Welcome to The Corner. In this issue, we explore how hedge funds degrade freight railroads by stripping operators of valuable assets and skilled workers.

Investors Continue to Loot Norfolk Southern Even After East Palestine Disaster

Arnav Rao

When a Norfolk Southern freight train jumped the tracks in East Palestine, Ohio, last year, it produced a mushroom cloud of toxic chemicals, traces of which could still be found months later in 16 states, according to a recently published study. The accident was in the news again last week when the National Transportation Safety Board presented its final findings on the derailment’s causes.

Yet unless you read deep inside the business pages, you are unlikely to know about the role that institutional investors are playing in undermining the safety and reliability of America’s railroads. Nor about how such management appears to be harming not merely public safety but also efforts to rebuild America’s industrial base and decarbonize the economy.

To understand the larger story, start with the fact that while Norfolk Southern was dealing with investigations of the East Palestine crash, it was also fighting a proxy battle with an activist hedge fund called Ancora. Though the railroad’s incumbent management managed last month to beat back the proxy challenge, it did so only by promising institutional investors that it would return to an operational strategy that goes by the Orwellian label “precision scheduled railroading,” or PSR. 

Pioneered in the 1990s by railroad executive E. Hunter Harrison, PSR calls for boosting short-term profits through deep cuts in service and personnel and gutting investments in locomotives, rolling stock, and infrastructure. Enticed by the short-term profits, hedge funds replay the same basic script at all four of the largest U.S. railroads over the next two decades.

After the industry-wide implementation of PSR, the stripped-down railroads consistently lost market share, decreasing from 48% to 36% of the freight market from 2010 to 2022. Freight instead flowed to large trucks, which have a much bigger carbon footprint than trains and are also far more dangerous, routinely killing or injuring more than 150,000 people a year in the United States. The degradation of the U.S. rail network also contributes to the fragility of supply chains, and has left a growing number of communities without service.

Norfolk Southern implemented PSR in 2019. Its new operating plan went well enough at first because the demand for freight transportation plummeted with the arrival of the pandemic. But as soon as the economy recovered, the railroad’s downsized network faced severe delays and backlogs.

Backups at Norfolk Southern’s intermodal terminal in Memphis, for instance, prevented Louis Dreyfus, Staple Cotton Cooperative, and Olam Cotton from delivering exports to the ports of Charleston and Savannah. Meanwhile, backups at terminals in Chicago and Kansas City prevented intermodal boxes from reaching manufacturers and end customers. The overall effect was enormous. Even though there was a 21% spike in intermodal traffic from U.S. ports, rail’s share dropped more than 16%.

Recognizing the pitfalls of aggressive PSR, new CEO Alan Shaw introduced a new resiliency-focused operating plan. Under this plan, Shaw aimed to stabilize the cycle of furloughing and rehiring and aggressive cost-cutting. Shaw argued that consistent capital investments and a stable workforce would provide a superior service product that could win back business from trucking.

Shaw’s resiliency plan earned the buy-in of management, unions, and regulators, and it started to show positive results. The accident in East Palestine notwithstanding, Norfolk Southern had the largest drop in the number of mainline accidents of all the largest U.S. railroads last year. Key railroad operating metrics such as dwell time, train velocity, and intermodal plan compliance improved, giving shippers a reason to shift business back to rail. Resiliency showed its benefits. When a ship knocked down a key bridge in Baltimore in March, blocking access to the city’s port for weeks, NS was able to swiftly set up alternative routing for coal shipments.

But by making the investments necessary to improve service quality and win back market share from trucks, NS once again became a target for hedge fund “rationalization.” In response to Wall Street grumblings, Shaw and his team felt they had no choice but to boost short-term profits by returning to the old PSR operating model. One of the first actions took place in February, when NS canceled three service routes to Bethlehem-Allentown from Kansas City, Memphis, and St. Louis, affecting nearly 40,000 domestic intermodal containers annually. Later that month, NS cut intermodal service to New Orleans and the publicly funded Birmingham, Alabama, intermodal terminal. 

Ancora demanded more. To further raise its margins, Norfolk Southern hired John Orr, a Hunter Harrison protégé who swiftly cut 30 additional intermodal lanes, representing 15% of the railroad’s total network. Going forward, NS will likely concentrate on only high-margin business not subject to competition from trucks, primarily hauling grain, chemicals, and above all, Appalachian coal. The rest will be ceded to polluting, highway-clogging trucks.

To prevent further destruction of the nation’s rail system by financiers, and the overuse of the nation’s highways, policymakers must begin exploring ways to restore sensible regulation to railroads. This should include a requirement that they operate as common carriers in the public interest. As bad as the crash in East Palestine was, failure to address the larger wreck of the national railroad system will bring far more dire consequences.
 

Open Markets and The Guardian Host Event “Fixing the Information Crisis Before It’s Too Late”

The Open Markets Institute and The Guardian US hosted a conference in Washington last week, Fixing the Information Crisis Before It’s Too Late (For Democracy). The event featured keynote remarks by Margrethe Vestager, executive vice president and European Commissioner for Competition; Jessica Rosenworcel, chair of the Federal Communications Commission; Jonathan Kanter, assistant attorney general of the antitrust division at the Department of Justice; and U.S. Trade Representative Katherine Tai. 

Vestager said that Big Tech platforms threaten free speech and democracy, saying, “We are all concerned by the market powers accrued by the companies that often act as gatekeepers. Enforcement will depend, more and more, on the quality of our cooperation.” Urging support for journalism, Rosenworcel said the FCC has proposed changes to station licensing that would favor TV or radio stations that produce original local content. AAG Kanter also deplored the beseiged state of journalism, saying that ad dollars are being siphoned off by the tech platforms acting as middlemen while journalists do the hard work. Kanter’s comments received coverage in Bloomberg Law.

Amb. Tai called out the dictators of the digital age, people like Mark Zuckerberg and others, who pose threats to democracy by distorting the free flow of information. Senators Elizabeth Warren, Amy Klobuchar, and Richard Blumenthal — along with former Congressman Ken Buck — delivered recorded remarks on how to rein in Big Tech to preserve democracy, halt the proliferation of disinformation, and avert the decline in journalism. Watch the full conference here. 

Open Markets Institute and National Women’s Law Center Host Event “Children Before Profits”

The Open Markets Institute last week also co-hosted a second event, “Children Before Profits: Addressing the Risks of Private Equity in the Child Care Industry,” to examine the risks of private equity plundering a publicly funded child care industry and to discuss concrete ways to address the threat. Co-hosted with the National Women’s Law Center and Community Change, the event featured talks by Representative Sara Jacobs, Federal Trade Commissioner Rebecca Slaughter, and C. Kirabo Jackson, a member of the White House Council of Economic Advisers, as well as recorded remarks by Sen. Elizabeth Warren. At the event, NWLC and Open Markets released a groundbreaking new report, coauthored by Open Markets’ Audrey Stienon, that outlines a policy strategy to guard the child care industry against financialization and corporate capture. Watch the conference here and read the report here.

📝 WHAT WE'VE BEEN UP TO:

• Open Markets Institute reporter Austin Ahlman and Center for Journalism and Liberty director Dr. Courtney Radsch co-wrote a report explaining why disinformation proliferates on platforms controlled by Big Tech companies, threatening democracy around the world, and what policymakers can do about it. “The same disinformation tactics that malicious and profit-driven actors have utilized in recent election cycles appear to be once again tarnishing the democratic process of several nations holding elections this year,” they wrote. Read the report here.
   

• Open Markets’ executive director Barry Lynn was quoted in Politico urging President Biden to flaunt his solid track record on fighting corporate power during his reelection campaign. “You’ve got people who have been waiting for the end of neoliberalism,” Lynn said. “And we have the guy who has the answer.”
   

• Open Markets Food Program Manager Claire Kelloway released a statement lauding the Department of Agriculture’s new Fair and Competitive Livestock and Poultry Markets rule under the Packers and Stockyards Act but warned that it can only have an impact if courts enforce the rule fairly. “For decades, courts have grossly misinterpreted the plain text and congressional intent of the Packers and Stockyards Act. This has left farmers exposed to a variety of unfair, deceptive, or abusive practices by meatpackers, and worse, fear of retaliation when they speak out,” Kelloway said. “The USDA’s statement of purpose is clear and strong. We’ll just have to wait and see if judges will respect this framework in court.” 
   

• Washington Monthly cited an April article written by Open Markets fellow Garphil Julien contrasting President Biden’s approach to trade with his predecessor’s, which noted that while the trade deficit dipped under Trump, it contracted by the largest amount in 14 years in 2023 under Biden.

  🔊 ANTI-MONOPOLY RISING: 

• National Football League was ordered to pay $4.7 billion in a class action suit. A jury in California found the NFL liable for violations of antitrust law over the predatory pricing and selective distribution deals it used to push its Sunday Ticket programming, which was only offered to satellite provide DirecTV. (Sports Illustrated)
   

• The European Commission announced a preliminary finding that Microsoft had violated antitrust laws by illegitimately bundling its Teams work communication software with its office productivity suite. (Associated Press)
   

• The Committee on Foreign Investment in the United States is reviewing the proposed acquisition of leading American firearm ammunition producer Vista Outdoor by the Czechoslovak Group over national security concerns posed by the merger. The acquisition is also facing potential scrutiny from the Department of Justice over its implications for the heavily concentrated market for primer, a key ammunition component. (Politico)
   

• A federal judge in the northern district of California rebuffed a renewed attempt by Disney to dismiss a class-action case challenging its ownership of Hulu and ESPN on the grounds that it has inappropriately limited competition and led to exorbitant price increases for streaming consumers. (Deadline)
   

• The European Commission found Apple in violation of its new Digital Markets Act over abusive app store practices that restrict developers’ and consumers’ access to alternate content channels. The Commission gave Apple 12 months to remedy its behavior, or it will be subject to potential fines of up to 10 percent of its total global revenues. (The Guardian)

  📈 VITAL STAT:

$13.4 billion

The penalty Meta could face in Europe for violating the Digital Markets Act with its ad-supported model, which European Union regulators say forces users to pay extra for the service or consent to the abusive data collection practices the bloc has sought to minimize. The DMA calls for corporations to be fined as much as 10% of their global annual revenue for breaches of the rules. And the figure could rise to 20% for repeated violations. (CNBC)

📚 WHAT WE'RE READING:

At the Edge of Empire: A Family’s Reckoning with China — New York Times diplomatic correspondent Edward Wong situates an ambitious modern political history of China within the story of his own family’s journey immigrating to the United States. Since leaving the increasingly authoritarian state, Wong’s family saw firsthand what China's authoritarianism has meant for its citizens and the Chinese diaspora. In his account, Wong gives unique insights into the way the Chinese Communist Party’s practices transcend national borders to distort democratic processes, undermine fair markets, and limit personal liberties around the world.