Regulation of the Truckers, by the Truckers, for the Truckers
ICC regulation benefits the trucking industry, but every dollar gained by the industry costs consumers thirty.
Ostensibly, the point of regulation is to protect the economically powerless from the predations of the economically powerful. As a matter of fact and history, though, the actual effects of regulation have been exactly the opposite. Producers have gained, and consumers have lost. Some critics, noticing this, berate members of regulatory commissions for lack of competence or lack of integrity. It may be true that, in general, regulators have lacked competence or, occasionally, integrity. But the consistent pattern of producer protection provided by the various regulatory commissions renders such an explanation improbable or, at best, incomplete.
A more likely explanation is that the effects of regulation are the intended ones, that the actions carried out under regulatory policy are neither accidental nor incidental. When made in this light, evaluation of the consequences of regulatory policies will prove more fruitful. And we can dispense with the pointless focus, incumbent within reform proposals, upon appointing "better" regulators and exhorting them to overcome what must now be viewed as the natural proclivities of the regulatory machine—to establish and maintain industry cartels designed to exploit the consumers for the benefit of members of the select group of producers. Understanding the producer-protection intent of the law allows us to translate otherwise inexplicable and bizarre rules and procedures into coherent ploys to promote the interests of specific classes of beneficiaries.
WASTE MAKES WEALTH? The social cost of the regulation of trucking has been estimated at amounts ranging up to $15 billion per year. This is, of course, a net figure, reflecting the aggregate loss to society. Undisclosed by such a figure is the transfer of wealth that motivates the regulatory policy. This is not to say that this transfer must be large. The beneficiary of strong-arm tactics will be quite willing to inflict damages far in excess of his own profit as long as such burdens fall upon others—a mugging victim's hospital bills may far exceed the cash intake of the mugger. That so little may be gained at such great expense is the most galling feature of the whole regulatory scheme.
For example, if the reported net worth of all regulated motor carriers is approximately $4 billion and the excess return earned as a result of regulation is as much as 8 percent (as estimated by the Council on Wage and Price Stability), the total monopoly gain to the regulated carriers would be only $300 million. The regulations' estimated net cost to society, however, is at least 30 times as large as any possible gain to these beneficiaries.
It would obviously be less burdensome to the general welfare if the rather inefficient transfer mechanism via the Interstate Commerce Commission (ICC) were dispensed with and a direct cash payment substituted. Such an open subsidy would not prove politically palatable, however, since there is hardly anyone who would feel either morally or socially obligated to supplement the income of trucking firms or their suppliers. Instead, we must suffer the waste of $30 for each $1 gained by the beneficiaries of an elaborate system required by the necessity to disguise the ultimate objective.
Naturally, defenders of regulation are ready to deny and refute any contention either that costs exceed benefits or that the few gain at the great expense of the many. They characterize the existing regulatory scheme as "fair," "equitable," and "necessary." Unfortunately, the input of the pro-regulators has rarely gone beyond mere assertions. The exceptions to this are all too frequently exercises in sophistry, inapt analogy, and shoddy arithmetic. A classic demonstration of financial error and ineptitude was the report "A Cost and Benefit Evaluation of Surface Transport Regulation," prepared by the ICC. Among other things, this report maintained that equity capital was less expensive to obtain than borrowed funds because the interest rate on debt was 10 percent while the dividends paid on stock amounted to less than 5 percent. Cornell University professor of business Harold Bierman avowed that any student making such a blatant error as this would receive an F for his course.
DOLLARS AT STAKE Monopoly profits do exist in regulated motor carriage, and the proof of their existence is the tangible value of the operating rights held by these firms. Such rights, when sold, generally command a price equivalent to 15-20 percent of the revenue generated. Based on recent aggregate revenues of the 1,700 largest regulated carriers—approximately $20 billion per year—the estimated value of all operating rights amounts to between $3 and $4 billion. A 10 percent return on total capital for these monopoly rights puts their annual yield between $300 and $400 million (an amount in line with our earlier estimate of possible monopoly profits). By way of illustration, in 1967 Eazor Express acquired operating rights from Fleet Highway Freight Lines for $260,000. In 1973, Eazor sold these same rights to Yellow Freight System for $860,000. No other assets exchanged hands. The price paid and the mark-up achieved over a six-year period are attributable solely to the value of the operating right. Even the industry lobby admits that "experience has indicated that not only carriers with viable profitable operations, but also carriers with poor operating results and even carriers in or near bankruptcy are able to demand and obtain prices for their operating rights far in excess of the cost of such authorities carried on their books."
Operating rights have a tangible value precisely because the ICC limits competition. This permits the exaction of monopoly profits, the existence of which serves as the reason for, as well as the means of, payment of huge sums for the rights. The instrumentality by which competition is restricted is primarily the issuance of certificates of public convenience and necessity. No common carrier can operate without such a certificate. No common carrier can exceed the limitations of his certificate.
Certificates are not easy to come by, notwithstanding ICC disclaimers to the opposite effect. Despite the fact that 80 percent of the applications for new or extended authority are approved by the ICC, the majority of existing authority is "grandfathered"—that is, based on routes in existence before 1935.
A firm seeking ICC approval to carry on a freight business must prove that the public convenience and necessity requires such service. Proving this is not easy, since any not-yet-existing service cannot have established much of a track record. Even should a record of service be established, it in itself is not considered sufficient to prove a public need for it. In the case of Inland Motor Freight et al. vs. US (1945), the courts upheld Inland's protest against a certificate issued by the ICC to John Tocco despite a showing of seven and a half years of service and testimony from shippers asserting a need for the service.
Furthermore, even if there is a need for service, existing carriers must be afforded the opportunity to provide such service before any new carrier can be granted authority. In the J.H. Rose Truck Line case decided by the ICC in 1969, the commission held that shipper dissatisfaction with existing carriers and preference for the Rose Company's through service and better rates were not adequate reasons to deny the existing carriers their exclusive franchise in the area. This procedure enables the ICC to carry out its objective, "to ensure that no new service is being created without a finding of public need."
How, then, do we reconcile the touted 80 percent approval rate for new applications with the stated objective of preventing "unneeded" (that is, unauthorized) service? Well, most of the new operating authorities are minor, specific, and narrow grants. The previously mentioned Rose Truck Line case, for example, involved authority to haul blowers, blower parts, blower accessories, and supplies used in the installation of blowers between Roselle, Illinois, and locations in 22 other states. Carting blowers strikes us as a rather narrowly circumscribed occupation. The 20 percent of applications denied may be of much greater significance than the 80 percent approved. Indicative of this is the admission by the American Trucking Associations (ATA) that the only sure way of getting into a market is to purchase the operating authority from an existing carrier.
WILLFUL WASTE After establishing the framework for the perpetuation of an exclusionary cartel, the specific measures for the exaction of the group's monopoly profits come into play. Restriction of entry by itself has the effect of an externally imposed limitation on the supply of transport services. Artificially curtailed supply will enable the authorized suppliers to enforce higher prices. Rate bureaus provide the mechanism whereby this is accomplished. These bureaus, exempt from antitrust laws, are quite free to fix the prices of freight service. Theoretically, any carrier is allowed to "flag out," that is, set his own rate. More realistically, however, independent rate setting is not allowed if the rate is perceived as a threat to the existing status of the industry. The virtually absolute stranglehold over rates thus maintained is well illustrated by the infamous Yak Fat case, wherein a facetiously requested rate for a nonexistent product was immediately protested by "competitors" and subsequently disallowed by the ICC.
Unfortunately for the regulated carrier cartel, their monopoly is not complete. This is not for want of trying. Most probably it can be attributed to the counterforce of powerful opposing interest groups. Two major exceptions to the complete monopolization of motor carriage are the classes of exempt commodities and the existence of private carrier fleets. The exempt commodities consist largely of raw agricultural products. The two notable nonagricultural commodities exempt from regulation are fresh fish and newspapers. In the light of the reputed deficiencies of regulated carrier service, it is understandable that items likely to raise a stink or become quickly useless are exempt. The private carrier fleets making up the other exception are owned and operated by large corporations. Thus, both the agriculture lobby and big business have been able to forestall the total monopolization of the motor transport industry.
This is not to say that some substantial burdens have not been imposed upon these alternative transport options. The most obvious burden placed upon private carriers and haulers of exempt commodities is the deadhead (empty) backhaul. The very nature of private and exempt carriage is conducive to traffic imbalances . A hauler of farm produce will rarely encounter a load of vegetables, or the like, to be transported from an urban location back to the farm. Private carriers restricted to transporting only their own products or raw materials will rarely have their plants or sources so conveniently located as to balance their traffic. It should not be surprising, then, that these unregulated carriers consistently endure a greater proportion of empty miles than the regulated carriers.
Imposition of the uncompensated expense of the empty backhaul is no mere quirk of fate. The policy is fully intentional. A private or exempt carrier cannot hire out to a regulated carrier for a backhaul, since ICC rules set a minimum 30-day term for hiring-out arrangements. Neither can a private carrier haul goods for a subsidiary or parent of the same corporate family. Shippers cannot even arrange to lease trucks in complementary-goods movements if the motive is to reduce the transportation costs of deadheading. In Keller Industries vs. US (1971), the reviewing court found that a cooperative leasing agreement "eliminates almost altogether one of the awful burdens of a carrier—that of the deadhead backhaul. Indeed, this was the genesis of the plan." The court then ruled that the fact of the avoidance of the burden of the empty backhaul was sufficient reason by itself to disallow the arrangement. Some private and exempt carriers have sought contract carrier status in order to utilize their otherwise empty backhauls. In spite of the fact that there are shippers standing ready to purchase this contract carriage, the ICC has consistently denied permits for this purpose. So befuddled have the public officials become over this issue that we find the US Department of Transportation facing the "dilemma" of "what mechanism would allow improved utilization while protecting the public interest." We may well ask, What is this "public interest" that stands in opposition to the more efficient employment of transportation resources?
Elimination of these restrictions could reduce total private and exempt carrier miles by around 30 percent. With total revenue miles of the largest regulated carriers around $15 billion and regulated carriers accounting for 40 percent of the revenue ton miles, the potential saving in miles driven by nonregulated carriers would approach $7 billion per year. If exempt carrier expenses are only 40 percent as large as regulated carrier expenses, then the dollar cost of these restrictions could amount to more than $3 billion per year. This cost alone is nearly 10 times the amount of monopoly profits enjoyed by the regulated motor carrier industry. Such figures serve as a measure of the lengths to which the regulatory mechanism will go in order to preserve a much smaller increment of monopoly profit for members of the regulated cartel.
OFFICIOUS OBFUSCATION Of course, the very existence of a regulatory bureaucracy serves as a fundamental element in the deterrence of threats to the inner circle of protected carriers. To outsiders (that is, most of the victims of regulatory practices), the workings of the ICC can often appear mysterious, confusing, and unnerving. Words take on different and obscure meanings within the context of the regulatory agency. Proceedings take on the appearance of ritualistic ceremonies of complex and drawn-out maneuvers. An aura of unpredictability is propagated and nurtured.
The main thrust of ICC motor carrier regulation is to guard against the evils of "destructive competition" that would lead to "chaos." The notion of destructive competition has long since been discredited by reputable economists. It has meaning only in the sense that nearly all businessmen would appreciate less intense competition in their own lines of endeavor. Thus, "destructive competition" only occurs in one's own industry, whereas "healthy competition" is what the economy needs more of in other industries. "Chaos" is even more nebulous. It is what took place before the ICC took motor carriers under its wing in 1935. Of course, the years immediately preceding 1935 saw the United States in the depths of the Great Depression. The implication that deregulation of motor carriers now would bring about a depression is a useful weapon to employ in resistance to increased competition. What "chaos" really means, though, is that common carriers would be required to manage in the same type of legal environment as other unprotected firms. No longer would the industry be able to fix prices, exclude new entrants, or restrict the options of their customers.
Aside from redefining the language to suit its own needs, the regulatory bureaucracy will frequently make bizarre or inexplicable statements. This serves the dual purpose of giving critics another erroneous assertion to refute and convincing others that the whole issue of regulatory policy is hopeless because the regulators are so incredibly dense that no headway can be made. A recent ICC complaint about the evils of unregulated carriage opined that "rates are low when competition is keen, high when the demand for service is great." The fact that this is precisely the way the free market is supposed to work, juxtaposed with the commission's apparent ignorance to that effect, is a perfect example of a phenomenon bound to confuse and dismay regulation's critics.
Complex plans to simulate or approximate free-market conditions within the framework of regulation—by collecting statistics, comparing them to some unspecified "norm," and then "fine tuning" policy accordingly—are excellent diversionary ploys. It becomes incumbent upon the critics to show why these crackpot schemes can't work before any steps toward deregulation can be taken.
A recent recommendation to the ICC speculated that "if the Commission was able to construct an economic model which would empirically estimate the supply and demand relationships for a particular transportation corridor and for various commodities within the corridor, the Commission would have additional data, independent of the representations made by the parties involved in a case. These data would allow the Commission to judge more precisely how many carriers and how much service would be necessary to meet the expected demand." It is probably safe to assume that the government will rush off to spend millions in an attempt to develop this type of model, without the slightest awareness of the idiocy of a plan to artificially anticipate (at great expense) what the free market performs on a "real time" basis at no extra charge. Needless to say, the supply of such plans is infinitely elastic.
Then, too, regulation thrives on creating uncertainty. Businessmen normally will seek to minimize uncertainty, but having to deal with a regulatory agency can be very unsettling in this regard. The law governing the ICC commands that its actions be "just and reasonable." Yet, it is left up to the commission to define these terms. Determination of what is and what isn't permitted within an authorized certificate is entirely at the discretion of the ICC; contradictory interpretations are disallowed, even though they may appear to be reasonable under the original terms of the grant. The commission may even modify certificates after their issuance, regardless of the elapsed time involved.
An example of this disconcerting procedure was experienced by Crescent Express Lines. In 1938 the ICC granted the company authority to operate between New York City and Woodbourne, New York, including off-route points within 20 miles of Woodbourne. More than three years later this was amended by the ICC to cover only nonscheduled, door-to-door service, and not more than six passengers at any one time. Through it all, of course, the burden of proof is on those who would challenge the commission's rulings.
Those unfamiliar with the intricate procedures may well be intimidated by the expense and the unpredictability of the outcome. If an application for a new service is contested, the problem of proving that the service is required confronts the would-be carrier. Even if an application is uncontested, the ICC still has "lingering doubts" as to whether the grant of a certificate is in the public interest.
Naturally, the commission also seeks to cast a cloud of doubt over the legitimacy of all nonregulated carriage. Any private or exempt carrier must behave in ultraconservative fashion, lest he be hauled into an expensive and time-consuming regulatory hearing over the acceptability of some or all of his business activities. In the Schenley Distillers case (1946), the court asserted that the only proper way for Schenley to determine whether its private carriage arrangements were legal, would have been to file for ICC authority and request that the filing be dismissed as "not required."
MOTIVE FOR MADNESS It is clear that the instrumentality of regulation rather consistently imposes burdens on the many for the sake of the advantage of the few. This objective is implemented through various measures designed to deter or prohibit unauthorized competition. Yet the gain in monopoly profits is so small compared to the costs inflicted upon society in general. What explanation can there be for a public policy so inordinately oppressive to the general welfare?
Perhaps the answer lies in the fact that the waste is divided amongst all consumers, while the smaller sum of benefits is shared in by a lesser number of recipients. On the earlier estimates of $10 billion for the extra costs imposed by regulation and $300 million for the monopoly gains, we obtain a ratio of $30 of waste for each $1 of monopoly profit generated by the system. Based on a US population of 216 million (though, in truth, all consumers of US goods, foreign and domestic, share unequally in the burden), the cost per person for motor carrier regulation is about $45 per year. If there are 15,000 regulated carriers sharing equally in the monopoly profits, the gain per carrier per year would be about $20,000. If we were to restrict the number of recipients to only those larger carriers upon which the estimate of monopoly profits was based, the share per carrier shoots up to $175,000 per year.
It seems, then, that the financial incentives for the beneficiaries of motor carrier regulation to insure its continuation may be substantially more potent than the financial incentives for each of the regulation's victims to bring about its demise. One is more apt to attempt to influence policies in which one has a large personal stake. Quite simply, then, the beneficiaries of the regulatory scheme are more disposed to outbid the victims in the political arena. Disclosures in the Korean bribery scandal have revealed how easily bought and reasonably priced a congressman's influence may be. At such prices, $300-$400 million in monopoly profits can go a long way, whether used for the more legitimate "campaign contributions" or the less reputable "compensation for personal services." The fact of the matter is that common carriers have purchased regulation as a vehicle for the transfer of wealth from consumers to themselves.
In the light of this most tangible quid pro quo between the members of the industry and the lawmakers, it is easier to comprehend why appeals based upon rationality or simple justice—to reduce waste or to preserve the right of peaceful persons to pursue a living in the occupation of their choice—must fall upon deaf ears.
John Semmens is working as an economist for the Arizona Department of Transportation, while completing his master's in business administration at Arizona State University.