REIHAN SALAM is a sceptic of the value of investments in American intercity rail and I am more optimistic concerning their likely benefits. But he makes a good point here:
A shockingly large number of people, including Obama, seem to believe that had the federal government not stepped up to the plate in the postwar era and invested vast sums in highways and putting a man on the moon, the United States would have wound up an economic backwater. But perhaps not building a huge network of highways would have kept American families in more compact, walkable neighborhoods. Instead of sprawling suburbs and SUVs, we’d have more high-rises and bike lanes. The Interstate Highways helped supersize America’s government, by centralizing authority in D.C., and our waistlines, by encouraging us to drive and to fatten up on fast food. It’s not obvious to me that we’re better off as a nation plagued by high taxes and heart disease.
What would the American economy have looked like without a massive government investment in highways? It’s very hard to say, and it’s certainly possible that the net effect of their construction is large and positive. But I also think that observers significantly overestimate the value of highways, because they fail to take into account the fact that in a world without them markets would have optimised to the non-highway status quo.
As it turns out, this is not the first time a debate like this has occurred. Back in 1944, economist Leland Jenks published a paper called “Railroads as an economic force in American development”. Here’s how economist Robert Fogel describes Mr Jenks’ work:
Leland Jenks’s article describing the pervasive impact of the railroad on the American economy first as an idea, then as a construction enterprise, and finally as a purveyor of cheap transportation, has become a classic of economic history. The particular contribution of the Jenks article was not the novelty of its viewpoint, but the neat way in which it summarized the conclusions both of those who lived during the “railroad revolution” and those who later analyzed it through the lens of elapsed time. Out of this summary the railroad emerges as the most important innovation of the last two thirds of the nineteenth century. It appears as the sine qua non of American economic growth, the prime force behind the westward movement of agriculture, the rise of the corporation, the rapid growth of modern manufacturing industry, the regional location of industry, the pattern of urbanization, and the structure of interregional trade.
It was a big deal, in other words. And this was a very common assessment of the value of the railroad. But Mr Fogel disputed this conclusion. To gauge the importance of the railroad, one can’t simply look at the way growth proceeded in the wake of its construction and attribute some or all of that growth to the new infrastructure. Rather, you need to compare “social savings” from a new technology relative to alternatives. That is, how much did the railroad reduce costs compared to other transport technologies?
Shipping via railroad was substantially cheaper than transport via wagon. But it wasn’t much cheaper than shipping via canal. Now, land use changed in response to the boom in railroad construction, and a great deal of new land was brought into production. But in a but-for world, it’s reasonable to assume that canal construction would have continued and markets would have optimised around canal infrastructure. In the end, Mr Fogel estimates that “the social saving attributable to the railroad in the interregional transportation of agricultural products was about 1% of national income”.
That’s not very much. Of course, Mr Jenks also points to the important economic role of construction of the railroads. That might well have applied to canals to some extent, as well, but that would require a canal building boom comparable to the investment in rail. Mr Jenks also talks about rail as an idea, and it’s more difficult to analyse this potential contribution.
But the lesson is clear. Highway construction generated some positive effects and some negative effects. We tend to focus on the positive effects and remark on how constrained the economy might have been without a highway boom. But absent a highway boom something would have been built and markets would have optimised to that something. It’s not clear that the savings from highways are so substantial that the American economy is clearly better off as a result of the system’s construction. Highways obviously had a large effect as an idea, and they made direct contributions to the economy as a construction enterprise, but the net addition to growth through trade is uncertain, and probably much smaller than most people assume.
That doesn’t mean that infrastructure isn’t worth building. New infrastructure will quite often yield real cost reductions, and my assessment is that many new projects, particularly those along corridors that are already busy and congested, would probably produce benefits. I suspect that the potential benefits would be clearer if roadways were kept free of congestion via tolls; toll revenues along some well-traveled routes would meet or exceed the cost of construction of new infrastructure capacity.
But as someone who takes the need for new infrastructure seriously, I think it is worth being realistic about what new investments can deliver. Higher incomes, in some cases? Yes. Economic revolutions? No, not for the most part.
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1-19 of 19 Doug Pascover wrote: Apr 18th 2011 6:22 GMT
The Denver-San Francisco canal would have been a good ride.
Recommend (15) Permalink Report abuse AcrossTheStreet wrote: Apr 18th 2011 6:28 GMT
What about Smart Grids for power? When we use that new infrastructure to spread our power evenly around the clock and around the network, it will be an economic revolution.
Recommend (6) Permalink Report abuse fundamentalist wrote: Apr 18th 2011 6:49 GMT
Don’t forget that the state heavily subsidized railroad construction in the late 19th century, too. Politicians can’t help thinking they are smarter at choosing the best technology than are the businessmen who create and use the technology. Thomas DiLorenzo details the fact that most railroads went broke because politicians forced them to build unprofitable routes in How Capitalism Saved America. Only those built purely for profit survived without massive bail outs from the government.
In the same way, the state builds too many roads and bridges to nowhere just to please campaign contributors.
Had the state not intervened, we would have built more canals and fewer railroads in the 19th century. In the 20th we would have built fewer highways and more railroads. We would travel by car only for short distances, rail for medium and air for long distances, using each at is most efficient. We would use less oil and pollute less.
Keep in mind that in the 1950’s and 60’s most “intellectuals” thought the USSR’s economic system was far superior to that of the US and would soon dominate the US. That was standard “intellectual” fare from FDR until Reagan. The massive highway construction under Eisenhower and the space program under Kennedy were attempts at borrowing from Soviet system in an effort to keep up with the USSR.
Recommend (9) Permalink Report abuse Doug Pascover wrote: Apr 18th 2011 7:22 GMT
Fundy, how do you define “operated purely for profit?” The Southern Pacific received massive subsidies and I think Collis Huntington still owes the government $57M in back taxes from the late 1800s, plus penalties.
Recommend (7) Permalink Report abuse rewt66 wrote: Apr 18th 2011 7:42 GMT
fundamentalist:
In 1917-8, the railroads nearly collapsed under the WWI traffic load – to the point that the government took them over. Partly as a response to this, the Army tried, in 1919, to send a convoy from coast to coast on highways. It took them more than 60 days!
One of the people on that expedition was a lieutenant named Eisenhower. When he became President, he created the “Interstate AND DEFENSE Highway System”. It wasn’t just trying to copy the Soviets. It was trying to give us another way to move military stuff around if we had to. (Never mind that the railroads held up far better under WWII traffic levels…)
Recommend (7) Permalink Report abuse rewt66 wrote: Apr 18th 2011 7:46 GMT
Doug Pascover:
Well, railroad construction got subsidized (by land grants), but at a price – the railroads had to carry the mail. And since the railroads *had* to carry the mail, the government had no reason to raise the reimbursement rate for hauling it, no matter what happened to the railroad’s expenses. The best calculation that I’ve seen is that the railroads paid the subsidy back several times (I forget the exact number, but it may have been as high as 60) before WWII. Then the government, in a bid to raise revenue for the war, allowed the railroads to buy themselves out of that provision.
Recommend (6) Permalink Report abuse Pacer wrote: Apr 18th 2011 8:47 GMT
Maybe we’ll yet get to find out whether life can go on absent mega banks and their ultra-valuable talent. The financial sector truly is the railroad of our time.
Recommend (5) Permalink Report abuse thecools wrote: Apr 18th 2011 9:05 GMT
That ignores the role of railways in the creation of the corporation as a viable business form.
Alfred Chandler, among others, has documented the revolutionary role of railways as the first large organisation to develop a professional managerial stratum dedicated to low frequency administrative taks.
Without that it is hard to imagine a GM or Ford or GE or many of the leading sectors of the early C20th, at least not without some significant delay as they searched for the optimum organisational system.
Recommend (4) Permalink Report abuse SirWellington wrote: Apr 18th 2011 9:09 GMT
Canals were the huge government infrastructure investment of the 18th century. As you recall I’m sure, George Washington was a big supporter. What kind of “free-market” analysis compares one big subsidized investment against another?
Recommend (7) Permalink Report abuse SirWellington wrote: Apr 18th 2011 9:20 GMT
In this counterfactual world, with cities only on large rivers, how will people be fed? The increasing populations in Eastern cities along canals were alleviated by movement to the West along railroads and the large population centers were shipped in low cost food from the West. People could still move west on wagons, but the cost of food would sky-rocket for the urban poor. The South could ship up the Mississippi, but they didn’t grow much food. Also, increasing the time to market for commercial agriculture, like cotton could decrease it value. Head-scratch. I think there were many many reasons why the railroads helped the country’s economy.
Recommend (5) Permalink Report abuse My Lord wrote: Apr 18th 2011 9:41 GMT
Count me skeptical. Yes, the government built the highways. It also built the railroads. And the canals. A few turnpikes were privately constructed, but the fundamental problem is the right of way and that and eminent domain is very much a government innovation. As transport follows a natural monopoly, government would have been heavily involved no matter the course. Yes, we probably could have gotten by with railroads and airplanes, but that doesn’t mean we would have wanted it that way. Highways provided an alternative to monopoly and that always seems a reasonable investment.
Recommend (5) Permalink Report abuse fundamentalist wrote: Apr 18th 2011 9:44 GMT
Doug, I meant that the decisions about where the line should go were made strictly on the basis of profit for the one railroad in the US that refused government subsidies. I’m sorry, I can’t remember the name of that railroad, but it’s featured in the book. For those who took subsidies, their routes were determined by members of Congress to appease campaign contributors.
rewt66, yes, I remember the history and Eisenhower’s excuses. I don’t know that he was justified in his assessment or his goals. Clearly, Eisenhower isn’t going to advertise his intentions. He was the consummate politician. He wasn’t going to say “We need to imitate the USSR.” But he was following in FDR’s footsteps, whose goal was to imitate the USSR.
And look at how Eisenhower had post-war Germany administered, as if it were a mini-USSR.
Kennedy said almost the same thing when he said we had to beat the Soviets to the moon and he proposed a massive government program to do it instead of relying on the market.
Recall MacArthur’s assessment of Eisenhower’s D-Day planning. MacArthur said he would court martial the SOB who planned it.
Recommend (1) Permalink Report abuse typingmonkey wrote: Apr 18th 2011 10:15 GMT
Building massive, continental-scale infrastructure from scratch almost certainly requires public-private parnerships (largely subsidies). However, that does not mean that the market cannot or should not be the primary force defining the ultimate scale, shape, and patterns of development and usage.
In the case of canals, these would be unlikely to proliferate beyond a few key corridors due to insufficient density of demand, exceptional capital and operating costs, and physics.
Railroads overcome most of those obstacles with their flexibility, speed, and efficiency.
Roads and cars are inefficient from economic, urban planning, and thermodynamic perspectives. But they are great for short or special trips.
So Washington was right to subsidize an initial strategic buildout of the dominant forms of infrastructure which arose over time. But that support should have been limited in scope and duration, or it should be fully compensated by the market. Instead, America erred as follows:
1 – We built commuter “interstates”, state highways, city arterials and local streets ALL at government expense. 2 – We redirected our military and foreign policy to defend cheap oil over all else. 3 – We never raised gas taxes to pay for any of this in more than token form.
Consequently, the car/road model has been massively oversubsidized. Traffic, debt, sprawl, climate change, obesity, stress, McMansions, mall culture, and even terrorism are the prices we continue to pay for this. And one more thing, we marginalized our own rail system which, under free market forces, would probably have dominated and served us better.
Recommend (8) Permalink Report abuse jdacruz wrote: Apr 18th 2011 11:35 GMT
In comparing railroads to canal, you have to compare the time savings enjoyed by rail. Though costs to ship via canal may be about the same, shipping time differentials meant that production processes could be sped up.
Also, claiming that markets would optimize around alternative modes of transport disregards short-term uncertainty. Surely, markets could adjust to a change in transportation — but such a change would be disruptive.
I don’t disagree with your main point, that highway construction projects probably do not provide the best ROI for our government, I just believe that you arrive at the conclusion via too many side streets.
Recommend (1) Permalink Report abuse hedgefundguy wrote: Apr 19th 2011 12:57 GMT
But perhaps not building a huge network of highways would have kept American families in more compact, walkable neighborhoods.
R.A.,
I gotta hand it to you. Everytime I think you’ve found the kookiest person with the kookiest idea, you go out and top yourself.
Salam has it wrong.
Sprawl began after World War II due to the GI Bill, the service men were allowed purchase homes with the V.A. backing the loans.
That began the sprawl, as the cities’ inner ring suburbs began to expand and add housing in the late 40′s and early 1950′s. Check the construction dates of homes in any inner ring suburb.
The highway system began later under Ike, as a way to transport the military. I think the Nike missle bases were added into the inner suburb rings in 1953. http://ech.cwru.edu/ech-cgi/article.pl?id=NMB http://nikemissile.org/
Highways added to sprawl in the 1970′s, as our family was one of the first to moved into a home in a farther out suburb, and that city was empty. Now it has a mall, 4 fire stations, etc.
Regards
Recommend Permalink Report abuse hedgefundguy wrote: Apr 19th 2011 1:08 GMT
Doug,
Check out the nikemissle.org link.
Some stuff on LA and SF sites are there.
Regards
Recommend Permalink Report abuse Stephen Morris wrote: Apr 19th 2011 2:11 GMT
This article touches on – but does not go into – the essential link between infrastructure and political power.
Because infrastructure is typically a “public good” (in the technical sense of that term), the critical decisions on which of several competing technologies will be adopted is almost invariably a political decision. This affects:
i) the choice of technology;
ii) where infrastructure will be built (and, in some cases, where it will be destroyed – see below); and
iii) the manner in which it will be built, financed, and owned – which determines who collects rents that might flow from it.
Vox (linked from Free Exchange here) recently discussed how London had avoided the recession. It noted, amongst other things, the critical role of infrastructure:
At least one other government intervention also disproportionately benefited London. The Olympic site currently employs 10,000 workers, and Crossrail a further 2,000.
Leaving aside the issue of state-sponsored sport, is the 15 billion pounds to be spent on the London Crossrail link really the best investment in infrastructure?
Or might it be better to spend a fraction of that money on (for example) re-instating the former Varsity Line between Oxford and Cambridge, as part of the Oxford-Cambridge Arc.
[The Varsity Line was spared by the Beeching Axe in 1963 but was nevertheless closed in 1967 by a Westminster government which chose instead to focus on improving the speed of services into and out of the centre of political power. Rail services between the two university centres – and associated places like Silicon Fen – must now go via London. However, this inevitably led to further congestion and inefficiency in London itself - which requires ever more money to correct.]
The question is, of course, irrelevant, because the decision – like most infrastructure decisions – is a political one. And in a country where political power is concentrated within “lunching distance” of the Cabinet, London will continue to direct national resources into perpetuating its position at the top of the pile.
Spatial proximity matters when it comes to political rent-seeking. Politicians are human beings who inevitably look more kindly upon those with whom they have regular social contact. And infrastructure decisions are some of the ways in which (outside the ivory towers of theoretical economists) politically dominant cities grow and perpetuate themselves by extracting rents from politically less powerful regions . . . . irrespective of efficiency.
Recommend Permalink Report abuse aaron_ wrote: Apr 19th 2011 2:46 GMT
Rail is economical for moving things, not people.
Recommend (1) Permalink Report abuse New Conservative wrote: Apr 19th 2011 5:18 GMT
@Fundamentalist
Most intellectuals in the 50′s and 60′s were “commiephiles?”
Eisenhower admired the Soviet Union?
Using Macarthur in a piece of cheap character assassination against Ike?
You’re better than this.
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