Economic Lessons From+

!05",)#!4)/./&(),,3$!,%#/,,%'% ImpriOVER 2,500,000mi READERS MOsNTHLY *ULY!UGUSTs6OLUME .UMBER !" th Annive#ary Economic Lessons from American History *OHN3TEELE'ORDON !UTHOR !N%MPIREOF7EALTH4HE%PIC(ISTORYOF!MERICAN%CONOMIC0OWER JOHN STEELE GORDON was educated at Millbrook School and Vanderbilt University. His articles have appeared in numerous publications, including Forbes, Worth, National Review, Commentary, the New York Times, and the Wall Street Journal. He is a contributing editor at American Heritage, where he wrote the “Business of America” column for many years, and currently writes “The Long View” column for Barron’s. He is the author of several books, including Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt, The Great Game: The Emergence of Wall Street as a World Power, and An Empire of Wealth: The Epic History of American Economic Power. The following is adapted from a lecture delivered on February 27, 2012, aboard the Crystal Symphony during a Hillsdale College cruise from Rio de Janeiro to Buenos Aires. America is still a young country. Only 405 years separate us from our ultimate origins at Jamestown, Virginia, while France and Britain are 1,000 years old, China 3,000, and Egypt 5,000. But what a 400 years it has been in the economic history of humankind! When the Susan Constant, Discovery, and Godspeed dropped anchor in the James River in the spring of 1607, most human beings made their livings in agriculture and with the power of their own muscles. Life expectancy at birth was perhaps 30 years. Epidemics routinely swept through cities, carrying off old and young alike by the thousands. History tends to dwell on a small percent of the population at the top of the heap, but the vast mass of humanity lived lives that were, in the words of Thomas Hobbes, “nasty, brutish, and short.” Today we live in a world far beyond the imagination of those who were alive in 1607. The poorest family in America today enjoys a standard of living that would have been considered opulent 400 years ago. And for most of this time it was the United States that was leading the world into the future, politically and economically. (),,3$!,%#/,,%'%05235).'4254(s$%&%.$).',)"%2493).#% This astonishing economic transforma- Going back even farther, to the dawn tion provides rich lessons in examples of of the industrial age, consider the Erie what to do and not do. Let me suggest five. Railway. In order to get political support for building the Erie Canal, Governor 1. Governments Are Terrible Investors DeWitt Clinton promised the New York counties that bordered Pennsylvania When the Solyndra Corporation filed for (known as the “Southern Tier”) an bankruptcy last summer, it left the tax- “avenue” of their own once the canal was payers on the hook for a loan of $535 mil- completed. The canal was an enormous lion that the government had guaranteed. success, but as such it affected the state’s In a half-billion-dollar example of how politics. A group of politicians from along governments often throw good money its pathway, the so-called Canal Ring, after bad, the government had even soon dominated state government. They agreed to subordinate the loan as the com- were not keen on helping to build what pany’s troubles worsened, putting taxpay- would necessarily be competition. ers at the back of the line. In retrospect, A canal through the mountainous ter- it is clear that the motive behind the loan rain of the Southern Tier was impossible, guarantee was political: to foster green and by the 1830s, railroads were the hot energy, an obsession of the left. And that’s new transportation technology. But only the problem with government investment: with the utmost effort did Southern Tier Politicians make political decisions, not politicians induce the Legislature to grant economic ones. They’re playing with other a charter for a railroad to run from the people’s money, after all. Hudson River to Lake Erie through their History is littered with government counties. And the charter almost guaran- investment disasters. teed economic failure: The Clinch River It required the railroad ImprimisIM PRI MIS −´ Breeder Reactor, for ;,ATIN=INTHEFIRSTPLACE to run wholly within instance, authorized New York State. As a EDITOR in 1971, was estimated $OUGLAS!*EFFREY result, it could not have to cost $400 million DEPUTY EDITORS its eastern terminus in 2EBECCA"URGESS to build. The project 4IMOTHY7#ASPAR New Jersey, opposite ran through $8 bil- COPY EDITORS New York City, but had %MILY3ARVER lion before it was -ONICA6AN$ER7EIDE to end instead in the canceled, unbuilt, in ART DIRECTOR town of Piermont, 20 1983. A half century !NGELA%,ASHAWAY miles to the north. It was MARKETING DIRECTOR earlier, the Woodrow &RED(ADRA also forbidden to run to Wilson administra- PRODUCTION MANAGER Buffalo, where the Erie tion thought it could ,UCINDA'RIMM Canal entered Lake Erie, CIRCULATION MANAGER produce armor 7ANDA/XENGER terminating instead plate for battleships STAFF ASSISTANTS in Dunkirk, a town 20 2OBIN#URTIS cheaper than the steel +IM%LLSWORTH miles south. Thus it +ATHY3MITH companies. The plant -ARY*O6ON%WEGEN would run 483 miles the government built, between two towns millions over budget #OPYRIGHTÚ(ILLSDALE#OLLEGE of no importance and 4HEOPINIONSEXPRESSEDINImprimisARENOT when completed, NECESSARILYTHEVIEWSOF(ILLSDALE#OLLEGE through sparsely settled could not produce 0ERMISSIONTOREPRINTINWHOLEORINPARTIS lands in between—not HEREBYGRANTED PROVIDEDTHEFOLLOWINGCREDIT armor plate for less LINEISUSEDh2EPRINTEDBYPERMISSIONFROM unlike the current pro- than twice what Imprimis APUBLICATIONOF(ILLSDALE#OLLEGEv posed California high- SUBSCRIPTION FREE UPON REQUEST. the steel companies )33. speed rail project, the charged. In the end it ImprimisTRADEMARKREGISTEREDIN53 first segment of which produced one batch— 0ATENTAND4RADEMARK/FlCE would run between later sold for scrap— Fresno and Bakersfield and shut down. and cost $9 billion. 2 *5,9!5'534s6/,5-% .5-"%2 < hillsdale.edu The Erie Railway was initially esti- An audio version of Imprimis mated to cost $4,726,260 and to take five is available online at years to build. In fact, it would take $23.5 hillsdale.edu/imprimis million and 17 years. With the depres- sion that began in 1837, it soon became commerce. Anyone can use them for a clear that only massive state aid would fee, although many Interstates are paid see the project through. So New York for through the Highway Trust Fund. State agreed to put up $200,000 for every But a railroad is a business that can only $100,000 raised through stock sales. Even be profitable with careful attention to that was not enough, however, and the the bottom line forced by competition. railroad issued a blizzard of first mortgage And governments are notoriously bad at bonds, second mortgage bonds, convert- running businesses because government ible bonds, and subordinated debentures businesses are always monopolies. Just to raise the needed money. This mountain remember your last customer-friendly of debt got the Erie completed in 1851, but visit to the Department of Motor Vehicles. it would haunt the railroad throughout its In addition to building infrastructure existence. Indeed, the Erie Railway would such as the Erie Canal and the Interstate pass through bankruptcy no fewer than Highway System, government can be six times before it disappeared as a corpo- good at doing basic research, such as in rate entity in the early 1970s. space technology, where the costs were far Why was the Erie Canal a huge suc- beyond the reach of any private organiza- cess—it even came in under budget and tion. Only government resources could ahead of schedule—that made huge prof- have put men on the moon. Nevertheless, its from the very beginning, while the I’m encouraged to see that the next gen- Erie Railway was a monumental failure? eration of rockets is being developed by One reason was that canal technology private companies, not NASA. That’s a was well-established and well-understood step in the right direction. by the early 19th century. More impor- Unfortunately, we are headed the other tant, the route of the Erie Canal was the way with the American medical industry. only place a canal could be built through the Appalachian Mountains. Thus it 2. Politicians Have Self-Interest Too would have no competition. And the reason the canal was built by government In 1992, New York State found itself $200 was that the project was simply too big for million short of having a balanced bud- a private company to handle. get, which the state constitution requires. A very similar situation arose in the The total state budget was about $40 1950s. Three decades before, a young billion, so it could have been balanced U.S. Army captain had joined an expedi- by cutting one half of one percent—the tion in which the Army had sent a large equivalent of a family with an after-tax convoy of trucks from Washington to San income of $100,000 finding ways to save Francisco, to learn the difficulties of doing less than 50 dollars a month. so. They were very considerable because So did New York cut its budget? Don’t the nation’s road network hardly deserved be silly. Instead, it had a state agency issue the term. By the 1950s, that young captain $200 million in bonds and use the money had become president of the United States to buy Attica State Prison from the state. and road-building technology was well The state took the $200 million its own understood. Dwight Eisenhower pushed a agency had borrowed, called it income, and national network of limited-access roads declared the budget balanced. New York through Congress, and the country has now rents the prison from its own agency hugely benefitted from the Interstate at a price sufficient to service the bonds.

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