heard 8,831 formal cases. The commission…is trying to make thousands of operating decisions that should be left to management and the market."
Another source of misallocation of resources is "umbrella rate-making," where the ICC orders rates to be set in certain transportation industries so that "excessive competition" will not harm other modes of transportation. For instance, some economists charge the ICC with being at least partly responsible for the destruction of the railroad industry in America, by ordering the railroads to keep artificially high rates so as to protect the generally higher-cost trucking industry. According to Business Week, "This produces a distorted, inefficient traffic pattern that gives little consideration to the rails' lower unit costs for long-haul traffic."
Given the historical background, it is not surprising that the "regulated" industries fear deregulation. Indeed, at the mention of deregulation, spokesmen for both management and labor fairly scream in horror. George Smathers, who was general counsel for ASTRO ("America's Sound Transportation Review Organization"), a railroad-sponsored lobbying structure, said, "Complete deregulation would be totally chaotic and, in the end, would serve the best interests of no one."
Nor is this the only large and well-funded lobbying organization struggling to maintain the prerogatives of ICC cartelization. The American Trucking Associations, for instance, maintains a full-time Washington staff of 240; the Teamsters Union, the truckers of which profit from the cartelization of the industry, has a staff in Washington of 125. William Bresnahan, chairman of the American Trucking Associations, is on record against deregulation, having said "deregulation would make it tougher for everybody to make a living." He wasn't, apparently, talking about the consumers, who yearly foot the multi-billion dollar charge foisted on them by the ICC.
Responding to increasing pressures on their cartel arrangement, some carriers have proposed "partial deregulation" schemes, shaving a few percentage points here, dropping a 50-year-old meaningless bureaucratic rule there, but generally trying to preserve the cozy, cost-plus fiefdom that has built up around the ICC and the transportation industry. But they are not about to be left off so easily: "The partial deregulation proposed by the carriers, while a selfish goal, would be a step in the right direction," noted Cordtz in his Fortune article. "But it would be only a half measure. The problem is greater than the cumbersome procedures of a bureaucracy or the inconsistencies and loopholes of a patch-up law. The problem is regulation itself and the ultimate solution is to get rid of the whole regulatory mess and let the transportation companies take their chances in the marketplace."
Would deregulation bring on chaos? The answer, from several helpful sources and studies, is—of course—a resounding no. Several studies have been made that put the lie to such fears. All come to the same conclusion: any amount of deregulation would be to the benefit of the consumer, and total deregulation is needed across the board.
In Freight Transportation Regulation: Surface Freight and the Interstate Commerce Commission, a study by Moore completed several years ago, the author concludes there is little need in the 1970's to continue ICC cartelization, if there ever was. He draws briefly upon the British and Australian experiences to bolster his assertions, quoting Mr. Stuart Joy, who testified before a congressional committee on the effects of deregulation in both countries. "The end of regulation in 1968 (in Great Britain) has not meant any chaotic burst of price warfare," Joy reported. "As far as we can see, the quantity or the frequency of bankruptcies in the road haulage industry has not changed with the end of regulation." The same result was reported in unregulated Australia.
In a more recent report, Trucking Regulation: Lessons from Europe, also by Professor Moore and for the American Enterprise Institute, it was found that in regulated West Germany and the United States, trucking rates are 40 to 50 percent higher than in relatively unregulated Britain, Belgium, Sweden and the Netherlands. It was also found that, rather than decreasing service, deregulation allows better and more complete service of consumer needs. Additionally, Moore postulates that rates would drop even more sharply in the United States than in Great Britain, because the rates in America are held at a higher artificial level than they were prior to deregulation in Great Britain.
We may also rely at least partly upon past experience in the United States. In 1956 truck tariffs on shippers of chicken and frozen food were briefly dropped, thus instantly deregulating that portion of the industry. By 1957, the Department of Agriculture found that rates on frozen foods, frozen chicken and fresh chicken had all dropped dramatically: frozen food shipping rates generally declined by 19 percent, frozen chicken rates dropped by 36 percent, and fresh chicken shipping rates had fallen by 33 percent, all in one year. And, to add icing to the competitive cake, the Department of Agriculture also found that quality of service had improved in that year.
Given all of this, a "deregulation steamroller" does appear to be on the move, and stands fair chance in today's increasingly anti-bureaucratic atmosphere of taking real root and flourishing. Scholars, politicians and crusaders—some from rather odd parts of the political spectrum—are all joining the crusade.
Some steps have already been taken in the anti-bureaucratic crusade. In 1974-75 Senator William Proxmire helped to abolish nine worthless Federal agencies. In 1976 he introduced legislation to abolish 13 more, among them the Interstate Commerce Commission. Senator Proxmire has publicly stated: "There are more whiskers and cobwebs in the ICC than any place in government. The best information we have is that the Commission has become a captive of the transportation industry itself. Instead of regulating transportation to avoid monopoly and increased prices, the ICC has established monopolies, reduced competition and ordered high and uneconomic rates to cover the costs of inefficient producers."
Of the Ford Administration's timid, reformist moves against the regulatory agencies, the proposed bill to partially deregulate trucking was called "the most sweeping." It would have ended antitrust immunity for the trucking cartels, simplified the maze of rules and regulations spouted by the ICC, made entry and egress to the industry easier, and eased restrictions on companies that operate their own trucking fleets. The American Trucking Associations immediately snorted that, "The trucking industry needs more competition like Custer needed more Indians." And Teamster President Frank Fitzsimmons blasted the proposals in a meeting with Ford Administration officials.
But the big push has begun. In February of 1976 Ford signed into law the railroad portion of the transportation decontrol program. The bill permits railroads to set their own rates without ICC approval. Similar provisions are contained in bills concerning trucking and airlines, pending before Congress. President Carter has made it a priority of his new administration to have at least some kind of regulatory reform, and other politicians, such as Senate Majority Leader Mike Mansfield, have filed bills to abolish the ICC. Mansfield's bill was co-sponsored by eight other senators, both Democrat and Republican.
Nevertheless, as noted by Gerald Ford, "Nothing resists change more stubbornly than a comfortably entrenched bureaucracy, intent upon self-preservation." Former Council of Economic Advisors Chairman Paul McCracken echoes gloomy sentiments: "There is no question that deregulation would give us more efficient transportation and redound to the benefit of the consumer. But the thing that produces action in government is a fairly focused interest group. What you've got on the other side are things that count in the political process—such as the Teamsters Union and the trucking lobbies."
Judging from the gathering momentum of the anti-regulatory agency movement afoot in the country, such facts of life may well be on the way to being overcome. But the bureaucrats and special interests have already responded with partial deregulation "reforms" of their own, designed to minimize damage to their own special prerogatives. Should this form of change—"reform"—take place, it would be a travesty, especially for the American consumer. For changing the bureaucrats around (so we can have "good" regulation), or making minor changes in mountains of rules and regulations (so it will be "easier" to conduct business) are mere palliatives.
The problem with the Interstate Commerce Commission today is that it exists. The unseen damages it daily wreaks upon the consumer and our economic system can be rectified only by its complete abolition. Such calls, to be sure, have been heard in the past, plaintive cries in the dark for the most part.
But this time…this time—for everyone's sake—it may finally, actually happen.
Tim Condon holds a B.S. in journalism and a J.D. degree from the University of Florida. He is a member of the bar in Florida and expects to be soon in California. He is presently a tax consultant in Santa Rosa, California and a member of the Libertarian Party.