The Surge in Freight Rail Investment

by Reihan Salam

One often hears about the parlous state of U.S. infrastructure. This morning, Peter Orszag laments the lackluster state of U.S. roads and bridges and calls for Congress to take a series of steps, including (1) coupling increased infrastructure investment with a plan for long-term fiscal consolidation; (2) bringing back Build America Bonds (BABs), which offer direct subsidies to state and local infrastructure borrowers rather than indirect subsidies via the exclusion of interest on bonds from taxation (as Chris Papagianis has explained, however, BABs may well raise bailout risk, as foreign investors purchase them under the implicit assumption that they are backed by the federal government, and not state and local governments); (3) encouraging new forms of financing like the Chicago Infrastructure Trust; (4) and encouraging market pricing, an idea that we’ve often championed.

Yet there is one mode of transportation that has been flourishing even as the quality of the infrastructure controlled by the Federal Highway Administration and various local transit agencies has deteriorated, and that is rail freight. Betsy Morris of the Wall Street Journal describes the surge in private investment that has been transforming the rail freight industry, increasing rail capacity and increasingly outcompeting trucks as they become more reliable. Railroads have grown more deeply enmeshed in the energy sector, transporting growing quantities of crude oil beyond the narrower networks of oil pipelines, thus giving energy producers more choices as to where to sell their wares.

Back in 2011, Mina Kimes observed that the growing clout of the U.S. rail freight industry had raised concerns among shippers, many of whom have little choice but to rely on a locally dominant railroad. This in turn has led to calls for the reregulation of shipping prices, an effort that may well lead to decreased investment. Marc Scribner of the regulation-averse Competitive Enterprise Institute has more recently argued that it is unlikely that cost-based rate ceiling would prove beneficial, as it would tend to reduce capital investment across the entire network in the interest of a minority of captive shippers. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.