Jim Young: President and CEO, Union Pacific Corp. and Union Pacific Railroad

A While the underlying fundamentals remain strong by recent historical standards, we are seeing some slowing in certain sectors, specifically paper, lumber, steel, aggregates and big-ticket consumer items such as automobiles.

Q What are your economic predictions for the coming 12 months?

A Most economic experts suggest some continued slowing of the economy over the next 12 months, and the trends we are seeing in our customers’ cyclical businesses would appear to support that outlook.

Q Any economic road signs or warning signs that the federal government should be particularly concerned about?

A Despite the moderate cooling of the economy, demand for transportation remains at all-time record levels, and that, in turn, is placing considerable stress on the nation’s transportation infrastructure. The solution is market-driven, private sector investment and the federal government needs to assure that regulatory and tax policies do not pose barriers to critical infrastructure investments needed to sustain economic growth.

Q Globalization: How will it affect our economy in the coming 12 months? Your thoughts on how it will affect your business sector?

A The growth of rapidly developing economies, particularly China, will continue to stress world oil supplies, thus maintaining historically high crude oil prices. In addition, there will be continued or even increased global shifting of manufacturing from developed to developing economies. Both of these factors will have somewhat of a dampening affect on U.S. economic growth — mostly in the traditional manufacturing sectors.

Perhaps surprising to some, the affect of these trends on our business is neutral to positive. While declining U.S. manufacturing may lower demand for domestic transportation of raw and fabricated materials, there is a corresponding increase in the demand for inland transportation of imported finished products. And while continued high fuel prices do increase our costs, they also tend to push more business to railroads since we are the most fuel-efficient mode of freight transportation.

Q How does the American image internationally affect this country? Your business sector?

A Clearly our image is a critical factor in determining the strength and stability of U.S. political, diplomatic and military relations around the world. Historically, this may also have been the case for economic relations, but I think the globalization of the economy has reduced that dependence somewhat.

Increasingly, it appears that economic self-interest and the interdependence of our global trading partners usually mitigates and may even trump political rhetoric, certainly as it pertains to an issue such as image. I would suggest that the same is true for the transportation business sector.

Q How will the value of the dollar affect us and affect your business sector?

A Again, most prognosticators suggest a continued decline in the value of the U.S. dollar against major currencies through the balance of this year and next, with the current account deficit exceeding $900 billion in 2007. While this should help U.S. exports, the somewhat artificial floating of the Yuan still relatively undervalues goods from China and supports continued growth in U.S. imports from that country. This in turn should sustain the current strong demand for intermodal rail transportation from West Coast ports to inland consumption areas in the U.S.

Q How do you define the nature of your business? Do recent economic trends require you to rethink that definition?

A Our business is rail freight transportation. As the largest U.S. railroad, we generate roughly $14 billion of freight revenue over a 33,000-mile network in the Western two-thirds of the country.

We serve every major population center west of a line from Chicago through St. Louis and Memphis to New Orleans, as well as every major port on the West Coast and in the Gulf region. We also access every major gateway to Mexico and interchange business with both Canadian railroads. Our lines of business include coal, aggregates, lumber, steel, paper, grain, food products, chemicals, ethanol, automobiles and consumer goods shipments of all kinds — both domestic and international.

Recent economic trends have led to unprecedented demand for rail transportation. This has solidified and emphasized the importance of our role in moving the

nation’s freight as opposed to causing us to rethink the nature of our business. These trends have, however, caused us to think differently about how we manage our business in a capacity-constrained environment. Compared to the last two decades of excess capacity where there was arguably more room for error, we are now much more focused on reliability, recoverability, efficiency and throughput.

The strong demand and limited supply is also giving us an opportunity to improve our returns and justify increased infrastructure investment to better serve our customers and support future growth.

Q Education: What do you believe this country has to do to retain the economic and political advantage that it has enjoyed for so long? Do you have to offer educational or remedial training that you once did not have to?

A Businesses in this country are subject to a virtual “excise” tax that has eroded our competitive position in the global economy. This stems primarily from high health care costs, litigation expense and a system of taxation that discourages needed infrastructure investment. Meaningful reform in these three areas would go a long way towards securing and even enhancing our economic advantage in world markets.

The changing demographics in this country pose a significant strategic risk for our company and all U.S. business. A shrinking work force coupled with increasing demand threatens our ability to meet the growing transportation needs of our customers and the economy. While we have always had a strong emphasis on training to assure a safe and productive work force, we are now looking to nontraditional markets and using more innovative recruiting and training programs to attract and retain qualified workers.

Q Taxes: What limits business development most right now? What encourages it most right now? What sort of tax legislation would you like to see put before Congress?

A Speaking strictly from the perspective of the U.S. rail industry, there is a critical and increasing need for infrastructure investment to meet the growing needs of the nation’s economy. While railroads have invested heavily in recent years and are committed to further investment where justified by adequate returns, providing some form of investment tax credit to encourage accelerated infrastructure investment would clearly be in the national economic self-interest.

Q Consumer technology: How is your company integrating Internet-based new media in your marketing, employment and product development areas?

A Contrary to some stereotypical views, railroading is a

highly technology-driven business. Our operations are run by complex dispatching, scheduling and signaling systems 24 hours a day, seven days a week, 365 days a year. Ordering and billing are automated, and we provide Internet-based account access and shipment tracking systems to our customers. Much of our training is done online, and we employ sophisticated simulators as part of our locomotive engineer training. Employees have access to a company Intranet for business and personnel information, we use the Internet extensively for recruiting and customer communication, and we have our own television network, which is also used for training and employee communication. The list could go on, but suffice it to say [new technologies] are both operationally and strategically critical to our business.

Q What is the most important resolution you have made about your business as we go ahead into fall?

A To stay the course by focusing on improving the safety, reliability and efficiency of our core business while improving shareholder returns to justify further increases in capacity investment.

Q Health care: What would you propose as starting points for the upcoming crucial discussion on how American citizens would like to have their health care delivered?

A I would not presume to be an expert in this area, but there are a couple of fundamental principles that I believe should frame the discussion on health care. First and foremost, the only real form of job security is a financially healthy employer.

Since rising health care costs threaten that security, addressing this problem must be viewed as a shared responsibility. Second, just as we emphasize that working safely is a personal responsibility, we also emphasize that living healthy is a personal choice that is essential to controlling health care costs. Preventative care and wellness programs should receive greater focus in any discussion regarding health care reform.

Q Tort reform: How much does the present tort law add to your business or business sector costs each year? What needs reforming first?

A Railroads are somewhat unique in that we operate under the Federal Employees Liability Act, which is a litigation-based system for resolving personal injury claims. This system, combined with present tort law, adds hundreds of millions of dollars of cost to our business each year. One does not have to look further than the multiple bankruptcies of otherwise-sound companies precipitated by major lawsuits to recognize that some type of reform is not only warranted but essential to assuring the continued competitiveness of American business. Several states have adopted tort reform focusing on liability limits and penalties for frivolous or groundless suits. The U.S. Chamber of Commerce is supporting these and similar reforms at the national level. These should serve as models for even more comprehensive reform going forward.

Q What is your biggest political concern as we go ahead into fall?

A That party politics and the pursuit of control will distract legislators at both the federal and state levels from addressing the critical economic and social issues outlined in these questions.

Q Regulatory reform: How big is the regulatory burden on your business or business sector? What would you like to see reformed first?

A The railroad industry was partially deregulated in the early 1980s. The result is a stronger, healthier rail system today and the promise of improved financial returns and increased investment in the future. The free market has served railroads and shippers well over the past quarter century, but recent initiatives to re-regulate the rail industry threaten both equally. Simply stated, if these initiatives succeed, neither my company nor any other U.S. railroad will be capable, and thus willing, to make the long-term investments necessary to meet our customers’ needs and support future economic growth in this country.

Q Safe and reliable energy supply: Will the demands of our business sector lead to more energy requirements? How would you like our government to deal with this? What do we need to do to ensure energy independence or sovereignty for this country in the future?

A Railroads are the most energy-efficient and environmentally friendly mode of freight ground transportation. In addition, railroads transport the majority of this country’s most plentiful and independent source of energy — coal. As such, they are now and can be increasingly an integral part of solving the problem of energy independence in the U.S. Providing incentives for accelerated capacity investment, encouraging new technology for utilizing coal resources and resisting ill-advised attempts to re-regulate the rail industry are important steps the government can take to help assure that railroads will continue to play a vital role in achieving energy independence for this country.

Q Terrorism and security: Will this challenge your business or business sector in the coming year?

A As a vital component of this country’s economic and military infrastructure, railroads have always placed a strong emphasis on safety and security. Securing the nation’s freight has become an even greater challenge in the post-9/11 era with the heightened threat of terrorism, and we do not see this lessening in the coming year. We work closely with Homeland Security/TSA and all other involved federal and state agencies to ensure timely sharing of security information and rapid response to any security threat.

Q Pension obligations: What does this country need to do to manage the financial challenges to pension funding?

A The two biggest threats to pension funding are the financial soundness of employers and Enron-like fraud. Meaningful health care, tax and tort reform coupled with the avoidance of unneeded regulation will go a long way to addressing the former. New financial controls and corporate governance initiatives implemented in the wake of recent corporate scandals have helped address the latter, but care must be taken not to take these to the extreme that they threaten the former.

Q What is your advice to the business community on how to survive and profit from the coming 12 months? Your advice to consumers?

A Focus on business fundamentals — customer service, productivity, asset utilization, cash flow, returns — and don’t overreact to normal market adjustments or economic cycles. My advice to consumers is the same — focus on fundamentals: Don’t overextend, continue to invest and save, and don’t overreact to prognosticators and doomsayers or you will validate their predictions.

My five tips for young people for success

1 Absolute integrity at all times.

2 Set priorities (personal and business) and focus relentlessly on them.

3 Learn something new each day.

4 Value and respect family, friends and co-workers.

5 Hone your communication skills to a fine edge.

Part of Examiner's The American Economy series.