Updates From Government Motors

General Motors is dropping Pontiac from its roster, so what’s the next move to expect from the now-effectively DC-based car manufacturer? As P.J. O’Rourke told an Australian audience this month:

“The US Government is going to take over the American car industry. I can predict the result – a light-weight, compact vehicle with a small carbon footprint using sustainable alternative energy. When I was a kid we called it a bike.”

And today, we call it the P.U.M.A.:

The federal government and the workers will own one of our largest and most storied industrial companies. That has never really happened before. In other words, the governmental restructuring of General Motors is a social experiment that will shortly teach us two things: Whether businesses can be managed to a profit when in the hands of bureaucrats and union officials, and whether American consumers will trust such people to stand by the products that they make. I, for one, am eager to learn the answer, because it will tell us what we should and should not do about health care.

I’d say the closest comparison (which is yet another example of, as Jennifer Rubin called it earlier this month, “That ’70s Show”) was what the government did to the railroad industry in the 1970s, which actually provides two illustrative models. The first was Amtrak, in which the government took passenger trains off the commercial railroad’s hands, which virtual all (only a half dozen railroads initially opted out of Amtrak) were thrilled to get rid of. Passenger railroading had been an increasingly losing proposition for American railroads, once the jet aviation came into vogue in the 1950s.

Amtrak, is of course, a taxpayer boondoggle that continues to lose money every year; about the only area that might be profitable, if Amtrak were to ever privatize, would be in the densely populated Northeast Corridor.

Conrail is the other model for government control of American railroads; it was formed in 1976 in the wake of multiple bankruptcies in the Northeast. The biggest of which, Penn Central, itself had only come into existence in 1968, as a merger between the Pennsylvania Railroad and the New York Central, before absorbing the New York, New Haven and Hartford a year later. The PC declared bankruptcy in 1970; within a few years, several other Northeast-based railroads had joined them in bankruptcy.

Somewhat surprisingly, Wikipedia actually has a pretty good summary of what happened next:

Conrail was incorporated in Pennsylvania on October 25, 1974, and operations began April 1, 1976. The theory was that if the service was improved through increased capital investment, the economic basis of the railroad would be improved. During its first seven years, Conrail proved to be highly unprofitable, despite receiving billions of dollars of assistance from Congress. The corporation declared enormous losses on its federal income tax returns from 1976 through 1982, resulting in an accumulated net operating loss of $2.2 billion during that period. Congress once again reacted with support by passing the Northeast Rail Service Act of 1981 (45 U.S. Sec. 1101 et seq.), which amended portions of the Regional Rail Reorganization Act by exempting Conrail from liability for any state taxes (45 U.S.C. 727(c)) and requiring the Secretary of Transportation to make arrangements for the sale of the government’s interest in Conrail (45 U.S.C. 761). After NERSA was implemented, Conrail began to improve and reported taxable income between $2 million and $314 million each year from 1983 through 1986.

Although Conrail’s government-funded rebuilding of the heavily run-down railroad infrastructure and rolling stock it inherited from its six bankrupt predecessors succeeded by the end of the 1970s in improving the physical condition of tracks, locomotives, and freight cars, the fundamental economic regulatory issues remained, and Conrail continued to post losses of as much as $1 million a day. Conrail management, recognizing the need for more regulatory freedoms to address the economic issues, were among the parties lobbying for what became the Staggers Act of 1980, which significantly loosened the Interstate Commerce Commission‘s rigid economic control of the rail industry. This allowed Conrail and other carriers the opportunity to become profitable and strengthen their finances.

The Staggers Act allowed the setting of rates that would recover capital and operating cost (fully allocated cost recovery) by each and every route mile the railroad operated. There would be no more cross-subsidization of costs between route-miles (i.e., rates on profitable route segments were not set higher to subsidize routes where rates were set at intermodal parity, yet still did recover fully allocated costs). Finally where current and/or future traffic projections showed that profitable volumes of traffic would not return, the railroads were allowed to abandon those routes, shippers and passengers to other modes of transportation. With the Staggers Act, the railroads, including Conrail, were freed from the requirement to operate services with open ended losses for the public convenience and necessity of those who simply chose rail services as their mode of transportation.

Conrail began turning a profit by 1981, the result of the Staggers Act freedoms and its own managerial improvements under the leadership of L. Stanley Crane, who had been chief executive officer of the Southern Railway. While the Staggers Act helped immensely in allowing all railroads to more easily abandon unprofitable rail lines and set its own freight rate it was under Crane’s leadership that Conrail truly became a profitable operation. Soon after Crane took office in 1981 he shed another 4,400 miles off the Conrail system in the following two years, which accounted for only 1% of the railroad’s overall traffic and 2% of its profits while saving it millions in maintenance costs.^[1] The Northeast Rail Service Act of 1981 relieved Conrail of its requirement to provide commuter service on the Northeast Corridor, further improving its finances.

In the late 1990s, the increasingly succesful Conrail, being run as a private enterprise, was acquired by two other large railroads, each the result of mergers themselves, CSX Transportation and the Norfolk Southern Railways.

So will General Motors remain a quasi-government enterprise in perpetuity, or be allowed to emerge as an independent commercial enterprise if it can emerge from its current woes? Time and the whims of Congress and the White House will tell.