Con(rail) Games

Remember the story of King Midas, who turned everything he touched into gold? Congress is sort of like that, except that everything it touches turns into disaster. The latest case in point is the attempt to denationalize Conrail.

Government, needless to say, has no reason to be in the railroad business. After dumping $7.6 billion of our money into Consolidated Rail Corporation since its creation in 1976, the government has finally decided to sell the company, now that it's managed several years of profits. Yet already, critics in the media and in Congress are jumping all over the Transportation Department. And if some of them have their way, you and I—whose money has been poured into this venture—won't get even a penny back.

That incredible outcome would occur if the most bizarre plan, proposed by one Rep. James Florio (D–N.J.), were enacted. Florio wants the proceeds from the sale of Conrail to go, not to the taxpayers (presumably in the form of a reduction in the federal deficit), but to rebuild the "railroad infrastructure" of the Northeast—in other words, the numerous branch lines abandoned because they had virtually no traffic and were hence unprofitable.

To fully appreciate the inanity of this proposal, we have to go back about a decade. Conrail was created in the first place because its predecessor railroads—primarily the ill-conceived Penn Central (an ungainly merger of the Pennsylvania and New York Central)—had gone bankrupt, leaving much of the Northeast with the prospect of interrupted rail service.

Why did Penn Central go bust? For the same reasons that all railroads had been declining since World War II—the heavy hand of government regulation. Nearly a century of government intervention on the side of labor unions produced bloated work forces and preserved steam-era work rules. In addition, rigid restrictions on service curtailments added to soaring costs. At the same time, price controls (rate regulation) made it difficult to cover these inflated costs. And to the extent that prices were raised, the railroads lost ever more traffic to truck lines. (And the truck lines prospered because government subsidized their rights of way and restricted entry by competitors.) As a result, the railroads' return on equity had sunk to below one percent by the mid-1970s. Penn Central was simply the most poorly managed of the major railroads, so it was the first to go under.

But something amazing has happened to railroading in the past eight years. Without fully realizing what it was doing, Congress enacted two complex, arcane bills—the 4R Act of 1976 and the Staggers Act of 1980—that restored considerable freedom to the rails: freedom to set prices, to lay off redundant workers, even to abandon money-losing branch lines. And in eight years the whole industry has turned around. From 1976 to 1983 the workforce on the 31 Class I railroads was cut by one-third; the amount of trackage, by 16 percent. And the average return on equity soared to over five percent. All of a sudden, railroads have become a growth industry.

Deregulation, along with a competent management team, has transformed Conrail, as well. As an extreme case of the railroads' problems, the changes at Conrail have been equally exaggerated. Since its creation in 1976, Conrail has shed nearly 60 percent of its original 100,000-member work force. Those who remain are working for 12 percent lower pay than employees of other Class I railroads (though they now own 15 percent of Conrail's stock in exchange). And the railroad has abandoned 24 percent of its former trackage.

Which brings us back to Rep. Florio's little gem. What the gentleman from New Jersey wants to do, you see, is to pump the billion or so dollars received from the sale of Conrail into those very same abandoned branch lines—lines so unneeded that they were a major cause of the near-demise of the railroads in the first place!

One can question whether taxpayers are getting the best deal from the proposed sale. Some analysts on Wall Street and within the Transportation Department figure that if the government made a public stock offering, it would net more than the $1.2 billion being bid by the current six (out of 14) finalist bidders. But a $1.2 billion return on the taxpayers $7.6 billion "investment" in Conrail is far better than nothing!

Ironically, the best lessons in how to denationalize are available from what used to be called "socialist Britain." There, Margaret Thatcher's government goes steadily on its way, hacking away at the 10 percent of Britain's gross national product accounted for by state enterprises when she took office in 1979. Between 1981 and 1983 her government sold off British Aerospace (aircraft and missiles), Cable & Wireless (telecommunications services), Amersham International (radioactive materials), Britoil (North Sea oil and gas producer), Associated British Ports, and National Freight Co. (trucking). Proceeds from the sale of stock of these firms totaled $1.5 billion and was applied to reduce the national debt.

During Thatcher's second term, the government has sold off Enterprise Oil and Jaguar. Being prepared for sale are British Airways, British Airports Authority, Rolls Royce (the aircraft-engine company), and British Telecom, plus portions of British Gas, British Steel, British Shipbuilders, and a number of smaller entities. While there has been lively debate about how best to divest large enterprises, there has been little serious debate over the desirability of getting government out of commercial enterprises. And the idea that the proceeds of these sales should be used for anything other than to relieve the burden on the hard-pressed taxpayers appears to be unthinkable. Bad enough that billions have been poured down these rat holes for so long. Let's not add insult to injury by frittering away the proceeds on do-gooding!

Denationalization—like nationalization—is still an unfamiliar experience for Americans. So our advice to Congress, as it figures out how to unload Conrail, is to take a lesson from the pros. Don't think up new boondoggles, especially ones that repeat the very same mistakes that created the problem in the first place. Sell the damned thing and be done with it!