Abstract
Marcus Alexis was a major contributor to the debate on deregulation of the surface transportation industry. He hypothesized that easing restrictions on rate-setting and firm-entry would promote efficiency and enhance consumer welfare in trucking and railroad industries. As commissioner and interim chairman of the Interstate Commerce Commission (ICC) he supported legislation that opened these industries to greater competition. This study revisits the model used by Alexis to derive his hypothesis, and uses current information to test its predictive accuracy long after the initial passage of deregulation. Findings from this study are consistent with Alexis’ forecast. Such evidence of his research expertise is just part of his legacy as a pioneer in the economics profession.
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Notes
Rail and trucking transportation service constitutes surface transportation for the purposes of this study.
Monopoly in rail is characterized by lack of competition along routes rather than the traditional measure of number of competitors in an industry.
The strategy of selectively targeting lucrative routes as opposed to competing on all routes served by rail carriers is an example of ‘cream-skimming’. Trucking carriers at that time were able to engage in such behavior because they did not face regulatory stipulation that required rail carriers to provide access to shippers located along low demand routes in rural locations.
For-hire carriers are companies whose only line of business is providing transportation services to shippers.
Even though trucking companies set their rates below that charged by rail, their relatively low operating cost at that time allowed them to generate rent while maintaining a competitive advantage over rail carriers.
Capture theory argues that regulators are held captive by the industry they oversee and promote rulings that advance the interests of the regulated industry.
The 1973 Regional Rail Reorganization Act (3R) was actually the initial legislation addressing the financial performance of the rail industry. However, this Act did not address rate-setting or route restrictions.
The selection of economists to serve as commissioners of regulatory agencies was the beginning of a new trend. Alexis observes that prior to his selection “Economists [were] seldom privileged to be active participants in bodies vested with jurisdiction in economic regulations. These collegial forums are traditionally the provinces of lawyers and former members and staff of legislatures” (Alexis 1982).
Alexis resigned from his post as interim ICC chair in part because of his concerns that future commissioners appointed by President Ronald Reagan would not continue on the path toward further deregulation.
Alexis also argued that removal of entry restrictions would promote competition from minority groups who were traditionally excluded from offering their services in this industry. In support of this prediction he comments that “Before I was on the ICC there were less than 20 minority group members who held certificates out of 17,000 regulated truckers. When I left there were close to 300, which was a 15-fold increase in a period of 2 years.” (Manhattan Report on Economic Policy 1982). Further evidence of employment gains by minorities in this industry are reported by Husbands-Fealing and Peoples (2006). They find a statistically significant post-deregulation racial employment disparity erosion in trucking following. They also find significant post-deregulation racial employment erosion in rail, however, a substantial employment decline for white workers explains this outcome.
Winston (1998) reports class-1 railroads abandoned one-third of their track miles and real operating costs cost per-ton mile fell 60 % immediately following rail deregulation. Most of these routes were short-haul services to rural areas. These services are now provided by trucking companies or class-II and class-III rail carriers at real rates exceeding the subsidized rates charged prior to the Staggers Act.
An example new cost-saving technology is electronic based communications and information systems used in tandem with logistics software, which allows carriers to coordinate efficient delivery and pick-up schedules (Peoples 2005).
The trucking industry includes for-hire and private carriage carriers. The latter category are non-trucking companies that haul their own shipments.
Post-deregulation truck driver wage erosion occurred despite productivity gains, in part, because trucking companies passed on cost-savings to customers in the form of lower prices. In addition, entry of low-wage, non-union competitors created a labor market environment that substantially weakened the industry union’s ability to continue the pre-deregulation practice of sharing rent.
The median voter theorem indicates that for a majority rule voting system outcomes will reflect the choices most preferred by the median voter. Hence, within this conceptual framework, an optimizing candidate will focus a disproportionate share of his or her campaign funds targeting these voters.
This strategy for obtaining a majority vote is taken from the median voter theorem which asserts that a majority rule voting system chooses the political option most preferred by the median voter, Holcombe (2006).
The framework used to provide a formal presentation of Alexis’ model is an adaptation of Tirole’s depiction of dynamic games (Tirole 1988, p. 245).
Oversight of remaining surface transportation functions was transferred to the Surface Transportation Board (STB).
There are only seven class I carriers serving the US.
Ying (1990) identifies increasing load factors as a significant source of cost-savings allowing trucking carriers to use fewer resources per ton-mile.
A surge in real motor fuel prices starting in the late 1990s creates a challenge lowering cost/sales ratios in surface transportation industries.
While stable shipping rates do not harm consumer welfare of shippers, there’s no guarantee that shippers will use this lack of price volatility to contribute to stable prices for their customers. Other forces in their respective product markets, such as degree of product market competition, should influence wholesale and retail prices of goods hauled by trucks.
Locomotive engineers, train conductors and switchmen are the rail operative occupations used in this study’s sample.
Declining employment trends are explained by the significant loss of jobs for switchmen. These jobs were affected by the introduction of electronic switching systems. Employment trends for locomotive engineers and conductors. Locomotive engineers actual experienced employment gains following the abolishment of the ICC and conductors experienced employment growth peaking at 62,000 by 2000 and fluctuating between the low 40,000 s and high 50,000 s thereafter (Peoples 2013).
A sample of Alexis’ contribution to the economics profession include appointments as director of the Federal Reserve Bank of Chicago in 1985, serving 4 years as deputy chairman and becoming chairman in 1990 of the Chicago Fed. He also served as director of the National Bureau of Economic Research.
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Acknowledgments
The author is grateful for the comments and suggestions of Kaye Husbands-Fealing, Margaret Simms and participants of the NEA session on “Bridging the Academy and Public Policy” session in honor of Marcus Alexis at the 2014 ASSA meeting in Philadelphia, Pennsylvania.
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Peoples, J. Marcus Alexis and Regulatory Reform in Surface Transportation Industries. Rev Black Polit Econ 41, 243–258 (2014). https://doi.org/10.1007/s12114-014-9181-2
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DOI: https://doi.org/10.1007/s12114-014-9181-2