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.
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.