TeeJaw Blog

Stossel: Government Is The Biggest Job Killer

Posted in Government and Politics, History by TeeJaw on Saturday, October 15, 2011, 10: 58 AM

Modern reenactment by the National Park Service of the joining of the intercontinental transcontinental railroad at the Golden Spike National Historic Site at Promontory Summit North of Utah’s Great Salt Lake:

The actual photo by Andrew J. Russell taken at Promontory Summit May 10, 1869:

The joining of the Union Pacific Railroad from the East and the Central Pacific from the West was of earthquake proportion in historic events. California was annexed by the United States in 1848 and became a free state in the Compromise of 1850. San Francisco became a booming city during the 1849 gold rush, as shown by this photo of San Francisco harbor in 1851:

From Wikipedia:

During this time, the harbor would become so crowded that ships often had to wait days before unloading their passengers and goods.

Before the joining of the railroad lines in 1869 there were two ways to get from New York to San Francisco.  One could, of course, hop on a horse and head toward the other city.  Even Daniel Boone wouldn’t have done that.  Another alternative would have been to make it to St. Louis by railroad and from there one could go by stage coach or river boat to Independence, Missouri and join a wagon train to California.   That was a four to six-month journey and generally only embarked upon by those intending a one-way trip to start a new life.  If one intended to return to the city from which one had departed the only sensible way was a sea voyage aboard a sailing ship around Cape Horn.  That was a 3-month journey.  But at least one could go and return in about the same time as a one-way trip by wagon train.  Posting a letter from one city to a relative in the other and getting a reply would take six months because it took three months for the letter to travel each way.  Even the pony express which existed for only 18 months during 1862-1863 did not shorten that time by much because its impact was more regional than national.

But on May 10, 1869 it became possible to travel between San Francisco and New York City in a mere 7 days.  A letter mailed in either city could be delivered in the other in that same time.  It’s hard to fathom the impact of this today.  The ability to communicate instantly by email between New York and Beijing is not equivalent in terms of how it changed an entire nation. Before email there were other ways to do the same thing, albeit not as readily available to the average person.

The building of the transcontinental railroad was done with massive government assistance.  The railroads and their backers did not finance it by themselves.  The main incentive and source of financing was the government grant of a patent to alternate square miles of public land on each side of every mile of track laid by the railroads.  With our present-day understanding of economic principles we will instantly recognize that this set up an incentive to lay as much track as possible, perhaps too much.  Perhaps some that was not needed and that would not be economical to operate.  We would expect such a scheme to lead to rent seeking and to promote reckless investment both private and public.  If Elizabeth Warren had been alive then her rant would make a bit of sense, although she would likely have been tarred and feathered and run out of whatever town she was in on one of the newly-laid rails.

John Stossel writes today  that Transcontinental Railroad was a Solyndra-like Big Government scandal:

The railroad didn’t make economic sense at the time, so the government subsidized construction and gave the companies huge quantities of the best land on the continent.

As we should expect, without market discipline — profit and loss — contractors ripped off the taxpayers. After all, if you get paid by the amount of track you lay, you’ll lay more track than necessary.

Credit Mobilier, the first rail construction company, made enormous profits by overcharging for its work. To keep the subsidies flowing, it made big contributions to congressmen.

Where have we heard that recently?

The transcontinental railroad lost tons of money. The government never covered its costs, and most rail lines that used the tracks went bankrupt or continued to be subsidized by taxpayers.

The Union Pacific and Northern Pacific — all those rail lines we learned about in history class — milked the taxpayer and then went broke.

One line worked. The Great Northern never went bankrupt. It was the railroad that got no subsidies.

John Stossel is not known for sloppy research so I take his recitation of these facts to be correct.  I think the building of the transcontinental railroad can be easily distinguished from the Solyndra scandal.  Solyndra never had a viable business because solar energy today is not a viable business.  No solar panels would be manufactured and no one would buy them if they were not subsidized by government.  Moreover, solar panels offer little real benefit either to the people who buy them or to the economy itself.  The whole thing benefits only the companies and their backers who pocket large financial gains from gaming the crony capitalist system it creates, and the politicians who get much of the subsidy money back in the form of political campaign contributions.

At least railroad transportation was a real business in 1869 and before, even without government subsidies.  The success of the Great Northern line proves it.  And the country did benefit from establishment of a transportation line from East to West that seemed like nothing short of miraculous at the time.

John Stossel nevertheless makes an undeniable argument against government subsidies:

We need infrastructure, but the beauty of leaving most of these things to the private sector — without subsidies, bailouts and other privileges — is that they would have to be justified by the profit-and-loss test.

In a truly free market, when private companies make bad choices, investors lose their own money. This tends to make them careful.

By contrast, when government loses money, it just spends more and raises your taxes, or borrows more, or inflates. Building giant government projects is no way to create jobs.

When government spends on infrastructure, it takes money away from projects that consumers might think are more important.

Stossel’s compelling analysis applies to much of what government does today.  The ethanol mandate and subsidy could be the worst example of such government malfeasance.  Solyndra will cost tax payers about $600 Million, or 6/10th of One Billion Dollars.  The worthless ethanol subsidy costs taxpayers $6 Billion every year with no end in sight.

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2 Responses

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  1. Bill said, on Saturday, October 15, 2011, 2: 37 PM at 2:37 PM

    For more perspective, see:
    http://www.coxrail.com/land-grants.htm

    • TeeJaw said, on Saturday, October 15, 2011, 6: 24 PM at 6:24 PM

      That’s an excellent bit of historical perspective and shows that the building of the transcontinental railroad was not comparable to the Solyndra boondoggle. I remember vaguely from a college class in economic history that they were trying to avoid the “free rider” problem of those with land close to the railroad line having a windfall gain in the value of theior land over lands farther away. If course, at that time almost all of the land in the West belonged to the government as a result of the Louisiana Purchase. Also, the land grants were a way for the government to subsidize the building of the railroad without having to appropriate money. I remember from doing oil and gas title opinions on Wyoming land years ago that quite of lot of the land grants that went to the railroads were sold by the railroads within a few years of the grant. The RR’s always reserved the coal which they needed to run their steam railroad and that resulted in vast coal mines at Hanna and Harriman, Wyoming.

      Here’s a bit of trivia I found: 2,000 gallons of water would enable the locomotives of that era to go only 15-30 miles. Then they needed another 2,000 gallons of water.


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