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ECONOMIC ANALYSIS: Why the resurgence of railroads will help drive state

August 18, 2008

I have two friends who are train fanatics of the worst kind.

These guys aren't just dazzled by the sight of a large train; they furtively seek them out. One friend has made it his life's ambition to ride every rail line in Great Britain. The other scours eBay for rail schedules from the 19th century.

Both of these wonderful men have exceptionally tolerant wives. I am a bit concerned my 4-year-old is turning into one of these creatures. He is learning to read from the signage of his train table.

For most of the rest of us, trains are but a mild nuisance. And more than a few of us view them as yesterday's technology. They are really the technology of the future, since an increasing part of our economy relies on trains to move goods. Demand will continue to grow far beyond my forecast horizon. Further, we are about to experience an enormous period of rail expansion. Here's why:

The invention of the automobile clobbered the demand for rail travel. This caused a real shrinkage in passenger travel on branch and main line rail. The birth of the 18-wheeler reduced demand for rail freight. Railroads languished.

Two decades ago, the Staggers Act deregulated the rail industry. Gasoline prices also rose, and rail freight service rebounded. The deregulation of the industry did a great deal to enhance the quality of service, and a small wave of mergers and acquisitions led to real network efficiency gains.

By about 1990, the growth in rail efficiency due to deregulation had run its course. All the mergers were complete, and the network had no real chance to expand. Fears of a freight bottleneck, and rising rail rates captured the attention of lots of analysts.

But along came information technology. The capacity for railroads to monitor shipments, control traffic flows and electronically track individual cars bought the industry another decade or more of productivity growth. Unfortunately, the productivity benefits of IT largely have run their course.

Today, the only way to extend productivity growth in rail transport is by new construction. We are on the verge of a massive wave of rail investment. This will include individual rail enhancements like the Heartland Corridor (which will fix dozens of bridge crossings in Appalachia to accommodate double-stacked containers) to new, enhanced branch lines. We also will see the creation of intermodal facilities to handle more rail, road and barge traffic.

We also will see some growth in passenger rail lines, but the costs of expansion, even when considering $5-a-gallon gas and the pollution and congestion costs, are unlikely to exceed the benefits in most places.

Expanded rail service is good news for the Crossroads of America. Logistics are an important industry in Indiana and the expansion means good jobs, less pollution and cheaper goods. Maybe it really is a good thing my 4-year-old loves trains!



Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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