The Search for a National Freight Policy

In enacting the MAP-21 surface transportation reauthorization bill last year, Congress put new emphasis on goods movement. It called for the US DOT to develop a national freight policy, designate a national freight network, develop a national freight strategic plan, and provide for a competitive grant program for large multimodal freight projects. In August 2012, DOT created a Freight Policy Council, chaired by Deputy Secretary John Porcari and consisting of DOT experts from all modes, to carry out the tasks called for by MAP-21. In order to tap into industry expertise, this year DOT created a National Freight Advisory Committee to advise the FPC. The NFAC consists of 47 members with expertise in all modes used for goods movement.

In parallel with these efforts, the House Transportation & Infrastructure Committee created a Panel on 21st Century Freight. Its report, “Improving the Nation’s Freight Transportation System,” was released last month. It provides a pretty good primer on each of the major modes, as well as brief descriptions of the current federal mode-specific user taxes and trust funds, as well as several lists of recommendations. Some of those simply restate provisions already in MAP-21, but others are more specific, such as calling on DOT to complete (soon!) an ongoing truck size and weight study, to extend the deadline for positive train control (PTC) for railroads, and directing the Secretaries of the Army and Treasury to assess financing options for the inland waterways system.

I’m glad to see more emphasis being placed on goods-movement, especially given that DOT expects 61% growth in freight between 2007 and 2040, which will require some major increases in infrastructure capacity (and therefore funding). The big questions are how best to decide what investments make sense and who should pay for them. And on these two questions, I have some serious concerns about the approach set forth in MAP-21 and embraced by a number of freight stakeholder groups. Let me explain.

The model underlying all these efforts is that the DOT, advised by industry experts, will define an overall national network of goods-movement infrastructure. Presumably it will include major Interstate highway routes, major freight railroad routes, key seaports, major sections of the inland waterways system, key cargo-hub airports and air routes, and even major pipelines—all of which are discussed in the House T&I Committee report. Then the DOT will weigh alternative investments to strengthen this network, and use some to-be-defined source(s) of funding to make grants to beef up the network.

The first problem with this model is the huge disparity among the modes. Railroads are investor-owned, not government-owned, and self-supporting. Likewise for pipelines. The other modes are all government-owned. Major ports are largely self-supporting, despite the cockamamie redistribution of monies among ports via the Harbor Maintenance Tax and associated Trust Fund. Major airports are also self-supporting. Highway freight does not fully pay its way, according to federal cost allocation studies and research by transportation economists. But it covers a vastly larger share of its infrastructure costs than barge transportation on the inland waterways, which according to a report last year from House T&I, covers only about 5% of its infrastructure cost via the barge fuel tax that feeds the Inland Waterways Trust Fund. Therefore, the self-supporting modes have no real interest in being taxed to pay for better infrastructure for the subsidized modes, but the latter have a strong interest in retaining their subsidies.

The second problem is the idea that central planning will lead to the most efficient and cost-effective investments in goods movement. Let me suggest a thought experiment. Suppose freight stakeholders had been asked to develop a 40-year strategic plan for freight infrastructure in 1955. At that point in time, not only was there no Interstate highway system (though that was reasonably predictable), but the intermodal container had not been invented. And therefore the global revolution in shipping wrought by this development could not have been taken into account in creating the plan. There was no such thing as just-in-time inventory systems, and there was no third-party logistics industry. Railroads, trucking, and airlines were all heavily regulated. My point is that freight transportation is inherently dynamic, and one of the forces that drives its dynamism is competition, both within each mode and between modes. A central-planning model cannot really account for this, and therefore risks making bad investment decisions on long-lived infrastructure that will be the wrong kind and in the wrong place.

The third problem is perhaps the most serious, and that is the likelihood of interest group politics prevailing over economic value maximization in deciding which major infrastructure projects to fund. Self-supporting railroads and pipelines make their own investment decisions, based on their own risk-benefit calculations—and if they make unwise investments, they bear the costs. Cargo airlines work cooperatively with airports to get the facilities they need, often committing themselves to long-term lease agreements. The trucking industry says it’s willing to pay a higher diesel tax, but has yet to come up with a mechanism to target the new funds strictly to high-priority trucking corridors. Barge lines lobby incessantly for a greater share of lock and dam investments to be paid for by general taxpayers (e.g., the proposed WAVE Act), and the port industry for some reason sticks with a bizarre redistribution scheme that gives the deep-harbor ports like Los Angeles and Seattle only a few cents back in maintenance funds for every dollar of harbor maintenance tax they send to DC, while pumping money into other ports that may or may not require deep-water dredging. Moreover, as soon as the DOT defines some corridors and facilities as the national network, we can be sure huge political pressures will be brought to bear to add corridors and facilities that got left out as non-strategic.

If a central plan for goods-movement infrastructure does get created, along with a funding source, even modes that are now self-supporting or nearly so could well see the potential of getting someone else to pay for part of the additional infrastructure they need. And those that are not self-supporting will have even stronger incentives to get somebody else to pay a large share of their infrastructure costs. A very wise 19th century French economist, Frederick Bastiat, once wrote that “The state is that great fiction by which everyone tries to live at the expense of everyone else.”

For all of the above reasons, I’d hate to see the goods-movement industry go down that path. The alternative is to develop more-direct and robust users-pay/users-benefit approaches under which each mode pays for the additional infrastructure it needs—and two or more modes work together on projects that facilitate intermodal connections (as in the CREATE program in Chicago and the Alameda Corridor in Los Angeles). That way, the costs of the new infrastructure get built into the rates each mode charges its customers, so that the price of moving goods reflects what it actually costs to build and maintain the infrastructure used.

– See more in the November Surface Transportation Newsletter