In these days of pouring public money into private coffers to keep afloat a deregulated financial system we were told was a key source of our well-being, it's instructive to recall another example of this "lemon socialism" in which taxpayers wind up with the lemons, add abundant sugar and give the resultant lemonade away for pennies on the dollar.
In the autumn of 1986, President Reagan signed the Conrail Privatization Act, and five months later, in what up to that time was the largest initial public offering ever, the government-funded rail company was sold for $1.9 billion ($3.7 billion in 2009 dollars). While this is far better than would have been the case had the Department of Transportation been allowed to sell off Conrail to one of its competitors, as was originally planned, American taxpayers who had sunk $19 billion of today's dollars into the operation still got, well, railroaded.
The Treasury-dipping didn't perturb those who preached privatization of everything from public lands to Social Security. In their scheme of things, the government's role - then, now and forever - is to bail out money-losing corporations, not to show, as it did in Conrail's case, that it can operate them efficiently, profitably and in the public interest. Such proven ability would spark too many discomfiting questions.
Fact of the matter is, Conrail was just one more installment in the sordid saga of taxpayers and the railroads.
America had a romance with the railroads that equaled its later affair with the automobile. It was embodied in the Iron Horse itself, the steam locomotive that made speedy rail travel possible. But the invention of this marvelous machine brought forth gangs of connivers and smooth-talking grifters with an aptitude for looting the public purse.
Greased with hefty bribes in the 1850s and '60s, Congress gave railroad companies land grants of 130 million acres (7 percent of the contiguous U.S.) and $7.7 billion in today's dollars of cash grants. The states granted 50 million acres on their own and passed bond issues to capitalize the companies laying track in their states. Municipalities went into deep debt to pass bonds that ensured the railroad planners would choose to come to their town rather than their rivals'. Nearly all the tracks laid came about as a consequence of special privileges. The companies got favored tax status, guaranteed eminent domain, and full red-carpet treatment. It was all done with the understanding that this investment in taxpayers' money would provide cheap, but excellent rail service - passenger and freight - for generations to come.
Instead, the subsidized buccaneers set up wholly owned dummy corporations that charged three times the actual cost of construction. Because each mile generated more bond money, roundabout routes were commonplace. Substandard construction was the rule. Stock was "watered" and manipulated into investment windfalls for a few and debacles for most.
Once the railroads were in place, the silky desperadoes in charge proceeded to run them without repairs until, clickety-clack, equipment was exhausted and bankruptcy declared.
Through it all, the townspeople and farmers, who had hocked their futures to provide bonded subsidies to the railroads, were charged outrageous prices to transport their goods. Passengers made out somewhat better because the railroad companies were eager to populate the towns they'd stuck on the edges of the millions of acres of land around their lines.
Eventually, this scandalous behavior, topped off by the Credit Mobilier affair, shocked even 19th Century believers in economic freefall into registering the "lobbyists" who handed out hundred-dollar bills like lollipops to Congressmen. Also created was the nation's first modern regulatory agency, the Interstate Commerce Commission. The railroad companies themselves favored this move since it freed them from myriad state regulations that they considered predatory and overly favorable to shippers. But, ultimately, the flawed ICC, which is a long story in itself, made matters worse, not better, a tradition it continued until the 1980 Staggers Act brought on deregulation.
By 1917, the ruined railroads, their profitable bits fully looted, were unable to keep up with wartime transport needs. So the Feds took over, rebuilt track, ordered new railcars and locomotives, kept freight moving and made the railroads viable again. After the war, despite objections, operations were returned to their private owners who began another round of their rip and run by immediately demanding that the government pay for economic "damage" supposedly caused by federalization.
By 1936, Harry Truman - who often compared railroad companies to bandits - was moved to denounce them from the Senate floor:
When Jesse James and his gang robbed a train and got off with $3000 down near Independence, Missouri, it was front-page news in the Independence newspaper. But today those trains are still being robbed. Now it's not Jesse James and his gang, it's holding companies formed by lawyers and accountants to strip the railroads of their assets - assets in the form of land grants which this country gave the railroads to build and maintain a railroad with.
The Pennsylvania Railroad wasn't a land-grant railroad, but in its final agony, a generation after Truman's speech, it acted like one.
In 1963, the company's new managers refused to fix its dilapidated equipment, but eagerly siphoned its revenue into telecommunications, earth movers, health spas, an oil pipeline, coal properties and 63,000 acres of prime Florida real estate.
Customer service collapsed. Profits tumbled. The road merged with the New York Central RR and became the Penn Central. More assets were stripped away. The downhill slide continued. When Congress bought the road in 1973, it was a rusty hulk losing $400 million a year. Nevertheless, the taxpayers shelled out $2.1 billion, more than three times Penn Central's worth. And although Congress got the money-losing railroad, the newly formed Penn Central Corp. got to keep the profitable spin-off companies and title to $1.5 billion in the railroad's accumulated tax write-offs.
To repair the long-term economic wreckage left behind by unscrupulous managers, the Feds combined seven bankrupt railroads into Conrail, bought new equipment and rebuilt track, investing $3.2 billion. Operating subsidies accounted for another $4.4 billion.
Conrail reduced "featherbedding" practices by cutting the labor force in half. Over the next few years, the system became efficient, well-managed, highly profitable, and 15 percent owned by its employees. Its continued operation saved tens of thousands of jobs in hundreds of businesses that would have gone under without rail transportation.
But a government-run railroad? Anathema to the laissez faire advocates who came to power with Ronald Reagan. For three years, Congress fought an administration eager to sell Conrail on the cheap. The proposal to offer the railroad to Norfolk Southern finally was scuttled in the summer of 1986 in favor of a more sensible plan to sell public stock and get a somewhat better return on the taxpayers' investment.
But sell at all? Why not keep Conrail in public hands, or sell only a piece of it? As South Dakota's former Republican Governor (and Congressman) Bill Janklow once put it, "We have public schools, public hospitals, public airports - so why not a public railroad?" Even when he spoke those words, in the days before the privatization assault got fully under way, such thoughts were heresy among most Republicans and not a few Democrats. And that attitude has only hardened since.
Only when an essential cog in the nation's industrial or financial infrastructure goes sour do the taxpayers get to take title to any enterprise, pouring billions into keeping it alive until the instant profitability is restored, then selling it off for a pittance compared with the investment. At least in the case of Conrail, the taxpayers got to see the government-funded operation wrenched back into efficiency before being forced to take a deal that returned only 10% of their investment dollars. In the current round of lemon socialism, the largest by far, we're still quite far from that day when the lemonade is poured. But we need not speculate aimlessly. History tells us what a rip-off that day will be for the people who footed the bill.