It is easier for a political party to maintain a coherent economic philosophy when it is a minority than when it is in power. Nothing illustrates this better than federal subsidies for the Dakota, Minnesota and Eastern Railroad.
The issue is crucial for Republicans: Does their party stand for free markets and economic efficiency? Or is it simply a vehicle for delivering government largesse to particular sets of special interests?
The Dakota, Minnesota and Eastern, based in Brookings, S.D., is a regional railroad with lines in Minnesota and South Dakota. The Minnesota lines cross the state through Lake Benton, Mankato and Rochester to Winona.
Eight years ago, the DM&E announced a plan to extend its tracks into Wyoming’s Powder River Basin coalfields. These fields produce millions of tons of coal a year (almost entirely for electrical generating plants), and they are served only by two railroads — the Union Pacific and the BNSF.
The DM&E extension would increase competition in coal shipping and presumably lower freight rates. It also would provide a direct link to the Mississippi River, where coal could be loaded on barges and moved cheaply anywhere on our inland waterways.
The extension requires new construction in western South Dakota and Wyoming. In Minnesota, the DM&E would use existing tracks that would require significant upgrading to handle several thousand coal trains a year.
Communities traversed by these lines dislike the prospect of one or two long trains per hour compared with the one or two per day until now. Objections were particularly strong in Rochester and Mankato. These cities, along with environmental groups and ranchers affected by the construction, opposed permits for the expansion — first in the regulatory process and then in federal court.
They were unsuccessful. All permits were to be in place by this year. There was only one problem: The railroad was unable to get funding in private capital markets.
Newly elected U.S. Sen. John Thune, R-S.D., helped solve that problem by securing a provision in the 2005 transportation bill for a $2.5 billion low-interest federal loan for the railroad. Coincidentally, Thune had acted as a lobbyist for the railroad until shortly before the 2004 elections, receiving some $220,000 for his services in 19 months. The track now seems clear for the project to go ahead.
The economics are pretty straightforward. It is a private-sector project that will benefit a private company. If successful, the DM&E would leapfrog from minor to major status among railroads. The new line may provide substantial benefits to society as a whole in the form of cheaper electricity for consumers, but it clearly will impose some external costs on affected communities.
Whether total benefits to society — public and private — exceed total costs is unclear. What is clear is that private capital markets have not been willing to fund the project. This is a clear market signal that even the private benefits the railroad can capture are small or uncertain relative to the costs. In a market economy, the expansion failed the most basic test.
A federal loan of this sort constitutes a public subsidy for a private project. The below-market interest rate constitutes one element of subsidy; the second is the government’s assumption of risk rejected by private capital markets. Most economists — especially free-market Republican ones — condemn such subsidized loans as harmful to society.
A Republican-controlled Congress, however, approved the project. This presents a more fundamental issue. What does the Republican Party stand for — free markets and economic efficiency or simply doling out public funds to favored friends and donors?
Don’t take this as a partisan attack. Any party that enjoys control of Congress for an extended period faces similar challenges. When the Democrats were in control for more than a half-century after 1932, they faced analogous temptations and succumbed many times.
But the challenge is particularly acute for contemporary Republicans. No other party has so emphasized its commitment to a market-based economy. No other party has made opposition to government subsidies and big-government spending as central in its platforms. No other party is backed by such think tanks as the Heritage Foundation or Cato Institute, which long have condemned such subsidies.
The DM&E case is just one manifestation of a larger fight developing within the party between those like Sen. Chuck Hagel of Nebraska and Sen. Lindsey Graham of South Carolina, both of whom stand on party principles, and the Tom Delays and Dennis Hasterts, whose objective seems to involve giving friends access to the public trough.
The fight will become particularly acute in this year’s congressional elections. Watch for it.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.