Buffett’s shrewd recognition of a railroad revival

By Daniel Grabauskas

Last week the Sage of Omaha, Warren Buffett, closed the biggest deal of his career. Value: $26.3 billion. It wasn’t about a high-tech company. It wasn’t about a financial services giant. No, it was the kind of big deal we haven’t heard about for a long while. Mr. Buffet bought a railroad. The Burlington Northern Santa Fe Railroad.

An uninformed observer might label the purchase of trains by an older gentleman with a lot of money as the manifestation of a burgeoning second childhood. (Every boy loves trains.) Not so. This is the shrewd move of a forward-looking businessman who sees better than most that the past is indeed prologue when it comes to the railroad industry. If we can not move goods reliably, quickly, and cheaply as possible, we can’t compete, and our economy won’t grow. This investment isn’t philanthropy sparked by patriotic fervor either. The bottom-line message to the private sector is that you can make money in the railroad industry. The public sector needs to see this as a way to achieve improved economic vitality of the nation in an environmentally sustainable way. Both sectors should recognize the opportunity and seize it.

The roads are too full of cars, and increasingly too full of trucks. Vehicles are overwhelming the system. They can’t fit on the available highways and roadways. Traffic congestion is getting worse by the day. Even with the slight drop in passenger vehicle miles during the spike in gas prices and the downturn in the economy over the past couple of years, the long-term prospect of more cars and trucks on the nation’s roadway system is almost certain. Most experts estimate that we will see as much as a 67 percent increase in traffic in just the next 10 years. There are no serious plans to add the miles to the interstate system that would be necessary to handle this increase. The problem is evident in many parts of the country already — and will be in many more soon enough.

Is the answer to build more roads?

Building more roads or adding lanes to existing roadways is expensive and environmentally challenging, and it runs afoul of the increasing awareness that such expansion encourages sprawl. Add the fact that the current transportation system is in dire need of repair and nobody has yet figured out how to pay to fix it, and you have a serious problem. No, we are not going to be adding enough lanes to highways or building enough new roads to meet skyrocketing demand. So then what? Re-enter the train.

The battles of the 20th century between trucking and railroads lead to a decline in the latter. There are many reasons, both practical and very often political, that roads beat out rails. Phillip Longman, senior fellow at the New America Foundation, has written about the reasons for this. Longman, among others, predicts that rail will be resurgent during the 21st century. I agree. And the quicker we make the choice to invest in it, the better.

Over the past couple of years, you may have seen or heard advertisements by some of the large railroad companies, such as CSX and Norfolk Southern. I was surprised when they started. I just don’t remember ever hearing any ads for railroads when I was growing up. Lots of ads for automobile companies, and even for trucking companies. (“Trucks move America.” Remember that one?) Hadn’t the railroads died? If you did hear an advertisement for a railroad it was for some cute, scenic pleasure trip for leaf peepers, not anything vital to our economy.

But the railroad ads today are as slick and polished as any high-tech company’s, or what you might see for the latest hybrid car. More surprisingly, many of the points in their sales pitch are even the same. You can even watch them on YouTube. The last in this short series is particularly funny.

Watch the ads:

The ads tout the railroad industry’s frankly amazing efficiency in moving goods over long distances. One train can move the equivalent of 280 18-wheelers. They also appeal to us drivers by announcing the welcome removal of trucks from the roads, thereby reducing congestion and improving safety. If that isn’t enough to win you over, trains have the added value of being super-green. One train can move one ton of goods about 425 miles on one gallon of fuel. (You read that right.) Are we all aboard?

A train revival doesn’t mean the end of the trucking industry. That’s part of the win-win equation here. Nothing beats the flexibility of rubber on road, particularly for short-haul work. If our rail policy is thoughtful and well-executed, there is a complimentarity for trains and trucks, with plenty of work for both. Neither one can meet all of the economy’s growing demands.

It’s too expensive and impractical to build a rail spur to the front door of every business. Enter trucks. But it is becoming increasingly inefficient and cost-prohibitive to move large quantities of goods over long distances by trucks, due to fuel costs, tolls, traffic congestion, accidents, insurance, etc. Re-enter trains. We must recognize the advantages and disadvantages of both modes of transport. If we do, we will make the private and public investments necessary to move our economy forward by using a smart combination of both 19th- and 20th-century experience.

During the last federal transportation bill’s reauthorization I watched the American Association of State Highway and Transportation Officials and the American Public Transportation Association — the road and the public transit folks, respectively — working together for the first time in a meaningful way. They realize they need each other. Both systems are old and need money to “fix it first.” Also, neither system can grow fast enough to move everyone on its own. Neither system meets all needs. The trucking and freight rail folks should see the same things — substitute “goods” for “people” — and work together.

Likewise, private investors and public policymakers need to get beyond the modal squabbles that hobbled the railroad industry during the last half of the last century in favor of trucks. End the competition. There is plenty of work for both industries but not enough money to build both of them out fully to meet the growing demands. Choices will have to be made about proper resource allocation between the industries, and those choices should complement each other. They need to respect each other’s role and cooperate. The potential benefits are great.

Finally, a word on smaller, older industrial cities. This is a chance for them, too. They are well-positioned as intermodal hubs for the shipment of goods via rail, and they could benefit economically by a reinvestment in rail. Businesses proximate to these centers could get their goods less expensively and have a new competitive price advantage. Promoting new or reinvigorated rail for freight and passengers can be a challenge to both uses, to be sure, but passenger rail almost always produces its own economic boost — along with greener modal choice.

Because most of these cities grew up during the heyday of the train, much of the infrastructure is still there to support rail. Some of the rail is still in use for passenger service, and some of the old rights-of-way are still intact, if abandoned. I'm reminded that during the Middle Ages, monks throughout Europe, desperate for paper on which to transcribe biblical texts, used the backs of old scrolls and parchments containing works by ancient Greek and Latin writers. Thus they inadvertently saved works that might otherwise have been lost. Similarly, I believe we'll look back on the proliferation of bikeways (rails-to-trails) as the way we've preserved these invaluable corridors for reuse to their original purpose. As a result, older industrial communities could leverage their historic locations for future advantage.

So the Sage of Omaha has taken the plunge into the deep end of the pool. I trust other, less daring souls, might now follow. I hope they will. They have to if we are to succeed in the economic battles ahead. Buffett’s gambit should be a wake-up call for Wall Street and for Washington.

Daniel Grabauskas is MassINC's first senior fellow for public policy. He formerly served as general manager of the Massachusetts Bay Transportation Authority.