Free Lunch (5 page)

And beyond these brand-name Americans are legions of the superrich of whom few have heard, who owe
their fortunes less to their enterprise than to the generosity of our Uncle Sam and his nieces and nephews in state and local
government.

There is a reason that 35,000 people are registered as lobbyists in Washington,
double the number of lobbyists employed there in 2000. They are there to seek favors, from outright gifts of your tax dollars to
subtle changes in rules that funnel money to their clients, thwart competition, hold you back, and buoy others. Among the ironies is
that many of the most damaging policies have been created in the name of Adam Smith, the original modern economist. Indeed, if
that eighteenth-century Scotsman could come back today, he might smite the plutocrats setting the government's bill of fare and
cast out the rule-changers. No doubt he would remind us of his eighteenth-century insight that subsidy economics are inherently
inefficient and wasteful, often costing several dollars to give away one.

Back in 1964 Ronald
Reagan started telling a story he repeated many times on the long road to the White House. It was about how the masses ruin
democracy by sucking dry the nation. Reagan attributed his tale to an eighteenth-century British historian whose name he
consistently mangled, Lord Woodhouselee, Alexander Fraser Tytler. Professor Tytler never wrote the words attributed to him, but
they have become central to the argument used by those who came to power with Mr. Reagan, and those who followed, to justify
their policies. In one tape-recorded speech in 1965, Reagan said:

Whoever wrote those words got it partly right.
But just as Karl Marx never envisioned commercial sports as the opiate of the masses, neither did most of those who agreed with
Mr. Reagan consider the prospect that the elites would be the ones to vote themselves the public's treasure.

Let's begin by examining two free lunches. The first case examines the moral hazard in a government policy
that rewards reckless corporate behavior. The second explores the reasons so many jobs are headed offshore, and who
benefits.

H
ALF AN
HOUR BEFORE DAYBREAK ABOARD THE AMTRAK SILVER
Star heading to New
York from Florida, the South Carolina skies were fair. The thermometer hovered comfortably in the low seventies. It was the start of
the glorious final day of July 1991.

The clickety-clack rhythm of the rails rocked the 407
passengers as they dozed. Among them was Paul Palank, a Miami police sergeant on his way to meet his wife and children for a
family reunion near the nation's capital. Palank loved trains as much as he feared flying.

At a
minute past five, the train approached the town of Lugoff, a farming community that the DuPont Company transformed into an
industrial center when it built a chemical plant there in 1948. The same tracks that supported Palank and his fellow passengers on
their journey north often carried CSX railroad hopper cars filled with chemicals to make Orlon, a synthetic “miracle fiber” that came
out of World War II research. On a siding parallel to the Silver Star stood a string of empty hopper cars waiting for a CSX train to
haul them away to be refilled. Freight traffic was so much more important, and more common, than passenger trains that railroad
companies didn't name the switch Lugoff after the town, or even after the DuPont factory. Railroad engineers called the train switch
the Orlon Crossing.

The Amtrak train was traveling two miles an hour below the posted speed
limit when the twin locomotives and the first twelve cars passed over the Orlon Crossing. Then the switch broke.

Six passenger cars hurtled off the tracks. The impact flipped over the first hopper car, whose hardened steel
wheels cut like a knife through the metal skin of the passenger cars. By the time everything came to a halt, 77 people were injured
and 8 were dead, including Sergeant Palank. He was 35 years old.

More than eight hours later,
Angelica Palank arrived at the train station in Alexandria, Virginia, to greet her husband. Eager to see him, Angelica pushed her
youngest son Taylor's stroller just as fast as five-year-old Josef could move his little legs to keep up. As the family waited on the
platform, a woman told Angelica that there had been an accident. Angelica did not believe her. A northbound train approached and
she felt relieved. When it blew by the station, Angelica turned anxious. She and the children hurried downstairs, hunting for the
arrivals-and-departures board. Train 82, the Silver Star, was not listed. She asked a ticket clerk, who gave her an 800 number to call.
The clerk pointed the frantic young mother to a pay telephone. A stranger's voice at the other end delivered the horrible
news.

In the weeks ahead the families of the injured and dead settled their claims, discovering
in the process how remarkably modest payments are to the survivors of transportation crashes and to the heirs of those less
fortunate. Only Angelica Palank refused to go along. She did not believe the crash was an accident. She did not believe her Paul
died because of some random bit of misfortune that no one could have seen coming. Determined to learn all she could about how
Paul was killed, Angelica sued.

To get the truth Angelica Palank would have to put herself
through law school. She could never flinch as she took on one of the richest corporations in America, a personal trial that extracted
a heavy toll on her and her children. Ten relatives died in one year, but still she stuck to her cause. Friends and neighbors cut the
grass and brought meals. At one point, she nearly lost her home to unpaid property taxes. It was scary and nasty, as is all litigation
about real wrongs. When she found lawyers willing to take her case—Christian D. Searcy and F. Gregory Barnhart in West Palm
Beach—their work began to peel back layer upon layer upon layer of corporate denials and superficial government inquiries. In
time they uncovered a trail pointing not to bad luck, but to policies with a blatant disregard for safety.

The compulsion to increase profits can blind men to risk, especially when those at risk are strangers. Society
imposes rules on corporate behavior to protect public safety in the face of baser impulses. These rules require enforcement,
though. They also require a corporate culture that appreciates the importance of safety. As Adam Smith wrote, “The object of
justice is the security from injury, and it is the foundation of civil government.”

For more than
two decades, the ideology of blind faith in markets, combined with the view that government is inherently inferior to self-regulation,
has caused politicians to trim enforcement funds. Trim long enough and the little cuts sever muscle. Ultimately they slash to the
bone. Such was the case in the derailment of the Silver Star. But it took one diligent woman and her lawyers more than a decade to
demonstrate how harmful these ideas about trusting all companies to do right can be.

Before
Angelica Palank's lawsuit got going in earnest, the National Transportation Safety Board examined the crash. The investigators
quickly deduced that the accident was not a chance happening. Rather, it resulted from improperly done repairs. Railroads—like
airlines, meatpacking plants, and other businesses where hidden dangers lurk—employ inspectors to double-check what safety
workers do. This saves lives and avoids lawsuits. Yet the safety board found that the CSX inspectors somehow failed to notice the
Orlon Crossing was in a dangerous state of disrepair.

CSX maintenance crews had used
shims to level the crossing, even though the switch “is not designed for adjustment.” Granite rock, known as ballast, covered the
wobbly switch mechanism. Once the investigators cleared the ballast away, they found this vital switch was without a proper pin to
hold the pieces in place. The switch was held together with nothing but a rusty nail. The safety board concluded that CSX
inspectors “could have and should have seen the switch deficiencies during a normal inspection and, with appropriate action,
could have prevented the accident.”

Although businesses complain frequently about
excessive government paperwork, neither the railroad nor the Federal Railroad Administration, the agency that is supposed to set
and enforce safety standards, required much recordkeeping. CSX's inspection process, the safety board concluded, “lacked an
adequate documentation procedure.”

The roadmaster and some of the work crew used the
jury-rigged shims because their employer never allowed them enough time or money to do their jobs properly. CSX cut corners to
inflate its profits, which in turn meant riches for its executives, whose pay packages were tied to reported profits and the price of
CSX shares.

John W. Snow, a lawyer and college economics professor who rose to become
the CSX chief executive, was an early champion of markets as the most efficient regulator of transportation industries. It was an
idea he promoted as an assistant secretary in President Ford's Transportation Department before he joined the railroad. Under his
leadership, the railroad aggressively cut costs.

CSX publicists encouraged articles about
Snow's drive for efficient capital investment. Typical of the stories was one praising the company's change from four engines to
three on some hauls. These trains arrived later, but still on time, while saving the cost and fuel of an entire locomotive. His handlers
did not make him available for stories about the bridges that became eyesores after years, and then decades, without painting. And
in polishing Snow's image as a champion of efficiency, they certainly did not encourage anyone to look at the systematic shortcuts
in safety.

Palank and her lawyers dug deep into the cutbacks in safety, deeper than the
National Transportation Safety Board. They looked for systemic changes, for a pattern. Eventually they found CSX workers who
would talk: Allen Clamp and Robert Griffith.

For three years, Clamp was an apprentice foreman
under Buster Bowers, the roadmaster on the section of track in South Carolina where Paul Palank died. Clamp testified that it
should have been obvious to CSX that there were too few men to perform the required safety inspections and maintenance. In the
crew's race to cover track as quickly as possible, Clamp testified that Bowers never “performed a disassembly inspection, never
walked a switch, and conducted no inspection, or inadequate inspections.” Clamp said under oath that Bowers even directed him
to fill out false inspection reports.

CSX tried to get this testimony thrown out. Five years had
passed between the time Clamp last worked under Bowers and the Lugoff crash. CSX said that made the testimony ancient and
unreliable. A Florida state appeals court let the testimony stand, noting that the other rail worker, Robert Griffith, confirmed that
Bowers also had instructed him to falsify inspection reports.

At trial, CSX urged jurors to not
believe the former employees. One Palank lawyer, Greg Barnhart had a counterargument: “CSX said, ‘Why would we do that?' We
said it was to save $2.4 billion,” the money CSX had saved on maintenance.

In his own way,
Barnhart was showing the jury the deadly effects of economic pollution. He explained how CSX benefited because it shifted the
cost of maintaining safe tracks off its owners and onto the unsuspecting public, which unknowingly assumed a risk of injury or
death.

The first jury that heard the Palank case awarded the family $6.1 million as
compensation for their loss. Then came the second trial before a new jury, its purpose to determine whether CSX should be
punished on the theory that the Lugoff crash was the result of greed encouraging a corporation to turn a blind eye to
danger.

The second jury heard all about the $2.4 billion not spent between 1981 and 1993,
most of those the years when Snow was fully in charge of CSX. The jury heard how in 1987 the Federal Railroad Administration
had told CSX that its practices were unsafe. They heard how the company stuck to its cost-cutting policies anyway.

Testimony showed that the National Transportation Safety Board findings, alarming as they were, had
missed much more damning facts. A panel of three Florida judges later wrote that the Orlon switch was defective and the cross
pin

What that meant was that for a full decade CSX
had escaped paying the cost of repairing the Orlon switch. Every day CSX trains loaded with freight, including toxic chemicals,
crossed the Orlon switch. So did Amtrak passengers, unaware they were riding over the equivalent of a bomb waiting to go
off.

The jurors were incensed. They awarded the widow and her children $50 million in
damages, taking 1 percent of CSX's net worth. The jurors also wrote a note on the verdict form: “It is hoped that CSX trainers will
emphasize [the] need to inspect both ends of cross pins.”

Judge Arthur J. Franza upheld the
punitive damages award. He delivered a stinging rebuke of CSX. “The clear and convincing evidence shows that Silver Star No.
82's tragic derailment was caused by willful, wanton negligence,” Judge Franza wrote, adding that he considered the railroad's
conduct to be “borderline criminal.”

“Clearly,” the judge wrote, CSX “knew of the peril created
by its reductions and the company chose to proceed on its own course.”

Then the appeals
began. Three Florida judges who took up CSX's pleas for relief ruled against the railroad. The judges said that testimony by former
employees showed that “CSX knowingly endangered public safety.”

The judges called CSX's
conduct a “flagrant violation of the public trust…Keeping with the policy that punitive damages should punish and deter, a jury of
six reasonable persons concluded that $50 million would adequately communicate to this defendant that this type of reprehensible
conduct should not and would not be tolerated.”

The appeals court approvingly quoted Judge
Franza, who ruled that while CSX saved more than $2 billion, “society paid with eight human lives…. The clear and convincing
evidence showed that the price of cost-cutting safety to turn over larger profits is too great of a price.”

CSX then appealed to the Florida Supreme Court, saying that its conduct was reasonable. Further, any
damage should be based only on the value of the section of track near the crash site, not the company's entire net worth. The
Florida Supreme Court rejected CSX's claims.

Finally the litigation came to an end in early
2002, more than a decade after Paul Palank's death, when the United States Supreme Court said that it would not hear CSX's
appeal.

Angelica Palank said she felt that she had accomplished her goals. She had proven
that the crash on July 31, 1991, was not bad luck but the predictable result of deliberate misconduct that flowed from the top of the
company. After paying her lawyers and income taxes on the punitive damages, she donated the rest of the money to a foundation
in her husband's memory. Today a few million dollars remain to finance grants for a cause her husband cared about deeply,
abused and neglected children in and around Miami.