ECONOMIC

TRANSPORTATION REFORMLast year the Congress passed and on January 2, 1974, the Presidentsigned the Regional Rail Reorganization Act, which is a pragmatic attemptto deal with the pervasive insolvency of railroads in the heavily industrializedMidwest and Northeast. Several of the eight principal bankrupt railroadshad threatened liquidation, and such a bill was needed because the risk ofeven a very short period of suspended service was too great to be tolerated.If the services of the Northeast's railroads are so vital to the rest of theeconomy, one must ask why so many of them were in such a weakenedfinancial condition. Factors more general and basic than those that normallycause bankruptcy are responsible.Poor management and unrealistically rigid labor contracts are popularexplanations of the railroads' inability to adapt to changing technology anda changing economy. These proximate causes largely reflect, however, a morefundamental cause—inefficient and intransigent governmental regulation.Governmental regulation of the railroads can be traced to two sources.The public wanted the Government to protect them from the industry in atime of near monopoly and the members of the industry wanted the Governmentto protect them from each other. This "protection" has been expensivefor both the railroads and the public. The elaboration of regulations intendedto provide this protection has created a complex set of specifications for thebehavior of firms that has tended to ossify with time. As a result railroadcompanies have increasingly given up control of fundamental managementdecisions to the Interstate Commerce Commission (ICC) in return for thepolicing of industry competition by the agency. Moreover, railroad management'sattention began to focus more on the rules that delimited its discretionthan upon the underlying economic realities in the markets in whichthey operated. As these realities changed, railroad management found itselfincreasingly inept at adjusting—the result being an increasing incidence ofbankruptcy.The Transportation ImprovementActThe Transportation Improvement Act of 1974, proposed by the Administration,is an important first step toward solving some of the more generalproblems of the railroad industry. It is also an imperative step toward a longtermsolution of the problem of the bankrupt railroad; because the viabilityof the rail system that will emerge from the wreck of the Penn Central willdepend in an important way upon successful regulatory reform. Among themore important reforms facilitated by the bill would be liberalization andrationalization of procedures for the "abandonment" of unprofitable lines.In 1971 the railroads were required by the ICC to maintain service on 21,000miles, about 10 percent of the total, of lightly traveled track for whichrevenues were less than operating costs.To cover these losses, railroads must charge higher rates on profitableroutes. This subsidization distorts resource use and interferes with the effi-40