Highballing Past the Magic
The White House is grateful to Norfolk Southern Corp. for being the first to offer to buy Conrail, an Eastern railroad that the federal government has owned since it rescued it from the wreckage of Penn Central and other bankrupt roads. It should show its appreciation by having the Norfolk Southern folks in for lunch or something. But turning down better offers and agreeing to a merger without even a hard look at the eventual consequences for transportation would be carrying gratitude much too far.
The Senate will vote this week on a White House plan to sell Conrail to Norfolk Southern for $1.2 billion. At least two groups of investors are offering $1.4 billion. The Treasury Department estimates that Washington would lose $174 million more in taxes if the deal goes through. Thus, at a time when Gramm-Rudman is chopping big holes in defense and domestic budgets, American taxpayers would be out of pocket nearly $400 million if the White House has its way.
That is the simple arithmetic of the deal. The tough arithmetic is calculating the cost to consumers of having one giant railroad serving most of the East Coast that could bargain over freight rates and service or simply tell shippers to go fly a kite, as it saw fit. With near-monopolies, arithmetic nearly always involves more adding than subtracting.
Why should Californians care what happens to Conrail, whose trains don’t get any closer to their border than Chicago? Because the railroads of the West don’t get any closer to New York or Boston than Chicago, either. About one-third of the eastbound freight that originates in the Western states comes from California--everything from apples and oranges to wine and electronic goods. And the cost of getting that freight east of Chicago would depend on what the merged railroad, virtually without competition, said it would be.
The White House and its supporters rest their case for the sale on a claim that Conrail cannot go it alone. Its financial track record, so to speak, for the 1980s does not support that claim. After years of losing money, Conrail turned the corner in 1981 with earnings of $39 million, and its profits for last year will be more than $400 million.
President Reagan preaches the magic of the free market, but the Norfolk Southern deal would bypass the magic. The market says to sell at the highest price. If Conrail indeed cannot stand alone, the market will do two things: It will make that abundantly clear, and it will make other arrangements that will start with offering Conrail to the highest bidder. That is the message that the Senate should send to the President by voting down the Norfolk Southern deal this week.
