Much More Than Words: The High Cost of Regulations

In the late 19 th century, the Pennsylvania Railroad was the largest publicly traded corporation in the world. By figuratively shrinking the U.S. and the world through shipments of goods and inputs that greatly enhanced labor division, PRR and other railroad companies were authoring a remarkable leap in human productivity in concert with similarly large advances in living standards.

The U.S. rail industry remains relevant to this day, aggressively pursuing technological advance that makes it possible for the industry to continue to add substantial economic value almost 200 years after it began. Sadly, rules and regulations exist as a barrier to the advance.

That's because rules and regulations are a tax. Which means they’re a price placed on commercial activity, and that are paid for by business owners, consumers, and the people as government officials substitute themselves for the marketplace. Consider Sarbanes-Oxley, signed into law in 2002.

While Sarbanes-Oxley wasn’t an explicit tax increase, rules and regulations are merely tax increases by another name. Though the law was justified to achieve better financial reporting alongside improved investor confidence in the aftermath of Enron and Worldcom’s collapses, stocks sold off on news of the legislation. With good reason.

The legislation implicitly required CEOs to become accountants over visionaries and innovators. And while the biggest U.S. corporations could spread the legislation’s enormous costs (auditors, lawyers, compliance officers, etc.) across myriad departments, the smallest companies aiming to replace the big suddenly had to swallow sizable increases in operating costs. The unseen tax of such legislation was enormous.

It’s not just that corporations had to expend so much to comply, it’s not just that compliance required all manner of head count additions that had nothing to do with growth, it’s that corporations had to divert precious resources away from productive new activities. And shareholders lost twice.

Not only did the corporations they owned have their productivity deadened a little or a lot, consider all the corporations that never went public altogether. Really, why float one’s shares to the public while potentially enhancing investor returns for the public, if the cost of doing so is so substantial? Why indeed.

It’s a reminder that regulations are a cost born by us all. And it’s worth considering through the prism of the railroads. While the makeup of trains and railroads on which they traverse has changed profoundly, and in different ways depending on the train and its commercial purpose, the industry endures all manner of Washington and union-enforced mandates prescribing staffing or operating practices regardless of the technology, route, risk or negotiated labor agreement involved.

To use but one example, two locomotive engineers are required on trains regardless of whether operation or safety is improved at all, and if at all. Since unions are a powerful political force, so are their demands powerful legislatively.

Consider shipment itself. While trucking-related accidents brought with them a 5,472 person death count in 2023 alone, railroad related deaths are near non-existent. This isn’t to besmirch trucking as much as it’s a way of saying that union-enforced rules make it more costly for railroad companies to shoulder some of the transport burden in a way that would save lives.

Which yet again vivifies the problem with rules, regulations, and mandates more broadly. Nice as they perhaps sound, they’re not costless. As they say, there’s no such thing as a free good. We all pay for what the very burden the many with.

This is worth remembering as feel-good rules crafted by rail unions are foisted on the railroad industry. What saps industry productivity isn’t just unfortunate, it’s also a very real tax paid for by railroad shareholders and the public more broadly.

Originally published on Real Clear Markets.