Trucking Deregulation

Regulation

The federal government has been regulating prices and competition in interstate transportation ever since Congress created the Interstate Commerce Commission (ICC) to oversee the railroad industry in 1887. Truckers were brought under the control of the ICC in 1935 after persistent lobbying by state regulators, the ICC itself, and especially, the railroads, which had been losing business to trucking companies.

The Motor Carrier Act of 1935 required new truckers to seek a “certificate of public convenience and necessity” from the ICC. Truckers already operating in 1935 could automatically get certificates, but only if they documented their prior service, and the ICC was quite restrictive in interpreting proof of service. New trucking companies, on the other hand, found it extremely difficult to get certificates.

The law required motor carriers to file all rates—also called tariffs—with the ICC thirty days before they became effective. Anyone, including a competitor, was allowed to inspect the filed tariffs. If the proposed tariffs were protested by another carrier (such as a trucker, a regulated water carrier, or a railroad), the ICC normally suspended the rates pending an investigation of their legality. In 1948 Congress authorized truckers to fix rates in concert with one another when it enacted, over President Truman’s veto, the Reed-Bulwinkle Act, which exempted carriers from the antitrust laws.

From 1940 to 1980, new or expanded authority to transport goods was almost impossible to secure unless no one opposed an application. Even if the proposed service was not being offered by existing carriers, the ICC held that a certificated trucker who expressed a desire to carry the goods should be given the opportunity to do so; the new applicant was denied. The effect was to stifle competition from new carriers.

Purchasing the rights of an existing trucker became the only practical approach to entering a particular market. By the seventies the authority to carry certain goods on certain routes was selling for hundreds of thousands of dollars. Because the commission disapproved of “trafficking” in rights, it was hostile to mergers and purchases and attempted to restrict authority as much as possible. The result was often bizarre. For example, a motor carrier with authority to travel from Cleveland to Buffalo that purchased another carrier or the carrier’s rights to go from Buffalo to Pittsburgh was required to carry goods destined for Pittsburgh through Buffalo, even though the direct route was considerably shorter. In some cases carriers had to go hundreds of miles out of their way, adding many hours or even days to the transport.

ICC regulation reduced competition and made trucking inefficient. Routes and the products that could be carried over them were narrowly specified. Truckers with authority to carry a product, such as tiles, from one city to another often lacked authority to haul anything on the return trip.

Regulation’s Costs

Studies showed that regulation increased costs and rates significantly. Not only were rates lower without regulation, but service quality, as judged by shippers, also was better. Products exempt from regulation moved at rates 20 to 40 percent below those for the same products subject to ICC controls. For example, regulated rates for carrying cooked poultry, compared to unregulated charges for fresh dressed poultry (a similar product), were nearly 50 percent higher. Comparisons between heavily regulated trucking in West Germany and the United States and unregulated motor carriage in Great Britain, together with lightly regulated trucking in Belgium and the Netherlands, showed that charges in the highly regulated countries were 75 percent higher than in the nations with freer markets.

A number of economists were critical of the regulation of motor carriers right from the beginning. James C. Nelson, in a series of articles starting in 1935, led the attack. Walter Adams, a liberal Democrat, followed with a major critique in American Economic Review. Professors John R. Meyer of Harvard, Merton J. Peck of Yale, John Stenason, and Charles Zwick authored a very influential book, The Economics of Competition in the Transportation Industries, published in 1959.

In 1962 President John Kennedy became the first president to send a transportation message to Congress recommending a reduction in the regulation of surface freight transportation. In November 1975 President Gerald Ford called for legislation to reduce trucking regulation. He followed that by appointing to the ICC several commissioners who favored competition. By the end of 1976, these commissioners were speaking out for a more competitive policy at the ICC, a position rarely articulated in the previous eight decades of transportation regulation.

President Jimmy Carter followed Ford’s lead by appointing strong deregulatory advocates and supporting legislation to reduce motor carrier regulation. After a series of ICC rulings that reduced federal oversight of trucking, and after the deregulation of the airline industry, Congress, spurred by the Carter administration, enacted the Motor Carrier Act of 1980. This act limited the ICC’s authority over trucking.

Both the Teamsters Union and the American Trucking Associations strongly opposed deregulation and successfully headed off efforts to eliminate all economic controls. Supporting deregulation was a coalition of shippers, consumer advocates including Ralph Nader, and liberals such as Senator Edward Kennedy. Probably the most significant factor in forcing Congress to act was that the ICC commissioners appointed by Ford and Carter were bent on deregulating the industry anyway. Either Congress had to act or the ICC would. Congress acted in order to codify some of the commission changes and to limit others.

The Motor Carrier Act (MCA) of 1980 only partially decontrolled trucking. But together with a liberal ICC, it substantially freed the industry. The MCA made it significantly easier for a trucker to secure a certificate of public convenience and necessity. The MCA also required the commission to eliminate most restrictions on commodities that could be carried, on the routes that motor carriers could use, and on the geographical region they could serve. The law authorized truckers to price freely within a “zone of reasonableness,” meaning that truckers could increase or decrease rates from current levels by 15 percent without challenge, and encouraged them to make independent rate filings with even larger price changes.

The Success of Deregulation

Deregulation has worked well. Between 1977, the year before the ICC started to decontrol the industry, and 1982, rates for truckload-size shipments fell about 25 percent in real, inflation-adjusted terms. The General Accounting Office found that rates charged by LTL (less-than-truckload) carriers had fallen as much as 10 to 20 percent, with some shippers reporting declines of as much as 40 percent. Revenue per truckloadton fell 22 percent from 1979 to 1986. A survey of shippers indicates that they believe service quality improved as well. Some 77 percent of surveyed shippers favored deregulation of trucking. Shippers reported that carriers were much more willing to negotiate rates and services than prior to deregulation. Truckers have experimented with new price and service options. They have restructured routes, reduced empty return hauls, and provided simplified rate structures.

In arguing against deregulation, the American Trucking Associations predicted that service would decline and that small communities would find it harder to get any service at all under the new regime. In fact, service to small communities has improved and complaints by shippers have declined. The ICC has reported that in 1975 and 1976 it handled 340 and 390 complaints, respectively, against truckers; in 1980 it had to deal with only 23 cases, and just 40 in 1981. A 1982 ICC study of the effect of partial decontrol on small cities and remote parts of the country found that service quality had either been improved or remained unaffected by deregulation. Increased competition has bolstered the willingness of trucking firms to go off-route to pick up or deliver freight.

Deregulation has also made it easier for nonunion workers to get jobs in the trucking industry. This new competition has sharply eroded the strength of the drivers’ union, the International Brotherhood of Teamsters. Before deregulation ICC-regulated truckers paid unionized workers about 50 percent more than comparable workers in other industries. Although unionized drivers still are paid a premium, by 1985 unionized workers were only 28 percent of the trucking work force, down from around 60 percent in the late seventies.

The number of new firms has increased dramatically. By 1990 the total number of licensed carriers exceeded forty thousand, considerably more than double the number authorized in 1980. The ICC had also awarded nationwide authority to about five thousand freight carriers. The value of operating rights granted by the ICC, once worth hundreds of thousands of dollars when such authority was almost impossible to secure from the commission, has plummeted to close to zero now that operating rights are easy to obtain.

Intermodal carriage has surged sharply since 1980: from 1981 to 1986, it grew 70 percent. The ability of railroads and truckers to develop an extensive trailer-on-flatcar network is a direct result of the MCA and the Staggers Act (1980), which partially freed the railroads.

The motor carrier industry has made little use of the rate zone provision and instead has opted for independent filings, which have increased sharply. These independent filings have increased price competition. Such filings by definition are not agreed on through rate bureaus. Truckers have been able to slash rates mainly by improving efficiency—reducing empty backhauls, eliminating circuities, pricing flexibly, and reducing by about 10 percent the proportion of employees who are drivers and helpers. At the same time, it has cut the pay of such employees by over 10 percent relative to wages of workers in the economy generally. In other words, although wages of drivers and helpers are still considerably higher than wages of comparable workers in other industries, the differential has shrunk.

Savings

One of the economy’s major gains from trucking deregulation has been the substantial drop in the cost of holding and maintaining inventories. Because truckers are better able to offer on-time delivery service and more flexible service, manufacturers can order components just in time to be used and retailers can have them just in time to be sold. As a result inventories are leaner. Without the partial deregulation that resulted from the 1980 act, these changes would not have been possible. In 1981, inventories amounted to 14 percent of GNP; one study found that because of improved transportation services traceable to the Motor Carrier Act of 1980 and the Staggers Act, the total fell to 10.8 percent by 1987, for a saving of about $62 billion. A more conservative estimate by the Department of Transportation is that the gain to U.S. industry in shipping, merchandising, and inventories is between $38 and $56 billion per year.

Current Issues

Federal law still requires new carriers to apply for certificates of public convenience and necessity. All tariffs must be filed with the commission. Most states continue to enforce strict entry and price controls on intrastate carriers. These controls cause inefficiency. One result is that in some cases, shipping products from overseas is cheaper than shipping the same goods within the United States. Shipping blue jeans from El Paso, Texas, to Dallas, for example, costs about 40 percent more than shipping the identical jeans from Taiwan to Dallas.

The continuing obligation to file tariffs results in higher costs. Rates for shipping dog food, which are regulated, are 10 to 35 percent higher than the unregulated rates for other animal foods. Chicken, turkey, and fish TV dinners can be carried free of regulation, but a frozen dinner with a hamburger patty instead of a chicken leg requires trucking rates that are 20 to 25 percent higher. When the commission ruled that used beer bottles and kegs were exempt under the “used, empty shipping containers” provision, costs to haul the empties dropped 20 to 30 percent.

Even if the filing of tariffs did not lead to higher charges, the requirement adds to paperwork and confusion. For example, rates must be published for peanuts “roasted and salted in the shell,” but a trucker carrying peanuts “shelled, salted, not roasted or otherwise” is exempt from any need to file. Truckers must submit tariffs for carrying show horses but not exhibit horses. Motor carriers must list their prices with the ICC to carry railroad ties cut lengthwise, but not if they are cut crosswise!

Current law also authorizes truckers to collude on tariff increases in rate bureaus. In any other industry such agreements would violate the antitrust laws. Although any single carrier can file separate rates, a rate bureau’s filing for higher tariffs leads to pressures on all carriers to boost their prices.

Trucking deregulation is unfinished. According to one study, abolishing all remaining federal controls would save shippers about $28 billion per year. A Department of Transportation study done by researchers at the University of Pennsylvania’s Wharton School estimated that abolishing state regulation would save another $5 billion to $12 billion.

About the Author

Thomas Gale Moore is a senior fellow at the Hoover Institution at Stanford University. Between 1985 and 1989 he was a member of President Reagan’s Council of Economic Advisers.

Related Links

Antitrust, Concise Encyclopedia of Economics

Labor Unions, Concise Encyclopedia of Economics

Michael Hammock, Bizarre Tales of Tariffs, Econlib Article, March 7, 2016

Surface Freight Transportation Deregulation, Concise Encyclopedia of Economics

Cliff Winston on Transportation, an EconTalk podcast, October 14, 2013

Steven Teles on Kludgeocracy, an EconTalk podcast, April 14, 2014