Politics & Policy

Blame Washington

The first president and the origins of American corporate welfare

Government “investments” have had a poor showing of late. President Barack Obama, convinced as ever that our economy can run on good intentions rather than hydrocarbons, got sold a bill of goods by such corporate rent-seekers as Solyndra and Tesla. And the federal government cannot even get the hydrocarbon-related businesses right, either: Our alleged “investment” in General Motors cost taxpayers many billions of dollars and made them partners in an incompetent and negligent operation that contributed to the deaths of at least 13 people who perished in accidents related to faulty switches in GM vehicles. As investment gurus go, Barack Obama isn’t exactly E. F. Hutton.

#ad#But our current feckless chief executive is not the worst offender on this front, and probably not even in the top ten, a point of more than merely historical interest argued at some length in Burton and Anita Folsom’s Uncle Sam Can’t Count: A History of Failed Government Investments, from Beaver Pelts to Green Energy, a terrific and very readable book published earlier this week. The Folsoms, who both teach at Hillsdale College, start setting ’em up and knocking ’em down with George Washington, a great president but a pretty lousy practitioner of beaver-pelt protectionism. The rogues’ gallery includes everything from federally supported steamship operations and railroads to Herbert Hoover’s Reconstruction Finance Corporation, the corrupt favor factory that gave birth to the Small Business Administration and Fannie Mae, and sundry 21st-century variations on the 18th-century mercantilist theme.

President Washington, inaugurating a line of argument that would be refreshed every generation up to (and, no doubt, beyond) our own time, viewed the beaver-pelt trade as a national-security issue, a critical component of the economy that demanded federal intervention to foreclose the possibility that devious foreigners would horn in on our national economic infrastructure and leave us vulnerable to outside interference. The Washington administration, concerned that British and French inroads in the pelt trade would lead to the strengthening of their ties with the Indians, saw to it that a $50,000 annual subsidy — which of course grew to six times that figure — was dedicated to building infrastructure for trade with the Indians, in order to “fix them strongly in our Interest.” Thus was born the Office of Indian Affairs. But like the Affordable Care Act so many years later, the rollout of the Indian trade infrastructure was so poorly managed that nobody wanted to do business there — especially not the Indians, who had many trading partners to choose from: English, French, and private American firms working outside the government system. Politics of course came to dominate economic concerns, and rather than stock federally established trading posts with goods the Indians actually wanted, the government stocked them with goods that they believed the Indians should want — goods that would have the effect of civilizing them and bringing their cultural values into line with those of the fledging United States. Which is to say, we tried to sell farm implements to tribes organized around hunting, offering plows to a market hungry for muskets.

That worked out about as well as you’d expect. The federal trade system bled money, while the best of the private traders, John Jacob Astor, became the new nation’s first multimillionaire. Naturally, the government’s first response was to propose a ban on private traders, though that bill thankfully died in the House. The Folsoms write that, upon examining the program, “many congressmen were astounded at the waste of government funds,” a sentence that has remained true for practically every period of American history. The political backlash was significant.

The same story would be repeated in the case of Cornelius Vanderbilt, who had to crack a government-backed shipping monopoly before showing travelers that he could cut rates and improve services while making a handsome profit. The monopoly eventually bought him out — and Vanderbilt reinvested his payoff in a new shipping business, further expanding services, cutting fares, and adding services (notably, free meals) to the point that newspapers joked that “a traveler who wishes to save money cannot afford to walk.” Steamship operators, envious of the subsidies offered to their British and European counterparts, began making the beaver-pelt case: Unless they, too, received subsidies, the nefarious Europeans would open up a steamship gap.


Precisely the same argument would be made a short time later when the Germans and the French began to have some success with experimental aircraft. Again, it was a question of national security: If the Germans had aircraft and we did not, then we would be at their mercy. Panels of experts were consulted, and those experts did what experts do, which is to recommend the shunting of vast streams of money to experts who reminded them of themselves and who shared their financial interests. And ask yourself — if you were in charge of picking the man to head up the all-important national airplane project, whom would you pick? On the one hand, there was the acknowledged aeronautical expert Samuel Pierpont Langley, whose résumé was close to perfect: Boston Latin, Harvard Observatory, Naval Academy, head of the Smithsonian Institution. If it’s him or a couple of nobody autodidacts from Ohio, the choice is obvious. Mr. Langley’s experimental aircraft, which were launched via catapult, careered into the Potomac, and there is now a town in Virginia that bears his name and remains to this day associated with lavishly financed government boondoggles catapulted into the wide blue yonder in the name of national security. The other guys, Orville and Wilbur Wright, invented the airplane.

#ad#As Robert Higgs argues in Crisis and Leviathan, there’s always an emergency to be found if you look hard enough for it. And we’ve had some real emergencies: The “war socialism” of the Wilson years was a reaction to the genuine emergency of the Great War, and it is to the credit of subsequent administrations and Congress that they rejected calls to make that “war socialism” an enduring national policy after the Hun was licked. But the allure of central planning is eternal, and, soon enough, the Great Depression and World War II gave the national college of experts an excuse to attempt once again to put the economy under political discipline. Those attempts were, unhappily, longer lived. As the Folsoms chronicle, Herbert Hoover argued that his Reconstruction Finance Corporation would need to operate only sporadically and could probably be retired after a few years. Soon enough, Franklin Roosevelt was using it to try to buy off newspaper columnists, Harry S. Truman’s cronies were treating it as a personal slush fund, and Dwight D. Eisenhower was discovering how to turn it into a Republican-friendly political piggy-bank.

There was an important difference in the postwar years, however. Wrong as Wilson, Hoover, and Roosevelt were about the efficacy of national economic management, their programs were enacted in response to genuine emergencies, and their ideas, though defective, had not yet been discredited by historical experience and the economic analysis of Ludwig von Mises and others, who identified the insurmountable problem of knowledge as the limiting factor on central planning. Later in the 20th and 21st centuries, advances in the mathematical study of complex systems would very strongly suggest that such planning projects were not feasible even in principle.

Wilson and Roosevelt can be forgiven their ignorance. But we know better now.

Not that you’d know it from President Obama’s energy policy, so-called conservatives’ agriculture policies, the immortality of the Small Business Administration, the persistence of the Export-Import Bank, the continuing outsized role of Fannie Mae, bailouts, windmill subsidies, corn-juice mandates . . . 

— Kevin D. Williamson is roving correspondent for National Review.

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