Staying on the Track
Dr. M. Ray Perryman — December 07, 2022
We just avoided a major train wreck!
Rail is a crucial component of the US logistics system, and a prolonged strike would lead to chaos. It would exacerbate ongoing supply chain challenges, put additional upward pressure on prices and, thus, do substantial economic harm. We rarely stop and think about how critical railroads are in knitting our complex economy together, but we came perilously close to a stark reminder.
Although a tentative agreement had been reached between the major railways and union representatives (with assistance from the Biden Administration), it required ratification by members of 12 unions before going into effect. That didn’t happen, and a strike loomed large.
Fortunately, Congress has the power to force the issue, and it did. Under the new contract, workers will receive an additional paid day off and a 24% pay raise through 2024. There are also provisions related to health insurance premiums and deductibles. Eight rail unions ratified the agreement, but four did not, primarily because of concerns regarding paid sick leave.
To illustrate the economic damage such a strike could have wrought, we recently analyzed the cost of a hypothetical one-month shutdown to the US and Texas economies. This assessment is based on the proportion of the economy that relies on the system and involves modeling the use of rail freight across several hundred detailed sectors.
We estimate that a one-month rail shutdown would have cost the US economy over $285 billion in gross product and nearly 1.3 million job-years of employment. (A job-year is the equivalent of one person working for one year, although in this instance, it would primarily be multiple individuals working partial years.) For Texas, the corresponding losses would have been over $29 billion in gross product and about 97,700 job-years.
Industries which would be particularly hard hit by a rail strike include chemicals and petroleum refining, processed food, electric and electronic equipment, petroleum and natural gas, agricultural products, and fabricated metals. Most of these are key export generators for both the United States and Texas.
A major rail strike would have been a substantial blow to the economy, and the timing was particularly bad. The supply chain is only now recovering from the pandemic disruptions and other calamities, and the last thing it needed was a further challenge. Higher prices and fewer choices for consumers would also have been part of the inevitable fallout. With inflation already high and the holiday season approaching, the effects would have been magnified.
We most definitely dodged a major bullet. While I prefer that such matters be resolved in the private market and it is unfortunate that Congress had to intervene, it was the only choice without devastating consequences. Stay safe!