The federal government has tried to save heavy industry before, and liberals are beginning to point to Conrail as the blueprint to follow.
by Michael Naragon
“Any honest reading of history suggests that the federal government has quite an impressive record of rescuing institutions considered too big to fail,” suggests an article in the March/April 2009 issue of Washington Monthly.
The first two examples cited by author Phillip Longman are Lockheed and Chrysler, which both received emergency loans from the government in 1971 and 1980, respectively. Both companies paid back their loans, with interest, and the government made no attempt to take a controlling interest in the institutions.
In one of the largest industrial bailouts in recent history, however, the federal government took over the failing Penn Central Company and formed the Consolidated Rail Corporation, or Conrail. According to Longman, the protagonists of the story were the bureaucrats who reorganized the company and rebuilt its failing infrastructure–railcars, engines, and track– at a price tag of over $7 billion.
At this point, while Conrail was losing over $1 million each day, the heroic bureaucrats found what the source of the problem really was: government. As the federal money swirled down the Conrail drain, the politicians had an epiphany.
The policies of then-President Jimmy Carter had further immersed the nation into an economic doldrum, so, in the interest of stimulating the entire railroad industry, Congress passed the Staggers Act of 1980. According to Economicexpert.com, the act “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.”
What happened, in essence, was that the federal government realized it was in its own way. The Interstate Commerce Commission had long exercised tough regulatory control over the railroad industry. The Staggers Act allowed the entire industry, including the government’s own rail line, to set their prices according to the market value, not according to government mandate.
After the government’s control of all railroads was removed, Conrail began to prosper. The company turned a profit by 1981, and in 1987, the government sold its interest in Conrail for $1.9 billion. Longman uses the discussion of the sale to take a shot at Ronald Reagan, explaining that the money from the Conrail sale went to fund his budget deficit. The government has definitely improved their ability to overspend in the last 22 years.
Longman–and I’m certain other Statists will follow–uses Conrail as evidence that the government has a great track record when it comes to saving businesses that are too big to fail. Perhaps we’ll hear of Conrail again when the universal health care debate comes to a head.
But the moral of the story, gentle reader, is not how government swooped in to save this railroad company, as they seem poised to do with the auto industry today. The real point of this episode is that the federal government looked themselves in the mirror. When politicians were faced with the loss of billions of dollars and, possibly, their jobs as a result, they quickly removed their own regulations. And what happened when they did? Profits poured in.
Unwittingly, Longman and others who seek to use Conrail as an example of government competence actually reveal what is wrong about Washington’s interventions. Rather than spend billions to “rescue” the automakers, perhaps our representatives should be more focused on repealing the pages and pages of environmental and labor regulations that continue to hold them back.
Maybe they’re looking to do just that after they take over, and they’ll use the inevitable profits to put a tiny dent in the trillions of dollars of federal spending today.
Or, more likely, they’ll turn the American auto industry into a sinkhole like the other government-run railroad… ever hear of Amtrak?
Good post.
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