STATEMENT OF ABRAHAM WEISS, ECONOMIST, INTERNATIONAL BROTHERHOOD OF TEAMSTERS

My name is Abraham Weiss. I serve as economist for the International Brotherhood of Teamsters.

This statement is in the nature of an economic postscript to the statement of Einar Mohn, vice president of the Teamsters' Union. It is my hope to demonstrate that the minimum-rate proposals in the Weeks Cabinet Committee Report, and the bills introduced to implement them, will place the trucking industry at a severe competitive disadvantage, all in the name of "dynamic competition."

Briefly, I propose to outline the economic and historical bases for the conclusion: (1) that the cost structure of rail carriers, as compared with motor carriers, gives the rails an undue advantage under the Weeks Report in cutting rates; and (2) that so-called dynamic competition is unhealthy for the transportation industry and will not achieve the stability sought.

Carrier costs and ratesetting

Transportation costs fall into two categories. First, there are the out-ofpocket or direct expenses which vary with changes in traffic volume and may be assigned to commodities on a cost-of-service basis. In other words, out-ofpocket costs are those which would not be incurred if the traffic would not move. Second, there are fixed or constant costs, also known as overhead costs, which are generally independent of the volume of traffic carried. It is the sum of these two types of costs which determine the revenue needs of any business, including a return on investment or profit.

Recognition of the different nature and extent of these costs is vitally important if we are to understand the impact of the rate-setting recommendations in the Weeks Committee Report and in the bill before this committee of the Congress.

The rails have a higher proportion of fixed or constant costs than trucking. It is often said that approximately two-thirds of the total expenses of a railway are constant, and only one-third variable.' Railroad fixed costs are due to a number of factors, such as the size and scope of operations; their fixed plant; the long economic life of specialized equipment (cars and locomotives); and so forth.

The high fixed costs of railroads permit, even foster, discrimination in rates and ratecutting. Railroads must have volume, even if it means cutting competitors' rates. Railroads are willing to carry traffic at low (out-of-pocket) rates which make only a slight contribution towards meeting the overhead (fixed) expenses. Competition, then, tends to reduce rates to variable (or outof-pocket) costs, which are significantly lower than for motor carriers.

Rail rates are inherently unstable. For this reason, railroad competition is admitted to be ruinous.2

The motor carrier industry, on the other hand, is characterized by high direct or variable cost (about 90 percent of total expenses) and relatively slight overhead, in sharp contrast to the railroads. Its unit of business is the individual over-the-road truck. Therefore, the current direct operating costs of trucking firms bulk larger per unit of service performed, in general, than in the case of the railroads.

This means that the limits within which motor carriers can reduce rates below fully allocated cost in order to meet competition is much more restricted than in the case of railroads. Since so large a proportion of motor-carrier expenses varies with the service performed, very little leeway exists in the motor-carrier cost structure to meet reduced rail rates. Railroad officials themselves acknowl

1 Jones. E., Principles of Railway Transportation (New York, Macmillan, 1924). pp. 77-78: Ripley, W. Z., Railroads: Rates and Regulation (New York, Longmans, 1912), pp. 55-56. D. P. Locklin, Economics of Transportation (Chicago, Richard D. Irwin, 3d edition, 1947), p. 699. 3 The Bureau of Transportation Economics and Statistics of the Interstate Commerce Commission considers that not more than 10 percent of motor-carrier operating costs can be considered as constant, due to the fact that motor-carrier equipment and other facilities can be readily adjusted to the volume of business done. See: Exhibit in ex parte MC-22, Motor Carrier Costs in New England (Washington, mimeographed, 1944). p. 75; also Statement No. 4616, The Meaning and Significance of the Out-of-Pocket. Constant, and Joint Costs in Motor Carrier Operation (Washington, mimeographed, 1946), p. 12.

edge that they have basic operating costs only a fraction of the net operating cost of trucks."

With this as background, let us now examine the rate minimum proposals in the Weeks Committee Report and H. R. 6141. Rates would not be considered too low if they are compensatory, that is, if they returned the direct ascertainable cost of the service involved. This presumably means out-of-pocket cost, without counting anything for overhead, debt, profit, or other factors which would have to be included were actual total costs to be considered as the minimum. But nowhere is the phrase "direct ascertainable cost" defined in these bills, nor is the word "cost" defined.

This policy means using cost factors alone, to the extension of all other considerations, in determining the lawfulness of competitive rate adjustments. The cost-of-service principle, in practice, means that the price of necessities would rise and the price of luxuries fall. Rates would rise on such items as wheat, coal, lumber, and steel, which are heavy and bulky in proportion to their value and which now, under the value-of-service principle, in contrast to the cost-ofservice principle, move at relatively low rates.

A rate policy such as is here proposed, which permits cutting rates to an out-of-pocket cost basis is little different from no regulation. Competing transportation agencies would tend to reduce rates to an out-of-pocket basis, since any traffic carried at a rate which covers out-of-pocket cost and perhaps a little more leaves the carrier better off than if it allowed the traffic to go by another agency. This process, however, cannot go on forever if a carrier is to meet all of its costs. In other words, unrestricted competition between the different modes of transportation, like unrestricted competition between railroads, is ruinous in character.

This is not just the teamsters' conclusion. Over 20 years ago, the Federal Coordinator of Transportation issued a similar warning to the Senate, in these terms:

"This 'out-of-pocket' cost theory is, it may be said, an element of great danger to the entire transportation industry, particularly as competition becomes general rather than incidental.""

The United States Department of Agriculture, in commenting upon the Weeks Cabinet Committee report comes to a similar conclusion, although in rather guarded, discreet terms:

"It is generally recognized among economists that, in a price war between two firms, it is the out-of-pocket cost per unit of output rather than the total cost per unit of output that affects the firm's relative ability to survive. A low. out-ofpocket cost per unit of output is conducive to survival. This fact is of key importance in anticipating the results of any given policy as to governmental control over transportation rates."

Out-of-pocket ratemaking would have this result: The railroads, because of high fixed costs, would be able to carry traffic at a fraction of its full cost, while motor (and other) carriers, with most of their expenses variable, could not operate for long without recovering their costs. They would be unable to compete for the traffic.

Every member of this committee knows that the railroads have been able to operate for decades with little or no return on capital. They have the financial resources and economic strength to win out in a rate war; other transportation agencies do not.

Let us state explicitly what the Department of Agriculture hints at: No carHier is going to haul at bare out-of-pocket cost, without any contribution to general overhead or profit, in order to improve its revenue position. The only reason for such rates, which the Weeks Committee report permits without review by the ICC, would be to take business away from a competitor and possibly drive him out of business.

Competitive versus noncompetitive traffic and ratesetting

One must also look at the types of freight carried by the rails, as against trucks, to appreciate the competitive weapon given the rails by H. R. 6141.

Robert E. Thomas, vice president of the Pennroad Corp. and chairman of the executive committee of the Missouri-Kansas-Texas Railroad Co.: address before the Boston Society of Securits Analysts, Boston, May 7, 1956. In Traffic World, May 12 1956. p. 37.

Regulation of Transportation Agencies-Report of Federal Coordinator of Transportation 8. Doc. 152. 73d Cong.. 2d sess.. p. 17.

U. 8. Department of Agriculture, Agricultural Marketing Service, The Marketing and Transportation Situation, July 26, 1955, p. 19, footnote 3.

Practically all motor-carrier traffic is competitive with the railroads. Many trucklines specialize in a few items due to the nature of available freight at their particular terminal. Some haul only one item, such as petroleum or autos.

In contrast, the rails carry a wide diversity of traffic, a large proportion of which is noncompetitive and which only the railroads can handle economically. Examples of rail-borne freight include grain, forest products, said, gravel, ore, et cetera.

Under the Weeks Cabinet report proposals, selective rate cuts could be made on competitive traffic, without which the other carriers could not long survive, at rates which would amount to no more than the added cost of performing the service, that is, the out-of-pocket costs. At the same time, rates of the same carrier on noncompetitive traffic would not need to be reduced or might even be increased to bear the burden of meeting overhead costs. The present system of uniformity in freight rates would be destroyed.

In effect, then, carriers would be free to raise rates on traffic which is competition-proof and to lower rates on competitive traffic in order to eliminate competition. The proposal, therefore, is directed to traffic which the rails hope to recapture from other modes of transportation.

Even if the railroads do not elect to undertake wholesale reduction in the rates of all competitive traffic, they can by selective rate cutting deprive the trucklines of back-haul traffic needed to balance their operations. Thus, even in the areas where the trucks may now have a cost and certainly a service advantage, this service can be destroyed or its cost greatly increased through unbalanced truck movement resulting from rail rate cutting.

One does not need to be an economist to forecast the disastrous, indeed fatal, results of such rate wars for the truckers. The largest trucker is a pygmy compared to the smallest railroad. His financial strength and resources are a fraction of his railroad competitor's. And he has little or no noncompetitive traffic to furnish reserve strength and to carry part of the burden in a competitive struggle.

And history records too many instances of the ability and willingness of the rails to make selective rate cuts for the purpose of driving competing carriers out of business.'

The rate proposals in H. R. 6141 (and companion bills) will generate rate reductions on shipments between large centers enjoying heavy traffic flows and vigorous rail-truck competition; the remaining regulation will not be adequate to keep rates to and from small centers in line therewith.

If rails cut their rates on high-rated traffic, will they not have to raise their rates on low-rated traffic? How, otherwise, will they pay for constant costs, overhead burden, and profits?

The small town, the small-business man, the small shipper-all will have difficulty maintaining rate parity with larger ones. The proposals will hurt the manufacturer and wholesaler who does not have the leverage of competition to force rates down to minimum levels as do their counterparts in large cities and large industries.

I stated earlier that the basic commodities-grain, coal, ore—are essentially rail traffic. These low-value commodities are least subject to competitive transportation. The result is that high-rated traffic, best able to stand the cost and most subject to competition, will be preferred, while these basic commodities will bear the entire burden of the unallocated costs not met by out-of-pocket costs.

How will the financial position of carriers improve; how will they obtain a fair return upon their investment if rates can be made to cover only the direct ascertainable cost of proudcing the service to which the rates apply, presumably the out-of-pocket cost? How do you save shippers billions in freight charges, and at the same time increase the carriers' net revenue, by reducing freight rates to minimum bases on highly competitive traffic? Doesn't it seem axiomatic that the transportation burden will have to be increased on noncompetitive traffic if the carriers are to receive adequate revenue? Someone must pay the bill.

If you think these questions are academic, I refer you to a talk last month by Walter W. Patchell, vice president of the Pennsylvania Railroad, before the coal convention of the American Mining Congress in which he warned the group that "railroad coal traffic was not paying its way on a full-cost basis, including its share of overhead and a proper return on investment."

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7 Interstate Commerce Commission-ex parte MC-20, August 14, 1940, pp. 513–515. Traffic World, May 12, 1956, p. 15.

Mr. Patchell then asked the group: "Could you set your prices simply by what it costs you out-of-pocket to get the coal out of the ground, without regard to your company's total over-all expenses?"

Yet isn't this precisely the minimum rate formula which the railroads are espousing in H. R. 6141?

Isn't the rail spokesman telling the producers of coal-a basic commodity about 70 percent of which is moved by rail and therefore least subject to competitive transportation-that coal freight rates will have to be increased? Doesn't this demonstrate the point I have been making about noncompetitive traffic bearing the brunt of out-of-pocket ratemaking for competitive traffic? The concept of "dynamic competition"

If there is one theme that dominates the Weeks Cabinet Report, it is “dynamic competition." This is supposed to be the magic touchstone to solve our transportation problems.

Yet any student of economics or of business history knows that dynamic competition means ruinous competition, the end result of which is monopoly. Competition itself does not invariably produce a satisfactory price (rate) structure. If fixed costs are large, as they are in railroads, competition is likely to produce discriminatory charges. Heavy fixed costs are also likely to force prices (rates) uneconomically low.

With high fixed costs, volume operations are a necessity. There is present, therefore, an inherent instability until either all companies act in unison through uniform rate agreements or the more powerful companies buy out the weaker ones.

This has been historically true in the railroad industry. As a matter of fact, it was unfettered competition which fostered abuses leading to regulation of the rails in 1887. Railroads were placed under regulation because heavy fixed costs led railroads to make preferential rates to competitive points and to grant rebates to important shippers.

The operation and results of "dynamic competition" on the railroads are picturesquely described by a leading transportation economist as follows: "The policy of enforced competition, although not carried out with complete success, was unfortunate in many respects. It encouraged the cutting of rates to unremunerative levels. It resulted in local discrimination since rates at competitive points were cut to extremely low levels. Rebating and other forms of personal discrimination were also natural consequences of the struggle between rival lines for traffic. Competition resulted in wasteful hauls by circuitous lines, in crosshauling, and in other instances of carrying goods unnecessarily long distances. It resulted in the extension of free privileges to shippers on an extensive scale, and in unjustifiable elaboration of service, thereby increasing the expenses of the railroads.""

The same is true of other public utilities-gas, electric, transit. Our industrial history shows that we have never had long, continued dynamic competition between public utilities. At some stage, they stop cutting each other's throats and combine into monopolies-at the public's expense.

If the transportation industry were not regulated, the forces are so powerful and the unstabilizing elements so great that only a limited number of giant, monopolistic railroad companies would have survived. The Weeks' report recommmendations and H. R. 6141 would open wide the doors to railroad combines. Reliance on dynamic competition alone to continue to produce just and reasonable rates under a wide range of transportation conditions is seriously open to question. This conclusion is not mine alone. The Federal Coordinator of Transportation, many years ago, stated:

"Uncontrolled competition in transportation would make rates and charges utterly unstable and undependable and invite much the same abuses as existed in the railroad 'rebate' days***. It would be particularly dangerous, if indulged in by the railroads, because there is still a very considerable volume of railroad traffic upon which other forms of transportation do not encroach. The tendency, as in the old days, would be to exact the last possible cent from sach traffic and make rates on the competitive traffic low enough to stifle the competition. The other forms of transportation have no such reserves of nonrotopetitive traffic to sustain their endurance.'

99 10

Locklin, D. Philip Economics of Transportation. Richard D. Irwin, Inc., Chicago, edition, 1947, p. 238. Regulation of Transportation Agencies-Report of the Federal Coordinator of Transportation, S. Doc. 152, 73d Cong., 2d sess., pp. 58-59.

The entire history of both rail and truck transportation indicates the necessity to consider the behavior of rivals. It indicates that rate cuts will be met promptly. Only the regulation of minimum rates can hold rate cutting in check. And as previously shown, no such check is provided in the proposed bill.

If there is a rate at which rate cutting will cease without the intervention of agreement or regulation, the history of the motor carrier or railroad industries does not seem to have disclosed it.

Yet by removing the ICC's present authority to fix minimum reasonable rates at a point higher than out-of-pocket costs (if the circumstances required), the proposed bills pave the way for destructive competition. A maximum-minimum rate range without ICC authority to fix actual rates is useless. It is just as important to restrain destructive competition as it is to restrain monopoly.

As "dynamic competition" becomes more and more successful, it becomes increasingly static. Successful competition eliminates the unsuccessful competitor, and monopoly takes its place. Then prices invariably rise when the successful competitor has no rival.

In the 1930's, did the railroads seek to relax controls or regulation in order to meet truck competition? On the contrary, they sought to extend controls to the truck industry. They had come to like the "stability" which ICC regulation had brought to the rail industry. It was the railroads who urged, perhaps with tongue in cheek, that the motor carriers be allowed to enjoy the benefits of Federal regulation to the same extent as the rails. Yet now they seek a return to "dynamic competition," which will lead to an unstable freight-rate structure.

Isn't it somewhat ludicrous to speak of dynamic competition between the 450 railroad giants that comprise our railroad system and over 20,000 medium- and small-sized trucking firms? Isn't this a case of the largest and dominant carrier system crying "wolf," in view of the fact that the railroads carry some 51 percent of all freight traffic, while the motor carriers have only some 18 percent; 11 that 54.9 percent of all certificated motor carriers (9,980 firms) have less than $50,000 gross revenue, in contrast to the 121 class I line-haul railways with revenues of over $1 million annually; " and that 92 percent of the motor carriers subject to ICC jurisdiction operate less than 10 trucks?

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One is led to wonder whether the railroads' basic philosophy is that theirs is the only transportation system which has to survive; that other modes of transportation are expendable. Certainly, they have continued their long-standing policy of charging what the traffic will bear. With the approval of the ICC, they have raised the level of their freight rates 12 times during the past 10 years. Rates on agricultural products now average more than 70 percent above the 1945 level.13

Does this record forecast lower rates by the rails on traffic which is essentially railborne? In view of these Commission-approved rate increases, why do the rails suddenly advocate "dynamic competition" and at the same time talk of reducing rates? Isn't it logical to assume that rate cuts are intended to drive out competition? Won't these proposals transform freight transportation into a private preserve for the railroads?

We need all forms of transportation, competing with each other under fair and equitable ground rules, to produce the lowest rate consistent with the best service. Competition exists in today's transportation system, but it is competition under fair and equitable rules for all forms of transport. On this very point, the committee may be interested in a statement by Thomas L. Preston, general solicitor, Association of American Railroads before the House Committee on Interstate and Foreign Commerce on April 24, 1953-just about 3 years ago. Mr. Preston, speaking in behalf of the railroad industry was testifying in opposition to H. R. 3203, the trip-leasing bill:

"The basic consideration which leads the railroads to oppose this bill is their conviction that its passage would in substantial measure defeat the national transportation policy declared by Congress in the Interstate Commerce Act, which

11 Traffic World, March 19, 1956, p. 30.

12 ICC Commissioner Mitchell, before Senate Small Business Committee, December 1, 1955 Reply by ICC to Senate Small Business Committee on the Interstate Commerce Act, November 28, 1955.

13 Marketing and Transportation Situation, U. S. Department of Agriculture, April 26, 1956, cover page.