We live by our predictions unlike economists, consultants and journalists. They, on the other hand, usually don’t tell you when they are wrong. Today I am officially reversing myself on a position. The title of my first blog was “Don’t Read The Headlines.” No more, today that would be incorrect. There was news of major importance. Biden has targeted both rail and ocean shipping by executive order to address consolidation from mergers and alliances. According to the Wall Street Journal, he wants to the address the aggressive pricing that has made it expensive for American companies to transport goods to market. Instead his administration’s response will be to reverse transportation deregulation that has been policy since the 1970’s and bring in the power of the Federal government to reduce costs by attacking alliances.
Americans have forgotten life before deregulation started in Jimmy Carter’s administration under the leadership of Dr. Alfred E. Kahn. Airline routes were regulated, with specified rates of returns similar to utilities. New entrants had to prove a need in order to be granted the right to serve a route. The quality of flying was certainly better, with airlines competing on the menus and amenities, such as piano bars on 747’s. On the other hand, fares were significantly higher. Kahn, working with Senator Teddy Kennedy, deregulated the industry and shut down the Civil Aeronautics Board. With inexpensive fares, the masses started flying.
The US government will likely fail in bringing down shipping rates by regulation because alliances are not the root cause of rising shipping costs. The Biden administration is ignoring the contribution of the lack of investment in port infrastructure, labor constraints and a shortage of new vessels in driving shipping prices higher. Daniel Maffei, Federal Maritime Commissioner, said in testimony before Congress in June, “For years, the increasing supply of cargo space on bigger and bigger ships kept ocean freight rates on the low side. Now, Covid and its effects have created record demand for shipping…the demand for imports will likely not diminish until 2022. But the supply of space on ships has not increased enough to keep pace even though virtually every usable ship is in service.” The Biden administration also expects the industry to decarbonize, which will cost billions. Ending alliances would likely drive investment from, not to the industry. In the short term, such moves won’t impact demand for container ships or boxes. In the long-term, regulation would choke off money for the new ships needed to meet the decarbonization goals if industry profitability dramatically decreases. More likely, the result of increased regulation would be less competition and higher prices.