The Role of Deregulation in Productivity Increase Is Overrated

Subject: Employee Management
Pages: 2
Words: 620
Reading time:
3 min
Study level: Master

Introduction

Starting from the mid-1960s, the U.S. government implemented several important measures which helped the American rail freight industry recover from the crisis. As a result, the industry doubled the revenue ton-miles (RTM) between 1966 and 2008, despite the sharp reduction in track-miles, freight car fleets, and staff members (Martland, 2012). Economists and officials often give credit to the deregulation efforts, specifically the 1980 Staggers Act (Martland, 2012). While the positive influence of deregulation cannot be denied, the biggest contribution to increased productivity came from technological advancements, which allowed for the utilization of resources much more efficiently.

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The Customers as the Ultimate Beneficiaries

Industry deregulation created a competitive environment for railroad companies, which started lowering their rates to attract customers. Due to that fact, the companies could not reach the rail revenue that they could have achieved. For instance, if rail rates remained at 1980 levels, the rail revenue of traffic moved in 2010 would have been $75,7 billion instead of $56,3$ (Martland, 2012). As a result, the productivity benefits in 2008 and 2010 reached only $25 million on average; approximately three-quarters of these benefits were passed to the customers in the form of lower rates (Martland, 2012). Nevertheless, improvements in productivity allowed for an increase in profitability despite inflation and constantly lowering rail rates.

Decrease of Service Units Number per Unit of Output

The first major source of improved productivity was a general reduction of service units per unit of output. For instance, RTM ratio decreased from 1,17 to 0,75, and carloads plummeted from 1,59 to 0,72 over the 1980-2010 period (Martland, 2012). This effect was achieved by a combination of changes in traffic mix, equipment type, and length of haul (Martland, 2012). In terms of annual savings for the industry, a decrease in service units per unit of output equaled nearly $10 billion (Martland, 2012). These numbers clearly show the value and importance of technological modernization.

Decrease of Resources Used per Service Unit

In addition to lowering the service unit per unit of output ratio, technological advancements in the rail industry led to improvements in resource utilization. For example, intermodal shipments allowed to speed up cycle time for equipment from more than 20 days to less than ten days per load (Martland, 2012). If cycle times had remained at 1980 levels, that would have made annual equipment costs $6 billion higher by 2008 (Martland, 2012). Technology-related improvement of labor productivity allowed yearly savings of $39 billion in current dollars (Martland, 2012). Overall, efficient use of resources per service unit made a massive positive impact on productivity.

Importance of Network Rationalization

Another vital aspect of the freight rail industry revival was the rationalization of the U.S. railroad network. Firstly, the elimination of 70,000 light-density miles led to approximately $1 billion in annual savings (Martland, 2012). Consequently, many redundant railroad facilities, such as yards and terminals, were abandoned between 1980 and 2010. These changes reduced operating costs and redistributed resources that were previously spent on maintenance of the inefficient lines.

Conclusion

Overall, the U.S. rail freight industry experienced a powerful surge between 1980 and 2010. Despite the record low rail rates, the companies managed to reach profitability due to increased productivity that mainly stemmed from technological advancements. Therefore, the average total and marginal costs during the article’s study period should have been lowered to the point that allowed railroad companies to stay profitable regardless of their rates.

In addition to that, the industry’s isoquants would have moved further to the higher portion of the chart over time since railroad companies managed to yield higher outputs consistently. This achievement became possible through investments in technological advancements, which allowed putting less labor and resources to get better results than in previous decades.

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Reference

Martland, C. D. (2012). Productivity improvements in the US rail freight industry, 1980-2010. Journal of the Transportation Research Forum, 51(3), pp. 83–107.