Likely Impact of Averted Rail Strike

Likely Cost to US Consumers and Businesses of a National Railroad Strike

The following is a summary of an analysis of the potential costs to US consumers and businesses of a railroad strike that could have occurred Friday, September 16, 2022 shortly after midnight. It was prepared by Patrick L. Anderson, principal & CEO of Anderson Economic Group LLC, and Tina Dhariwal, Senior Analyst.

Much of the analysis was completed before a tentative settlement was announced in the early morning today (Thursday). As the potential for a strike or similar disruption remains, and given the prominent role played by Congress and the Administration, we are releasing the results.

Information and Methodology

The primary information bases for this estimate is information on freight volume, loads, types of cargo, energy sources for utilities, coal inventories, oil uses by pipeline, and food and agricultural products sent by rail. We incorporated limited financial and operational information from selected large carriers, and information from Amtrak on long-distance rail. Some information was also obtained from the primary railroad association, and the board appointed by the president to review the labor dispute earlier this year. However, we did not rely upon public statements of the bargaining entities as indicators of the consequences of a strike.

We use a rigorous methodology to estimate the direct costs to workers and consumers of a strike. We presume that workers and businesses substitute other goods and services whenever possible in the event of a disruption, and that short-term delays of goods often involve minimal costs. A further methodology note is below.

A strike would cost US consumers and businesses $60 million dollars on the first day; $90 million the second day

A transit strike involving trucks or rail is one of the most expensive, disruptive events in a modern economy. It has at least three costly effects:

  1. First, it means some goods never reach the market, and become spoiled.
  2. Second, it means some goods do not reach the market, and therefore other goods and services
    are never produced, and related wages are also lost.
  3. Third, it means that customers and companies must spend time and effort shifting and adjusting, which sometimes means they shut down unnecessarily and customers assume they cannot get
    what they would otherwise buy.

In addition, the role of freight railroad workers in maintaining passenger rail service and facilities means that long-distance passenger rail would also be disrupted. This is a fourth category of losses.

A national strike by the railroad unions would certainly cost workers in that industry wages, and cause some goods (especially food items) to spoil. It would also slow down production in vulnerable industries. To enumerate these costs, we constructed a scenario in which a large share of the freight traffic and some share of long-term passenger traffic were stopped starting the beginning of the day Friday September 16, 2022. We estimated the likely rail and passenger traffic that would be directly interrupted, and from this estimated lost wages, spoiled food and other items, and long-term passenger rail losses.

We estimate that the first-day impact would be approximately $60 million. This is composed of: $30.9 million for lost freight; $3.8 million for long-term passenger rail disruption; and $25.0 million in lost railroad industry wages. These are direct effects in the industry and customers of the industry, and do not include any “indirect” effects in other industries or indirectly-caused losses in other industries.

The second-day and third-day losses increase to $91 million per day, due largely to increased spoilage of food & agricultural goods (which grows to $61.9 million per day). That implies a potential quarter-billion dollar loss to workers and consumers in a 3-day strike involving Friday, Saturday and Sunday.

Wage, Freight, and Long Distance Passenger Income Losses per Day
Day 1$59,832,508
Day 2$90,777,194
Day 3$90,777,194
Day 4$57,426,979
Day 5$63,602,338
Day 6$110,985,873
Day 7$110,985,873

These losses do not include any income losses for investors or managers of the railroad companies. This is partially because the immediate effect of a strike to such companies is both lower expenses and lower revenue.

The auto, food, and energy industries are vulnerable

We identify three industries as particularly vulnerable:

  1. The agriculture and food industry. The most immediate and irretrievable loss is lost food items and crops. This extends beyond food and crops on railroads and reaches farm produce and goods that are not yet harvested, already harvested and stored ready for delivery, and consequential losses due to failure to fertilize or harvest.
  2. The auto industry. The US auto industry has historically low inventory, and has been suffering from supply problems for at least two years. A railroad strike would further delay both production and sale of vehicles. Uncertainty regarding railroad delivery could even shut down some assembly plants if a strike went beyond a few days.
  3. The energy industry. Despite the focus on renewable energy, much of the US economy runs on energy derived from coal. Some industrial states, such as Michigan, continue to have coal as the number 1 or number 2 most important source of energy. A railroad strike of more than a week would affect coal supplies and energy production capabilities in multiple states. Our analysis of coal inventories indicates that the large majority of power plants could absorb a rail disruption of a week.  Rail also moves a large quantity of ethanol and petroleum, as well as products and byproducts of refineries. Thus, a rail strike would also affect petroleum and ethanol products.

Some damage from the potential strike already occurred

Some damage from the potential strike already occurred. Much as happened before the West Coast Port shutdown in recent years, and occurred before auto industry strikes such as the GM strike in 2019, shipping customers anticipated work disruptions and begin adjusting ahead of time. Much of this is undisclosed. However, in this case, a number of railroads have already rescheduled or postponed certain critical shipments due to a possible shutdown. This estimate does not include any costs due to actions taken before Friday.

“$2 billion a day” is a gross exaggeration

The “$2 billion a day” that has been claimed as a possible loss due to a strike is almost certainly a grotesque exaggeration. Such a claim recalls the “$1 billion a day” claimed for a dock strike years ago. We noted at the time that to cost a billion a day, you would have to sink the ships. In fact, a quote from Patrick Anderson that “We’d have to sink the ships,” became the title for a research article on economic impact analysis. https://journals.sagepub.com/doi/10.1177/0891242404269500

The “$2 billion” apparently comes from a document produced by the AAR, which represents the railroad owners. The AAR has correctly pointed out the serious consequences of a strike and the broad range of industries that would be affected. However, even a cursory analysis reveals that the “$2 billion” in that document is derived by taking a dubiously sourced “$1 billion” figure from decades ago and multiplying it by two. https://fm.cnbc.com/applications/cnbc.com/resources/editorialfiles/2022/09/08/AAR-Rail-Shutdown-Report-September-2022.pdf

Rigorous methodology; track record

As always, we follow a rigorous and conservative methodology. In particular, we expect consumers and businesses to substitute among providers wherever possible, and for many customers to accept small delays in shipments without significant costs. We also take into account the industrial structure and regional differences. Finally, we do not exaggerate the impacts by using unreasonable multipliers or “black box” methods, nor incorrectly assume that companies or employees lose the same amount of money each day regardless of the duration of a strike.

Our firm has done rigorous assessments of strikes, labor disruptions, power outages, and similar events for two decades. This includes the GM strike of a couple of years ago, and at least two port shutdowns. We do this using a published methodology that recognizes substitution as well as income losses. The methodology is described in references including this book: https://www.amazon.com/Business-Economics-Finance-MATLAB-Simulation/dp/0367394065

In addition, we have reviewed past estimates of the costs of strikes, shutdowns, and interruptions after the event has concluded and economic and financial information is available. These reviews, such as the one done after the 2019 UAW-GM strike and the West Coast Port shutdown, confirm that this methodology provides a reliable and un-exaggerated indication of actual losses.