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How to Make Goods More Expensive: Target Truckers

Daily Sept 12 2014

Tags Big GovernmentTaxes and SpendingU.S. Economy

09/11/2014Salmaan A. Khan

Enduring the bureaucratic and regulation-ridden work environment, US truckers work tooth-and-nail to keep supply chains moving and on schedule. Because of regulatory interference, US trucking outfits are among the few remaining industries that are still largely run and/or owned by mom-and-pop operations. According to the American Trucking Association, nearly 70 percent of all goods moved in the US are transported on trucks. That comes to almost $670 billion in real, physical goods, from durable and manufactured goods, to finished parts for assembly, to consumer goods.

There are about 3.5 million truck drivers in the US, and of those, 1 in 9 are owner-operators. Trucking represents 84 percent of all commercial transport revenue, and 68 percent of all freight tonnage in America. Rail, on the other hand, makes up less than 6 percent of freight tonnage transport.

In 2009, $33.1 billion was paid by commercial trucks for federal and state highway taxes. It makes up roughly 5 percent of GDP, and 1 out of 13 private sector employees are involved in the trucking industry, not just drivers but office staff, warehouse, and engine and truck manufacturers. Go one step more and include accountants, attorneys, insurance companies, and other related services.

In spite of trucking’s importance to both consumers and producers, however, the State has been preying on trucking companies and seeking to squeeze truckers of their productivity. One recent example of this is the Hours of Service Rule. Introduced into the Federal Register in December 2011, some additional provisions were passed in July 2013 and trucking companies are now starting to feel the pinch. Some of the new updates include: limiting the maximum average work week for drivers to 70 hours, a decrease from the previous maximum of 82 hours. Also included are restrictions on night driving, a mandatory 34-consecutive-hour break after completing their 70 hours, and it requires truck drivers to take a 30-minute break during the first eight hours of a shift.

In 2011, prior to the installment of the HOS rule, Schneider National predicted a productivity drop of between 3 and 4 percent. Four months after its implementation, Schneider reported declines of 3.1 percent on solo shipments and 4.3 percent on team shipments. These examples illustrate the common government error of looking at truckers in the aggregate. The problem is that government regulations ignore the fact that truckers are all different in terms of experience and productivity. And since the average age of a trucker is fifty years old, most have experience in knowing when they need to stop and rest. Moreover, any experienced driver will tell you that trucking is not your ordinary 9-to-5 job, and to increase productivity (and thus lower prices for consumers), many truckers like to drive at night to avoid traffic congestion on the highways.

The American Transportation Research Institute conducted a study in December 2013 on the HOS rule, they concluded that it is hurting both drivers and companies together. In its survey, it uncovered that almost 80 percent of motor carriers say they have had productivity losses since the rules went into effect as of July 2013. And things have gotten especially more difficult for commercial drivers, for whom an overwhelming majority (4 out of 5) claim that the new HOS rules have negatively impacted their quality of life, while 2 out of 3 say they are experiencing more fatigue. The same ratio (2 out of 3) says they have experienced a decrease in pay. One of the more interesting findings is that driver’s state they are now forced to drive during peak driving hours and that the new rules did not account for safety risks caused by increased traffic. ATRI concludes that annualized cost at a minimum is $1.6 billion and could go as high as $3.9 billion.

Syed Armutcuoglu, managing director of investment bank Loeb Partners, believes the new HOS rules coupled with the chronic driver shortage and a still-weak economy will drive many smaller carriers out of business. “The majority of trucking companies own fewer than five vehicles” he said, “and cannot survive a 3% to 5% drop in utilization.” The HOS rule was pushed even more aggressively after the accident that involved a freight truck killing the driver of actor Tracy Morgan. But lo’ and behold, the driver of that truck was found to not have slept for 24 hours! In other words, new regulations did nothing to stop the accident. And — ironically — of the 40–45,000 traffic deaths that occur each year, fewer than 9 percent of those deaths involve commercial vehicles. More than 80 percent of those accidents are the fault of the non-commercial drivers. Of those death-related accidents only 4 percent of trucks are fatigue related. Drinking-related issues accounted for .06 percent of those accidents.

The second damaging set of regulations are CSA rules, or Compliance, Safety, and Accountability program rules, an unscientific, point-based use of metrics that is supposed to reflect a company’s safety record. The lower the number, the safer you seem to carriers. Unfortunately, even if you are a safe driver, such a minor thing as a small light outage on the side of the hauler could count as a reason for State Troopers (many of whom are dedicated to harassing and citing truckers), to hurt your CSA score, therefore making you look like a perilous road villain in the eyes of carriers. Recent criticism by trucking experts states that CSA rules do not take into account who is at fault in accident, instead it has a strong tendency to look at only the number of crashes a particular company has experienced. One example given during Congressional testimony was that rear-end collisions, where a trucker is hit in his semi while sitting still was counted by the FMCSA (Federal Motor Carrier Safety Administration) exactly the same as if the truck were involved in a highway crash going at high speed. There are no empirical studies that show CSA scores improve safety.

Last, in February the Obama administration announced a rigorous set of new fuel requirements for big-rigs and tractor-trailers that is putting small companies in a financial bind. According to the Washington Examiner, the EPA is ordering large trucks and buses to reduce greenhouse gas emissions by up to 20 percent and overhaul engine design starting with models built in 2014. Most operators will need to spend thousands upgrading their rigs or buying new vehicles, with prices starting at $50,000 on average. According to John Salez, owner of B&H Trucking in Elk Grove Village, Illinois, he claims the new rules have prevented him from investing nearly $2 million in buying new trucks.

Altogether, with the mandatory requirements of expensive exhaust systems, regulating hours, and an absurd point system that is falsely believed to reflect accurate safety records, it all spells lower productivity and higher prices. What once took ten trucks, now takes twelve, thus leading to an increase of the cost of goods which of course is passed in part on to the consumer. Meanwhile, the resulting increases in the price of entry into the trucking industry squeezes small trucking businesses, leading to labor shortages which could have been prevented had the industry been left to the owner-operators.

Author:

Salmaan A. Khan

Salmaan A. Khan is a graduate of Benedictine University with a B.A. in Economics. He currently works for a telecom company and is pursuing a graduate degree in supply chain management.

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