Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
PANEL ON ECONOMICS AND REGULATION Keynoter: John W. Snow Moderator: Ann F. Friedlaender Secretary: Byron L. Nupp William J. Duffy Jack Faucett Robert E. Gallamore Gregory Ingram James C. Miller Leon Moses Timothy R. Murphy James R. Nelson Richard M. Soberman William Vickrey Leibert Wallerstein 38
SECRETARY'S ADDRESS PANEL ON ECONOMICS AND REGULATION By BYRON L. NUPP U.S. DEPARTMENT OF TRANSPORTATION Our group was deeply concerned over the serious financial problems faced by large segments of the nation's transportation system, including the urban portion. We discussed the bankruptcy of many of the nation's eastern railroads and the efforts of the government to alleviate the situation. The economic distress of some of the nation's largest airlines was also a subject with which we dealt. We discussed the causes and possible cures for these and related problems and the role that universities might play in investigations of these questions. Among other things, we considered the ways in which government, by its investment and regulatory policies, may have contributed to the financial problems of transportation firms. In all of this, we recognized that if universities were to contribute real understanding, they could not concern themselves only with questions of efficiency and long-run equili- brium but would also have to consider transitional problems, questions of equity, and the impact of such things as deregulation on existing firms, labor, etc. Before we knew it, we had so many subjects to talk about that we would make no order of it at all! And so we decided on a different course: rather than explore the sub- ject experimentally, we went back to our fundamental subject to find out what university researchers can do in economics that has a comparative advantage over consultants, government agencies, and business firms. With this in mind, we went over the entire range of theoretical economics to see what basic issues university researchers could deal with to the greatest advantage. We identified a group of theoretical economic issues and then from these principles we stepped the thinking down to applications, applications to the practical problems facing policymakers, businessmen, and legislators. As a result of this process we developed a set of priorities which have long-run and short- run consequences, most of it rather short-run. So I will present a set of about nine priorities, four of them large enough to be set forth as major priorities and listed separately. Then we have a list of five others which I will comment upon briefly. The first priority illustrates the process of identifying an economic principle or set of principles, and then developing an understanding of a 39
series of short-range or intermediate-range problems that can help provide some economic insight into regulation and urban affairs. Priority Number 1. Scale Economies, Regulation and Market Structure Pricing Policies Non-Economic Regulations Multi-Product Firm Productivity I will here emphasize scale economies. Scale economies or the econo- mies of scale are talked about a lot but we do not have a precise understand- ing of their meaning. We need fundamental thinking by university scholars on the dimensions of scale, whether it is the industry, whether it is the firn, the kind of technology, the vehicle, or the route. Scale economies play very important roles in the scope and the length of time over which deregulation will prevail. Will we eventually come to full deregulation when long-range competitive equilibrium occurs following necessary short-range adjustments or will scale economies somewhere put a stop to it, so that to realize greater public welfare we will have to maintain some kind of regulation or subsidy? This involves both pricing and the rate issues; it involves the impact which noneconomic regulations have upon the system of transportation, safety, environment, and so forth. There is also the multi-product firm and its scale problems. Trans- portation, to a degree, is a multi-product activity, although it is frequently thought of as a single-product activity. Finally, productivity has an intimate relation to the issue of whether or not there are economies of scale in transportation. And productivity studies, again, are in their infancy. The grounding of those studies has some- thing to do with scale economies and their effects on regulation and market structure. Priority Number 2. Investment Criteria and User Charges Fiscal Policy second Best Investment criteria and user charges was adjudged Priority Number 2. 40
We felt that one of the fallacies in many of our regulatory and policy areas is a lack of integration. This is an old desire on the part of trans- portation policymakers. We do not integrate investment criteria in public expenditure programs, highway buildings, locks and dams, air infrastructure involving fiscal policy user charges, benefit-cost analysis, and other things with the regulatory issues and their economic impacts. Long-run, post-1980 consideration is necessary here because the analytical problems are so great. But, in the meantime, the economists can be investigating some of the practical problems inherent in a very unmanageable subject, something that can be used by officials who may have to go before legislative bodies to explain the issues. In this connection we should consider the item called "second best." In economics, second best is a very good term. It is one that I am very fond of and it does not mean that you go to second-rate things. It means that one cannot, in every case, attain at a given time this long-run competitive equi- librium. In the case of railroads, existing stocks of equipment affecting costs and prices must impact management structures and know-how. There may be people in the market with certain vested interests. Hence, one must find a pricing mechanism that is not the best possible in terms of economic theory, but a good advantage can be gained in a second-best analysis maximizing what we can do for the public. Thus, second-best analysis is something that economists in universities should be looking at from the standpoint of doing quantitative and empirical research in the short-run to see how we can meet the many interim problems we face in the field of regulation and transportation. Priority Number 3. Distributional Impacts Methods of Compensation Conceptualization vs. Implementation Priority Number 3 -- a very close number 3 -- deals with the distri- butional impacts of transportation. When we raise rates or cause rates to be lowered, the impact on society is diverse. Some people lose, others gain; some regions lose, some gain. And when these gains and losses come about, one of the most difficult of the distribution economics problems is the question of compensation. How do you compensate people who lose in the shift in the distribution of resources? This is often such a severe problem in any policy aiming at redistribution that it can slow the process unless one handles the compensation very carefully. It does not always have to be cash compensation. Any compensation upsets and alters the redistribution policy. | For example, if we decided to certificate carriers, and we decide that on the basis of grandfather rights, anybody in the business can stay in it as though he were certificated, we have in effect compensated somebody because of some policy. There is some distributional loss. We have provided compensation 41
to someone, but he has been compensated at the expense of the public who pays the price of this grandfather right. There are many, many areas where compensation is involved in policy changes, including regulatory reform, which will have to be met in a scientific way if change in regulation is going to work. And for economists there is need for original thinking. Economists can do something here, both in the long-and short-run. In the short-run we need to conceptualize distributional models. Ann Friedlaender's pioneer work at the Massachusetts Institute of Technology (MIT) is in this direction. We need the longer-range kinds of studies and data to form the basis of implementing policy changes. Here universities can make significant contributions in many ways. Priority Number 4. Transportation, Economic Activity, and Land Use Geographic Distribution of City Size Distribution of Activities Within a City Priority Number 4 is the most difficult of all. It has not been given a higher priority largely because we think some of the other panels may have done a pretty good job in this area of urban and regional studies. In fact, I think we are the only panel here that really concentrated on intercity transpor- tation, while most of the others were oriented very strongly toward the urban problem. But we do think that geographers have uncovered a certain problem about the distribution of city size and also the distribution of activities within a city where there may be economic forces at work. There may be impacts of price or industry structure which play a role in leading to particular distributions of city size throughout the country, and which also involve the distribution of activities within cities. Unexplored issues provide research opportunities for university economics. Now, let us consider the other five priorities -- important issues but, nevertheless, ranked below those just discussed. Other Priorities Performance Measures Technology & Innovation Transportation & Environment Regulatory Processes, and the Power Struggle 42
There is a need for more study in the performance of transportation. One of the main concerns is the very simplistic measures we have for defining performance, guch as tons and ton miles. This is a subject where the en- gineers have done a better job than economists in looking at comprehensive measures of performance. We need a more comprehensive and skillful way of measuring economic performance in this field of transportation. Technology and innovation have major economic significance. Many technologists today believe that technology responds to economic opportunity rather than scientific opportunity. I do not believe this, but there is a question about new technology and its economic assessment. This is a neglected area in the university program. Transportation and the environment is a subject that is going to be vexing if John Snow is successful in deregulating the railroads, the trucks, and so forth. When he achieves that, their pattern of activity changes. Trucks may get bigger. You may get heavier traffic volumes or lighter traffic volumes. More or less energy with more or less pollution can be used. What kind of an environmental statement will be required under these conditions? What are the economic principles involved? We believe that university economists can help us. Finally, there are regulatory processes and the power struggle. These two are borderline areas where economics meets some of its sister social sciences. It was brought out in our panel that much of this regulation does not really regulate. The imperfections of the market which exist in transpor- tation today are not due to regulation. In fact, regulation in some sense may be a subject for the sociologists. It has a kind of totemic value to the people involved rather than a value as an economic process. On the other hand, the economic impact of regulation is in many cases very great and there are power blocs and power struggles reflecting vested interests. Somehow or other we have to separate out the economic issues from the noneconomic issues in regulation. There is one final item we considered that relates to all the others. The word with which all of you are familiar is "intermodalism" or intermodal transportation. We have analyzed this issue very carefully, but we thought the subject was one of such comprehensive scope that it did not yield research- able hypotheses. So that while we considered intermodalism, we regarded it as a theme that underlines all of the other priorities that we considered. 43
