Policy Analysis No. 33

Efficiency and Adjustment: The Impact of Railroad Deregulation

By Michael W. Babcock
January 31, 1984

Executive Summary

The Staggers Rail Act of 1980 marked the most significant change in rail policy since the Interstate Commerce Act of 1887. It eliminated most common-carrier obligations, granted railroads greatly increased commercial freedom, and generally reversed previous policy. What caused this dramatic reversal? What changes in the transportation markets contributed to this regulatory reform of the railroads? Some perspective on these questions can be gained from table 1. It compares the performance of the transportation sector to that of the economy as a whole. Changes in the demand for transportation closely parallel changes in the demand for production, because of the derived nature of transport demand. Thus, between 1950 and 1982, ton-miles of intercity freight and the gross national product increased by similar magnitudes. However, the growth in the demand for transportation was less than the growth of GNP and industrial production. This difference is partly due to technical improvements in manufacturing that require less raw-material input per unit of output. Changes in the composition of GNP have also affected relative growth. As proportionately more resources are devoted to service production, inevitably the demand for goods transportation will grow less rapidly than the general economy.

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Michael W. Babcock is an associate professor of economics at Kansas State University in Manhattan, Kansas.