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GM and the Railroads--Stuntz

This is more David’s department than mine, so if this observation is all wet, I’m happy to take correction. But in recent weeks, I’ve been thinking about the fate of the railroads in the late nineteenth and early twentieth centuries. Like the auto companies today, the railroads of the late nineteenth century received huge subsidies, often in the form of free land adjoining new track. Like GM and Chrysler, most of those subsidized railroads went belly up – not despite the government subsidies, but partly because of them. 

That sounds bizarre, but it isn’t. Allegedly friendly governments offer their business patrons a killing embrace – do this or that, and we’ll give you more money or land or trade protection than you could possibly ask. The subsidies are so generous, responsible corporate managers will do pretty much anything to get them. Over time, the corporations acquire more and more skill at pleasing the relevant government officials – and lose the ability to please their customers. The railroads laid track and built stations in places where the demand for transport could not match the supply; today’s GM is striving to build “green” cars that consumers may not buy. Insolvency is the inevitable consequence of such business decisions. So it was a century ago with railroads; so it is today with America’s auto companies. Perhaps the banks are next . . .

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Comments ( 14 )

Great. If you're right, we're on the doorstep of the Amtrak-ization of both the auto and finance industry, in which case...gawd help us.

Government has NO BUSINESS being in the car business or the banking business other than to set some very basic rules. The car businesses are failing b/c of huge egos in both management and unions. Lack of innovation, design and economy kept the U.S. automakers behind for YEARS and they STILL did not adapt. Now we have a president who is rewarding the unions who kept demanding ridiculous pay and benefits for the workers and the management who kept capitulating all the while putting out inferior products and ignoring the desires/needs of the buyers.

There might be a slightly stronger argument for some involvement in the banking industry b/c it was government meddling that got them in the fix they find themselves today. The problem with that, is that if government GOT them here, WHY do we think that government is capable of getting them out of that fix????

That seems largely right, except that since the government is largely the owner of these companies, two things may distinguish them from the railroads: (1) they will likely continue to receive ongoing subsidies (can't keep parceling out land, but cash is apparently endless) and (2) the state can (and likely will) adjust regulatory regimes with an eye to securing themselves a reasonable market share. It seems more likely that what we're seeing here is the emergence of a kind of European neo-corporatism, albeit one that the Europeans largely left behind in the 1980s (for good reason).

Maybe the RR companies went belly-up, but arguably, they helped create the American juggernaut that launched us into leadership in the 20th century and gave the US the wherewithal to weigh in effectively in two world wars.

The money was well worth it.

Amtrack came in to the picture later.

Look, I want a green car, but I will not buy one NOW because I have a good car. Many people looking for cars now will buy green cars, if they are out there. Right now, there are just not that many choices.

I guarantee you that, given two cars with the ONLY difference being one runs on electricity (same price, same power, same amenities) and the other runs on gas 9 times out of 10 people will buy the green car.

That is why the Accord hybrid is more expensive than the internal combustion engine. If they were the same price, no-one would buy the internal combustion engine.

And if a Mercedes and a Yugo were the same price, we'd all buy the Mercedes. What does this prove? Car companies don't price cars to deflect sales away from "green" technologies--the prices reflect huge differences in manufacturing costs. You can't just *imagine* that those costs will vanish because you want to buy a cheap electric car.

The railroads went belly up because the government created the interstate highway system and regulated rail rates so they could not compete with truckers and allowed unions to force uncompetitive work rules on the railroads and bad management. The free real estate the railroads got in return for reduced shipping rates for government business had nothing to do with the collapse of any railroads. Can you name a railroad that failed because of the real estate for favored customer status?

"I guarantee you that, given two cars with the ONLY difference being one runs on electricity (same price, same power, same amenities) and the other runs on gas 9 times out of 10 people will buy the green car."

I guarantee you that, given two cars with one running on electricity and one running on gasoline, you cannot produce the "green" car as cheaply, or give it the same amenities or power.

While I agree with your basic point, I must disagree somewhat with your historical analysis.

The railroads were given land grants to build in places where there were no people, on the theory that once there was transport, it would become practical to farm (homestead) these locations. Typically the grant was for every other section (square mile) on each side of the track. Clearly, the value in this proposition (once the railroad is built) is in the land itself, not in the putative profits of running a railroad. So, the railroad builders tended very much to build the railroad in the fastest, cheapest way possible that would fulfill the grant requirements, get the land, spin the land ownership off to an independent subsidiary, then walk away from the railroad itself, allowing it to go bankrupt. In other words, going bankrupt was the intended business plan right from the start, although of course not stated as such.

Serving customers was never their intent - that was to be left to whoever bought up the bankrupt remains (and good luck actually running the shoddily-constructed road at a profit). Indeed, most of these roads had to be completely rebuilt almost as soon as they were finished in order to make them practical to run. This second build was paid for by the customers, of course. And guess who had a monopoly on hauling your produce once you decided to homestead out in the plains? The railroad. Which is a large part of the reason why coming in after the land-grabbers could still be a viable business.

Why did the politicians go along with this? Well, who do you suppose bought up the alternate (non-railroad) sections of land when it was still cheap? You guessed it.

We still have the analogous situation today when Washington politicians get freeway ramps built in places where there is land but no people. The land then becomes much more valuable for subdivisions, And, just by coincidence, someone the politician knows well, or is related to, etc., just happens to have bought up that land 6 months prior. Funny, that.

While I'm also against the GM/Chrysler meddling, asserting that govt. subsidies helped kill rail transit seems a stretch. Didn't they kill it by creating roads?

Is there evidence of govt. led rail build-up being a real factor in the death of rail co.s, or is this just a hunch?

Well isn't a factor in the railroads demise the assumption on their part that their benefactor would be so forever? For instance, railroads often profitably operated lines that made no money on passengers, but did make money on mail service. railroads lost most of their freight business to trucking, which was made much more convenient and cost effective by the fact that the government built the infrastructure, the interstate highway system, for them. Urban rail lines were often owned by or operated as electrical utilities, which gave them additional lines of business and a substantial cost savings, until antitrust regulation made largely prohibited the practice.

If the hybrid cost the same to manufacture AND SUPPORT as the conventional powerplant one; there would be no need to sell the conventional one. Kill the conventional and sell only the hybrid.

Or are you suggesting that Honda is using the hybrid to price-segregate the market? After the terrible examples that the domestic auto manufacturers have given on attempting to price-segment the market?

No you have this kind of backwards because the railroads laying track in underserved areas (where exactly?) were costly and inefficient to maintain. Today on the other hand the government requiring the auto makers to make "green" cars is the opposite as "green" cars are LESS COSTLY and MORE EFFICIENT to maintain. The Auto companies went belly up because they were making cars that were MORE costly to repair, maintain, and run.

What I am wondering though is what is going to happen to all those railroads that GM bought up, owned or destroyed? Are we going to have better public transportation for the first time in 80 years? Is GM's vice grip on the railroads finally over? What about the all the safety and fuel saving patents that GM bought from inventors and engineers and then shelved? Will the government force GM to release these? Let's hope so. There might be a silver lining on this cloud my friends.

Government in the control of manufacturing automobiles?! Remember the Yugo? Enough said.

Danny L. McDaniel
Lafayette, Indiana

I really do not think that Yugo or US railroad systems are to be compared with GM and Chrysler. These are three completely different situations. Speaking of Yugo, by the early 1990s, the effects of United Nations sanctions on Yugoslavia forced Zastava to withdraw the car from the US market. I doubt that anyone in the government offered Zastava any benefits.