Friday, January 4, 2013

AMERICAN INFRASTRUCTURE – Do Roads, Schools and Bridges Make for Economic Riches?

By  Doug Goepfert, guest writer

“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.

The Start of the Ohio and Erie Canal
The Start of the Chesapeake and Ohio Canal
The Start of the Interstate road system in America
The Start of the Santa Fe Trail
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
The Santa Fe Trail
On Infrastructure - “That Used to be US”, Thomas L. Friedman and Michael Mandelbaum, Copyright 2011, Farrar, Straus and Giroux.
Report Card of America’s Infrastructure – American Society of Civil Engineers
History of Income Taxes in the US
US Census Bureau World Population Forecasts
Corporate Income Taxation in the United States
Funding of the United States Interstate Highway System
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:

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This blog lives under the auspices of the Department of Economics whose mission has been to hold high the lantern beaming an "economic way of thinking" onto the world. Selfishness, rationality and equilibrium have been central to the teaching of an economic way of thinking rooted in the Renaissance. And, in this regard, the department has faithfully stayed the course. The intent of this blog, thinking out loud..., however, is to entertain exchanges which may challenge the centrality of economics as we teach it.