Political Order and Political Decay (28 page)

The failure of a purely free-market system to provide adequate service and reconcile competing interests was gradually recognized on a conceptual level. In 1885, a group of economists established the American Economic Association, which broke away from the American Social Science Association and began formulating a theoretical case for national railroad regulation. This group, led by Henry Carter Adams (who would go on to be the first chief economist of the Interstate Commerce Commission), argued that the government needed to step in to settle disputes over rates and prices because of market failures in the existing system. At this point in the nineteenth century, many of the economic concepts that are routinely taught today in introductory microeconomics courses—public goods, externalities, theories of monopoly and oligopoly, marginalism—were still in early stages of development.
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As in the case of civil service reform, the academics looking at regulation pointed to the practical experience of countries such as Britain, which, having bequeathed a tradition of laissez-faire economics to the United States, nonetheless regulated railroads far more closely.
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The creation of the first federal-level American regulatory agency, the Interstate Commerce Commission, is a revealing case of late American state building. What is remarkable about this story is that it took more than forty years—from the mid-1880s until the period immediately following World War I—for the United States to put in place a “modern” regulator on a par with those that had been created in Europe by the mid-nineteenth century. While the economic logic of regulating railroads on a national level was impeccable, both American political culture and institutions conspired to delay the creation of an ICC with adequate powers for almost two generations.

During the 1880s, Congress tried on several occasions to create national rules for the railroads, not on the basis of a coherent theory of transportation economics but rather on the basis of the political coalitions of different regional interests that could be assembled around the bill. Western agrarian interests pushed strongly for a prohibition of pooling, a provision that might have made sense in other industries with low barriers to entry and small economies of scale, but not for railroads, which in many circumstances were natural monopolies. The obvious solution, not undertaken for several decades, was to permit pooling, but to strictly regulate rates in a way that would balance the interests of both the railroad operators and users. Similarly, the prohibition of rate discrimination between long- and short-haul shippers did not allow railroad pricing to reflect actual operating costs. Such discrimination was often efficient and allowed the railroads to make use of excess capacity in rural areas by taking more circuitous routes.

Both the antipooling provisions and the prohibition of rate discrimination were questionable policies in themselves and acted at cross-purposes. This tension was embodied in the Interstate Commerce Act of 1887, in which Congress finally authorized the creation of the ICC as a permanent regulatory body. Rather than create an authoritative executive agency, the new ICC was set up as an independent commission governed by a balanced board of party appointees serving staggered terms. Typically for a society governed by “courts and parties,” the new agency was not given executive powers to set rates or broad policies; it could seek to adjudicate complaints only on a case-by-case basis and left enforcement of judgments up to the courts. Rather than trying to reconcile the conflicting interests pushing for legislation, Congress provided the commission with vague powers, the limits of whose authority would come to be defined by the other branches of government.
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The United States was facing, for the first time outside the realm of foreign policy, the issue of state autonomy: To what extent could an executive agency use its powers, delegated in an ambiguous and poorly thought-out piece of legislation, to set policy in what the government regarded as a rational manner? We saw in chapter 4 how Prussia moved to one extreme of the autonomy scale, creating a high-quality bureaucracy that could make decisions with virtually no accountability to democratic politicians. The inclination of the late-nineteenth-century Supreme Court was to move the United States in precisely the opposite direction from Prussia, toward a minimal delegation of authority, not in the interests of democratic accountability but to protect private property rights. The Court in the period after the
Munn
and
Wabash
decisions was becoming steadily more conservative, taking the view that corporations were legal “persons” whose rights deserved equal protection under the Fourteenth Amendment. The amendment, enshrining the right of all American citizens to the “due process of law,” was enacted in the immediate aftermath of the Civil War to protect the rights of newly freed African American slaves, but the Court used it subsequently to protect private property rights. Between 1887 and 1910, the Court handed down 558 Fourteenth Amendment decisions, the most notable of which was the 1905
Lochner v. New York
case in which a New York State law limiting working hours was held to violate “liberty of contract” that the Court argued was implicitly protected by the Fourteenth Amendment.
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The Supreme Court naturally took a dim view of the federal government's regulatory powers with regard to interstate commerce: in the words of Stephen Skowronek, “The Supreme Court, now firmly dedicated to saving the private economy from the impulsiveness of American democracy … rejected virtually every aspect of the commission's broad construction of the law [i.e., the Interstate Commerce Act] and reduced the ICC to a mere statistics-gathering agency.”
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Thus the parties and the courts reinforced one another in limiting executive autonomy: the first through the cumbersome commission structure, by which party appointees kept control over the ICC, and the latter by restricting the commission's powers to regulate.

It took a series of legislative acts in the first decade of the twentieth century to give the ICC the executive powers it should have had from the start. The Elkins Act of 1903 permitted the commission to set minimum rates; the 1906 Hepburn Act gave it powers to enforce those rates; and the 1910 Mann-Elkins Act shifted the burden of proof to the railroads to justify rate increases.
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It was only at this point that the regulatory regime took a more modern form, with the government treating the railroads as a utility whose rates would be set administratively rather than by market forces alone.

The historian Gabriel Kolko has argued that these Progressive Era reforms were driven by railroad interests and big capital generally, which used their influence over Congress to limit competition by means of the ICC.
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In this he is only partly correct. Railroad earnings stabilized and began to rise in the decade or so after the passage of the Interstate Commerce Act, but the political balance thereafter shifted toward the populist interests of small farmers and shippers who favored the prohibition of rate discrimination. The negative consequences of this shift for the railroads became evident only by World War I, when the needs of wartime mobilization dramatically increased demand for rail services. The capacity of the American railway system was severely inadequate, reflecting the underinvestment that had occurred by railroads increasingly unable to recover costs due to regulatory limitations on rates. As German submarines intercepted American shipping to Europe, goods piled up in American ports and the ICC proved unable to unsnarl the traffic. As a result, President Wilson nationalized the entire railroad system in December 1917, adjusted rates and wages, and had the government run the railroads directly until they were returned to private control in the Esch-Cummins Act of 1920.
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Stephen Skowronek celebrates the 1920 Transportation Act as a milestone in which “national administrative authority superseded the limits of courts and parties and in the process transformed the organizational, procedural, and intellectual landscape of American government.”
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He is certainly correct that the nation's first national regulator set a precedent for the growth of the powers of the federal government in the twentieth century. But the ICC's economic legacy was far more mixed. The commission structure that balanced party appointees prevented it from developing sufficient bureaucratic autonomy, and it remained hostage to underlying political interests. Over the following decades, the ICC shifted from having too little power to imposing an excessive regulatory burden. This impeded innovation and new investment in the national rail system. For example, the ICC did not permit the Southern Railway to realize the efficiency gains from its introduction of Big John aluminum hopper cars during the 1960s, making it uncompetitive with barges.
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Railways faced increasing competition from trucking and ships, which were actually subsidized by other government programs, such as the building of the interstate highway system. By the 1970s, American railroads were in the midst of a full-blown crisis, with most railroads in major financial trouble and the Penn Central only the last of thirty-seven eastern carriers forced into bankruptcy.
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In response, the intellectual climate shifted notably by the late 1970s toward a consensus on the need for deregulation of the entire American transportation system. The Carter administration began a series of reforms designed to unwind some of the regulatory burdens that had accumulated over the previous decades, relaxing common carriage rules and allowing railroads more flexibility in pricing.

The purpose of this discussion of the ICC is not to stake out a position on the appropriate level of regulation or deregulation. The point is that state power over the economy is potentially dangerous because it risks being captured by one interest group or another at the expense of the general public. Moreover, all bureaucracies tend to become increasingly rule bound over time, particularly when they are driven by the political demands of legislators. It is very difficult to create a government agency subservient to democratic will but at the same time sufficiently autonomous and free from capture by powerful interest groups.

Many people would say that the problem is one of government itself, and the solution is to severely cut back or abolish the regulatory state. But a national transportation system cannot be left up to market forces alone; the free market was what created the chaotic situation of the late nineteenth century in the first place. Bureaucrats are often blamed for being obtuse and inflexible, but missing from this perspective is an understanding that more often than not the original legislative mandate is the source of dysfunctional bureaucratic behavior. The ICC was caught between demands of consumers for low prices and of railroads for cartellike agreements that would support their return on capital. The shifting policies of the ICC, sometimes favoring consumers and sometimes favoring railroads, were a response to the shifting political currents in Congress and the White House. Amtrak, the government-operated passenger rail service that was created in 1971 as part of the reorganization of the railroads, is today no one's model of a high-quality, innovative rail service. But the reason for this is not the mere fact that it is run by the government; government-operated railroads in Europe and Asia have often been leaders in service efficiency. Rather, the problem is that Amtrak operates under a contradictory political mandate: it is supposed to recover costs and invest in new capacity while at the same time providing service to a host of small towns and rural areas represented by the legislators who determine the company's budget. Were Amtrak freed of the latter mandate and allowed to focus on the dense Washington–New York–Boston corridor, it could become a highly profitable institution and provide much better service.

Had the ICC been created as an autonomous, high-quality executive agency rather than a commission, it might have played a much more effective role over the past century. A more autonomous bureaucracy would have had more flexibility to set rates and adjudicate between different interest groups, as the government actually did in the brief period from 1917 to 1920 when the railroads were fully nationalized. It might have been able to anticipate the fact that railroads no longer constituted a natural monopoly given the rise of road and air transportation, and permitted rates to reflect actual costs more realistically. The design of the American state, with its complex system of checks and balances, makes this kind of outcome difficult to achieve: the history of the ICC shows the continuing dominance of the courts and Congress over executive decision making. This particular limitation in the quality of government is rooted precisely in the strength of the rule of law and of democratic accountability in the American political system.

Does this mean that the United States is incapable of producing high-quality, autonomous bureaucracy? Yes and no. Even though the American system is biased against this type of strong government, individual cases of bureaucratic autonomy have arisen in the course of the country's history. One such case is the U.S. Department of Agriculture at the turn of the twentieth century, and in particular the role of Gifford Pinchot and the U.S. Forest Service.

GIFFORD PINCHOT AND AMERICAN FORESTS

The U.S. Department of Agriculture (USDA) was founded by President Lincoln in 1862 as part of a development strategy to upgrade the productivity of American farms, of a piece with the Morrill Act of the same year that created the system of land-grant colleges (Penn State, Michigan State, Cornell University, Kansas State, Iowa State, and others) that would train a new generation of agronomists. The Agriculture Department was originally intended to be staffed by scientists, but by the 1880s it acquired a different purpose: the free distribution of seeds. Supported by representatives from farm states, the Congressional free seed program came to dominate the agency's budget toward the end of the century. The USDA became, in other words, a variant of the patronage system that characterized the federal government as a whole at the time, disbursing not jobs but seeds to political clients.