“My grandfather, an Italian immigrant, started this business
without any government help. Obama can (some
expletives deleted)!” The sign hung on a fence outside a large factory
along the New Jersey turnpike. Jeff and
Jane stopped their car in awe of its size.
“I love it,” said Jeff.
Jane thought otherwise.
She chuckled. “Wow, such a large business built on customers who trudge over fields
without roads to get there, people who figure payment without primary
education, suppliers who carry flour on their backs, and machinery which is somehow
delivered by horse and buggy. Amazing!”
“Actually you're right...that's exactly how they began…as did many, many
others”, pronounced Jeff, clearly annoyed. “OK,” Jane laughed, “so this company grew
without any central infrastructure of roads, bridges, schools, government?
Explain to me how that happened. I'm
sure lots of third world folks would like to know!”
Jeff was livid now. “Just how did the government build the roads, etc.
and pay for the construction? Through taxes
on the profits of business and on the payrolls of the employees of those
businesses, that’s how! No business, no
infrastructure!”
Infrastructure... surely a key word in this year’s economic
discussion. If you’re a liberal
Democrat, you might say we need to create infrastructure, it will bring the
entrepreneurs. If you’re a conservative
Republican, you might say leave everything to the business people, income from
their taxes will create roads, bridges and schools.
So which came first: business profits or
infrastructure? I investigated this and
the answer might surprise you.
Let’s start by looking at Italy in the 1920s, most likely when the
gentleman’s grandfather came from Italy and started the family business. Did he travel 4300 miles across the sea to
start a new life because he liked to travel?
Because he read an early Rick Steves book? Nope.
Italy is a mountainous country where there were no large roads. The
provinces were separated by harsh terrain and folks could not trade easily with
others. People were forced to live off
the land in the immediate area. With a growing population, they looked outward
to find opportunities for employment and schools for children. In America there was a stable government,
good roads, bridges and schools. In
other words, there was an infrastructure on which to build their lives.
But this doesn’t answer the question of which came first, business
profits or the infrastructure. Who paid
for the first road? How was that first
school funded? How did that first local
government come to be? Was it really
from tax proceeds on income from the earliest entrepreneurs?
I thought about the Jamestown settlers arriving in 1608 in the new
world. The Jamestown colony was
underwritten by a group of English investors (The Virginia Company) hoping to
profit from their invested capital. The
colony would compete with other countries expanding in the new world, also
seeking routes to the Orient to take advantage of foreign trade.
Without a means to generate income and fend off aggressors, most of the
colony starved to death. Under a second charter from the King, a new
group of settlers arrived. A
governorship with advisors was developed and military law established. The savior of the colony was tobacco (long used
by Native Americans for trade, medicine and spiritual purposes), and planted by
John Rolfe in 1613. Finally the settlers
had a cash crop on which to grow and develop. The harvesting of tobacco enabled the colony
to support itself.
Could private business exist without government organization and
military support? Not this time. Nonetheless, without those wealthy English
investors the colony would never have existed.
How about the first road? One can
go back to the Stone Age to find the first paths used for commerce. Native Americans followed paths developed by
foraging bison and deer. The Natchez
Trace Trail ran from the Natchez, Mississippi to Nashville, TN. Thomas Jefferson further developed the
Natchez Trace through treaties with local Native Americans. By 1809, the US Army had made it navigable by
wagon, opening up the southwest for trade and settlement.
Private individuals and corporations would also improve stretches of
other byways and charge a fee to pass. A
“turnpike” refers to a road that was blocked by a long wooden “pike” until
“turned” after a toll was paid to the owner.
Score one for entrepreneurs here.
By 1900, administration of most toll roads was handled by state highway
departments.
Another early path used for interstate commerce was the
Santa Fe Trail. In 1825, Congress
designated $30,000 for surveying and marking the route to Santa Fe New Mexico
from the terminus of the Missouri river.
The trail facilitated trade between eastern and western America and
Mexico. It would carry manufactured
goods to the west and was heavily used in the gold rushes of 1849 and 1859.
But wait! Where did
that $30,000 come from? In 1825, the federal government was supported solely by
tariffs charged on imported goods. The
first income tax would not appear until 1862.
In fact, prior to 1817, the federal government ran on sales taxes and a
variety of general taxes on items such as distilled spirits, tobacco and snuff. In this case, the infrastructure came before
income taxes on businesses. But it
certainly was funded from taxes on commerce.
More on roads. The Federal
Highway Act of 1921 created the Bureau of Public Roads to help states create
the first interstate two-lane highway system. In 1944, President Franklin D. Roosevelt signed
new laws creating a National System of Interstate Highways, but the project
lacked a plan for funding. In 1956,
President Dwight Eisenhower (a Republican) signed the Federal-Aid Highway Act.
This project enabled what was called the “Greatest Public Works Project in
History.” Which came first here?
Well, Eisenhower originally wanted to fund the project with private
capital supplied by purchase of government bonds, but aides said revenue from
traffic tolls might not be sufficient to cover repayment of interest. So, a trust fund was developed by the federal
government for building of the roads, and the trust was reimbursed with federal
gasoline taxes and other taxes on vehicle use.
Though the federal government accounted for 90% of the spending for the
project (states 10%), this 41,000 mile, $129 billion dollar project was funded
in a manner that did not add to the debt of the nation. You and I funded this public works project as
we drove to work, took our vacations and transported products to market.
How about the canals and subsequently the much faster and efficient
railroads? The first canals, the
Chesapeake and Ohio as well as the Ohio and Erie, were formed with independent
capital (yes, from folks with money) raised through government formed
organizations.
The first railroad, the Baltimore and Ohio, was built in much the same
way. The initiative came from Baltimore
bankers and merchants who needed a way to route commercial goods from the Ohio
River to the Port of Baltimore, specifically to compete with the Erie Canal in
New York State in bringing goods to the east coast. In 1827, Maryland and Virginia legislatures
chartered the Baltimore and Ohio Rail
Road Company with the task of building the railroad. Almost every person in Baltimore invested in
shares of the initial $3 million stock offering of the company. Which came first here, the infrastructure or
the entrepreneurs? These canals and
railroads were not funded on income taxes on business income. Yet the profit motive encouraged people to
invest private capital in infrastructure necessary for increased commerce. The
government provided the organization.
How about the first schools?
Publicly funded primary education can be traced to the Puritans of New
England. Education was a priority for
them, first to promulgate the new concept of individual responsibility coming
from the Protestant Reformation, and second, to teach the route to
salvation. Old world standards still
held the primary responsibility of education to be that of parents, the church
and private schools.
The Puritans set up combined civil and religious governments in
“towns”. The Massachusetts law of 1647
said that towns of 50 or more must have a teacher of reading and writing,
supported by a general tax. Said a historian
of the period, “It is important to note that the idea supporting all this
legislation was neither paternalistic or socialistic. The child shall be educated not to
advance his personal interests, but because the state will suffer if he is not
educated.” Taxes on business
income? No, but again commerce footed
the bill. General tax revenues don’t
grow on trees.
Under the constitution, responsibility for primary education lies
with the states, and states solely
supported primary education until 1965.
Beginning with the Elementary and Secondary Education act of 1965,
federal funding has been provided to the states to support their effort. The most recent example is the No Child Left
behind Act of 2001. Which came first,
the infrastructure or taxes on business?
By this time, not only do we have funding coming from income taxes on
individuals, but also, starting in 1909, from federal income taxes on
corporations.
So, while our first investment in infrastructure did not
arise from taxes on the profits of successful businesses, it most certainly
came from levies on commerce and from wealthy investors seeking profit from
trade. Commerce is surely a basis of
human economic progress, and for a thriving economy we need to facilitate trade
between peoples.
Infrastructure first took shape in America in the form of
roads, canals, schools and railways.
Today, we need to include air routes, shipping lanes, and oh yes,
bandwidth. Moreover, economic growth
means boosting trade between the US and the rest of the world, competing with
other countries to supply worldwide demand.
Why? Go back to Italy in the
1920’s. Those Italians emigrated to find
new opportunities when population in their province was growing too fast for
local commerce to support. In 1920,
world population was 1.8 billion people.
By 2005, it had grown to 6.5 billion people. By the year 2035, it’s projected to be 8.5
billion. If we don’t believe our future
prosperity depends on the infrastructure we build to support international
trade, we should think again.
How well are we maintaining our present infrastructure? In its 2009 “Report Card on Infrastructure”,
the American Society of Civil Engineers stated that while America spent just
2.4% of its Gross Domestic Product on infrastructure, China was spending 9% and
Europe was spending 5%. Further, the
report gave America the following marks:
Roads D-, Schools D, Bridges C, Dams D, Aviation D, Inland waterways D-,
the list goes on. The society estimated
that an investment of $2.2 trillion is needed.
That’s roughly the amount of the total annual receipts of the federal
budget; particularly staggering when you realize that funds for more than half
of federal spending in recent years have had to be borrowed!
In their book “That Used to be US”, Thomas Friedman (“The World is
Flat”) and Michael Mandelbaum expand on the subject of infrastructure. They offer five pillars underlying the
prosperity that America has enjoyed in the past: 1) Providing Public
Education 2) Building and Maintaining Roads, Bridges, ports, airports,
bandwidth, networks 3) Keeping doors to immigration open to supply not only
workers but also the best minds in the world 4) Government support for basic
research and development and, 5) regulations to safeguard against financial
collapse and environmental destruction, plus laws that encourage capital flow
to us and encourage innovators to “flock to our country because they know their
patents will be protected.“
Further, they say we need to approach four challenges: 1) How to adapt to a global economy, 2) How
to participate in the IT revolution, 3) How to cope with soaring deficits and
4) how to manage in a world of rising energy consumption and rising climate
threats. Certainly these are concerns
which small business cannot handle alone.
So which came first, the infrastructure or business
profits? The fact is each of us, the 1%,
the 99%, the Democrat, the Republican, the rich, the poor, the businessman, the
banker, the worker, has created the infrastructure that formed the commercial
powerhouse that is the United States. Today we need urgently to support both
the infrastructure and the entrepreneur; and we can’t underestimate the
importance that private investment and capital markets have had in building our
country. We need leaders who can inspire
folks to understand the importance of infrastructure for our country’s
commerce, find creative ways to finance it, and, most importantly, look past
individual constituency concerns to see a larger vision for our nation.
As for that sign on the New Jersey Turnpike, it turned out
to be a hoax. The company involved
disavowed any knowledge of it and, for that matter, supporting any political
statement. Very understandable.
Sources:
The Start of the Ohio and Erie Canal http://en.wikipedia.org/wiki/Ohio_and_Erie_Canal
The Start of the Chesapeake and Ohio Canal http://en.wikipedia.org/wiki/Chesapeake_and_Ohio_Canal
The Start of the Interstate road system in America
The Start of the Santa Fe Trail
The Start of the B&O Railroad http://en.wikipedia.org/wiki/Baltimore_and_Ohio_Railroad#Charter
Italian Immigration in America
“Italian Emigrants, Italian Immigrants: The Labella Family of Avigliano,
Potenza, Basilicata, Italy and Port Chester, New York, United States of America”,
Tina
Bochicchio Woetzel, Copyright 2004, IUniverse, Inc. 2021 Pine Lake Road, Lincoln. NE 68152
History of Jamestown Colony
Funding of K through 12 education http://www2.ed.gov/about/overview/fed/10facts/index.html
Education in the United States http://usinfo.org/enus/education/overview/docs/ijse0600.pdf
The Santa Fe Trail
http://en.wikipedia.org/wiki/Santa_Fe_Trail#Economics
On Infrastructure - “That Used to be US”, Thomas L. Friedman
and Michael Mandelbaum, Copyright 2011, Farrar, Straus and Giroux.
History of Toll Roads in America http://en.wikipedia.org/wiki/Toll_roads_in_the_United_States
Report Card of America’s Infrastructure – American Society
of Civil Engineers http://www.infrastructurereportcard.org
History of Income Taxes in the US
US Census Bureau World Population Forecasts http://www.npg.org/facts/world_pop_year.htm
Corporate Income Taxation in the United States http://en.wikipedia.org/wiki/Corporate_tax_in_the_United_States#History
Funding of the Federal Budget http://www.gpo.gov/fdsys/pkg/ERP-2012/pdf/ERP-2012-table80.pdf
Funding of the United States Interstate Highway System http://www.fhwa.dot.gov/programadmin/interstate.cfm
Early American Roads – Natchez Trace
Kay Strong, Ph.D., Southern Illinois University, M.T., University of Houston, M.A., Ohio University; Associate Professor at Baldwin-Wallace College; Areas of expertise: international economics, contemporary social-economic issues, complexity and futures-based perspectives in economics. E-mail: kstrong@bw.edu