Tuesday, August 6, 2013

The "public investment" fantasy

Today's Wall Street Journal has a useful response to the president's continuing argument that we need more public investment to stimulate the economy. It is behind the subscriber wall, but a few choice excerpts give the gist:

For almost five years now, President Obama has been making the argument that government "investments" in infrastructure are crucial to economic recovery. "Now we used to have the best infrastructure in the world here in America," the president lamented in 2011. "So how can we now sit back and let China build the best railroads? And let Europe build the best highways? And have Singapore build a nicer airport?"

In his recent economic speeches in Illinois, Missouri, Florida and Tennessee, the president again made a pitch for government spending for transportation and "putting people back to work rebuilding America's infrastructure." Create the infrastructure, in other words, and the jobs will come.

History says it doesn't work like that. Henry Ford and dozens of other auto makers put a car in almost every garage decades before the National Interstate and Defense Highways Act in 1956. The success of the car created a demand for roads. The government didn't build highways, and then Ford decided to create the Model T. Instead, the highways came as a byproduct of the entrepreneurial genius of Ford and others.

Moreover, the makers of autos, tires and headlights began building roads privately long before any state or the federal government got involved....

Railroads are another example of the infrastructure-follows-entrepreneurship rule. Before the 1860s, almost all railroads were privately financed and built. One exception was in Michigan, where the state tried to build two railroads but lost money doing so, and thus happily sold both to private owners in 1846....

In fact, when the government built the transcontinentals, they were politically corrupt and often—especially in the case of the Union Pacific and the Northern Pacific—went broke....

No matter where you look, similar stories come up. America's 19th-century canal-building mania is now largely forgotten, but it is the granddaddy of misguided infrastructure-spending tales....

In Ohio, when the canals were privatized, one newspaper editor wrote: "Everyone who observes must have learned that private enterprise will execute a work with profit, when a government would sink dollars by the thousand."

In all of these examples, building infrastructure was never the engine of growth, but rather a lagging indicator of growth that had already occurred in the private sector. And when the infrastructure was built, it was often best done privately, at least until the market grew so large as to demand a wider public role, as with the need for an interstate-highway system in the mid 1950s.

There is a lesson here for President Obama: Government "investment" in infrastructure is often wasteful and tends to support decaying or stagnant technologies....

There is another version of this argument that one often hears from Democrats who long for the New Deal: Big infrastructure projects directly stimulate the economy while they are underway. True, without question. The problem is one of timing. Today, one cannot just decide to dam up the Colorado River or build a highway along the California coast, as Roosevelt did. The years of permitting and litigation required to start such a project mean, first, that the actual stimulative benefit for working stiffs (as opposed to Washington lawyers and lobbyists) is deferred for years, if not forever. Therefore, these projects are no longer useful for Keynesian countercyclical effect. Second, delay massively increases the costs of such projects, which means they are much harder to justify as anything other than crony capitalism for the principal beneficiaries, including those lawyers and lobbyists.


  1. Even if Obama's claim were true, it wouldn't be true. Nor Seabees nor the Corps of Engineers built the roads and bridges, or anything else beyond disaster repair kinds of things, private enterprise did. Government didn't even pay for any of that--we private citizens did, with our tax money.

    At best, were Obama's claim true, government brokered those deals--an important role, but even here, private brokers operate more efficiently.

    Eric Hines

  2. The entire article is available; it's no longer behind the paywall.


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