As described in William J. Bernstein’s book The Birth of Plenty: How the Prosperity of the Modern World Was Created, France’s minister of finances under Louis XIV from 1665 to 1683, Jean-Baptiste Colbert, worked tirelessly to expand commerce by improving his country’s roads and canals. Unfortunately, trade was hindered by more than potholes—a complex system of internal tariffs was throttling commerce. Colbert tried to dismantle the tariffs but was only partially successful. After his death, “all fiscal restraint was lost. By the end of Louis XIV’s reign three decades later, the State had doubled the tolls on the roads and rivers it controlled, and the nation that had once been Europe’s breadbasket . . . was bled white. . . .” Bad regulations trumped good roads.

During the Great Depression Franklin Roosevelt initiated massive public-works programs to improve the nation’s infrastructure in hopes of putting people back to work and jump-starting the economy. The construction efforts were staggering. According to Conrad Black:

The government hired about 60 percent of the unemployed in public-works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York City’s Lincoln Tunnel and Triborough Bridge, the Tennessee Valley Authority, and the heroic aircraft carriers Enterprise and Yorktown. They also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields.

Yet these extraordinary accomplishments were not enough to pull the nation out of the Depression. Neither were the millions of jobs generated by this monumental work.

At the same time as he was directing resources away from the private sector, Roosevelt also unleashed upon it a regulatory blizzard that significantly increased the risk of doing business. Higher personal, corporate, excise, and estate taxes; wage and price controls; production restrictions; antitrust lawsuits; and constant experimentation provided few incentives for companies to expand. As in Louis XIV’s France, an improved infrastructure could not revive commerce in the face of stifling government regulations.

Enough Roads; Too Many Roadblocks

Today President Barack Obama is touting high-speed rail and other infrastructure improvements as keys to economic renewal. But if massive infrastructure investments were not enough to turn the economy around in the 1930s, they are far less likely to do so today. Because Roosevelt was starting from a lower base his improvements would have had a far greater impact on the economy of his day than would similar work done now. Also, the lighter regulatory burden in the 1930s meant there were projects then that truly were “shovel-ready.” Today environmental impact studies, possible archeological finds, and nuisance lawsuits may stall construction for years or halt it completely.

The real roadblock to economic growth is the burgeoning regulatory burden that President Obama, like Roosevelt before him, has placed on business. According to a study by James Gattuso and Diane Katz, “[T]he Obama Administration imposed 75 new major regulations from January 2009 to mid-FY 2011, with annual costs of $38 billion.” Hundreds of additional regulations will pour forth from Obamacare, Dodd-Frank, and proposed EPA greenhouse gas restrictions. All this on top of an already monumental regulatory burden imposed by government. A Small Business Administration report estimates the cost of regulatory compliance at over $1.75 trillion in 2008 alone.

Briefly, our current economic woes were triggered by the collapse of a housing bubble, produced by loose monetary policy together with federal pressure on mortgage companies to lend to bad credit risks. When the bubble burst, housing prices fell, causing many homeowners to default on their mortgages. Investment vehicles based on those mortgages lost much of their value, leading to huge investor losses and the failure of some major financial institutions.

Lost in Transition

Absent government interference industry would retool, shifting capital and labor out of home construction and into other areas. Because neither capital nor labor is homogeneous, this shift takes time. Equipment that can be put to other uses may have to be sold or physically moved. Other equipment may have to be modified or scrapped altogether. Workers may need to increase their market value by relocating or by gaining new knowledge and skills. In a recession consumers typically reduce spending and increase savings, thus freeing up the resources needed to complete the shift.

Keynesian economists, however, see both labor and capital as homogeneous, aggregated lumps. Where Austrians see capital in transition Keynesians see “idle capital.” Keynesian programs to put that capital back to work only hinder or halt the needed transition, either leaving capital in its malinvested state or forcing it into the very idleness they seek to remedy. For example, expanding credit may re-inflate the collapsed bubble for a time, leading industry to continue producing unneeded goods. Stimulus spending—whether for infrastructure or other things on the government’s wish list—transfers scarce resources from industry to government, further impeding the transition. New laws, enacted to prevent future recessions, make businesses reluctant to invest until the associated regulatory structures are defined—a process that can take years. Once in place the regulations may inhibit capital flow, locking inefficiencies and malinvestment in place and propping up companies that should be allowed to fail. Unemployment insurance and other such programs eliminate or at least reduce workers’ incentives to move or reeducate themselves.

The country’s problems are not the fault of inadequate highways. They are the result of government intervention: loose monetary policies, programs that encourage unsustainable debt, explicit and implicit guarantees to financial institutions, massive spending that crowds out private investment, oppressive regulations, higher taxes with constant threats of more to come, and political payoffs to “friendly” companies and unions. Building high-speed railroads will not stop the malign effects of these policies; the solution is to stop the policies.

Goods, people, and information will not flow freely across a nation, regardless of the quality and extent of its infrastructure, if taxes and regulations block their flow. Trade perished in France as Colbert’s improved roads and canals were made all but useless by high internal tariffs. Hundreds of thousands of miles of new and rebuilt roads were not enough to move commerce past the regulatory roadblocks that Roosevelt erected. President Obama’s proposed high-speed trains—indeed, his latest nearly half-trillion-dollar jobs program—will not pull the country over the mountain of regulations that has been created in the decades since the Great Depression and that Obama has raised to new heights.

As described in William J. Bernstein’s book The Birth of Plenty: How the Prosperity of the Modern World Was Created, France’s minister of finances under Louis XIV from 1665 to 1683, Jean-Baptiste Colbert, worked tirelessly to expand commerce by improving his country’s roads and canals.  Unfortunately, trade was hindered by more than potholes — a complex system of internal tariffs was throttling commerce.  Colbert tried to dismantle the tariffs but was only partially successful.  After his death, “all fiscal restraint was lost.  By the end of Louis XIV’s reign three decades later, the State had doubled the tolls on the roads and rivers it controlled, and the nation that had once been Europe’s breadbasket … was bled white….”  Bad regulations trumped good roads.

Prometheus Bound (in Red Tape)

During the Great Depression, Franklin Roosevelt initiated massive public-works programs to improve the nation’s infrastructure in hopes of putting people back to work and jumpstarting the economy.  The construction efforts were staggering.  According to Conrad Black:

The government hired about 60 percent of the unemployed in public-works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York City’s Lincoln Tunnel and Triborough Bridge, the Tennessee Valley Authority, and the heroic aircraft carriers Enterprise and Yorktown. They also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields.

Yet these extraordinary accomplishments were not enough to pull the nation out of the Depression. Neither were the millions of jobs generated by this monumental work.

Not only did the work direct resources away from the private sector but, worse, Roosevelt unleashed a regulatory blizzard on the nation’s private sector, significantly increasing the risk of doing business in the country.  Higher personal, corporate, excise, and estate taxes; wage and price controls; production restrictions; antitrust lawsuits; and constant experimentation provided few incentives for companies to expand.  As in Louis XIV’s France, an improved infrastructure could not revive commerce in the face of stifling government regulations.

High-Speed Rail to Nowhere

Today, Barack Obama is touting high-speed rail and other infrastructure improvements as keys to economic renewal.  But if massive infrastructure investments were not enough to turn the economy around in the 1930s, they are far less likely to do so today.  Because Roosevelt was starting from a lower base, his improvements would have had a far greater impact on the economy of his day than would similar work done now.  Furthermore, the lighter regulatory burden in the 1930s meant that there were projects then that truly were “shovel ready.”  Today, environmental impact studies, possible archeological finds, and nuisance lawsuits may stall construction for years or halt it completely.

The real roadblock to economic growth is the burgeoning regulatory burden that President Obama, like Roosevelt before him, has placed on business.  According to a study by James Gattuso and Diane Katz, “[T]he Obama Administration imposed 75 new major regulations from January 2009 to mid-FY 2011, with annual costs of $38 billion.”  Hundreds of additional regulations will pour forth from Obamacare, Dodd-Frank, and proposed EPA greenhouse gas restrictions.  All this is on top of an already monumental regulatory burden imposed by government.  According to a Small Business Administration report (pdf), the cost of regulatory compliance was over $1.75 trillion in 2008 alone.

Goods, people, and information will not flow freely across a nation, regardless of the quality and extent of its infrastructure, if taxes and regulations block their flow.  Trade perished in France as Colbert’s improved roads and canals were made all but useless by high internal tariffs.  Some 700,000 miles of new and rebuilt roads were not enough to move commerce past the regulatory roadblocks that Roosevelt erected.  President Obama’s proposed high-speed trains will not pull the country over the mountain of regulations that has been created in the decades since the Great Depression and that Obama has raised to new heights.  A bridge wrapped in red tape is truly a bridge to nowhere.

The main reason for the increase, the author writes, is that beginning in the 1960s, “Many people looked at the costs of the automobile without considering the benefits, and their solution was to get rid of cars and highways.” The result was “an anti-mobility coalition that blames America’s mobility for all sorts of problems, real and imaginary. . . . The only solution they see is to reduce mobility by reducing per-capita driving.”

O’Toole, however, recognizes that cars, while costly, provide benefits that vastly outweigh their costs. He explains that the automobile provides tremendous mobility, giving Americans far greater choices about where they live, where they shop, and whom they visit. That mobility gives Americans higher incomes and lower consumer costs than most of the rest of the world, among other benefits. In sum, we owe our high standard of living to the mobility cars and trucks give us. Unfortunately, transportation planners want to discourage us from driving and believe they will be able to achieve their utopian vision by allowing traffic congestion to become as bad as possible.

How have the planners been able to impose their vision? They have taken advantage of the government monopoly on roads and most transit to advance their “smart-growth” theories. As a result, cost-efficient transportation planning has been largely abandoned.

O’Toole details how an alphabet soup of agencies and acts have imposed the planners’ misguided vision. Those include UMTA (the Urban Mass Transportation Act of 1964), which essentially nationalized the transit industry by dishing out federal grants to any public agencies that took over private transit companies; FAHA (the Federal Aid Highway Act of 1982), which first introduced congressional earmarking to federal transportation funding decisions; CAAA (The Clean Air Act Amendments of 1990), whose presumption that highways increased pollution was used to discourage or forbid cities with poor air quality from using federal funds to build new roads; TEA (the 1998 Transportation Efficiency Act for the 21st Century), which promoted and, along with EPA programs, helped fund smart-growth lobby groups; and ISTEA (the 1999 Intermodal Surface Transportation Efficiency Act), which encouraged the diversion of federal gas tax funds from highways to mass transit.

O’Toole also discusses the massive problems with rail transit, the planners’ panacea for both urban and intercity transportation. The results are bleak. “Since 1992,” he writes, “American cities have invested some $100 billion in urban rail transit. Yet no rail system in the country has managed to increase transit’s share of urban travel by even 1 percent.” He calls high-speed rail “a giant black hole sucking in hundreds of billions of dollars and producing negligible benefits.” Due to the politicization of transportation, enormous sums of money are squandered on infrastructure people don’t use, while the infrastructure they do is neglected.

The book also reveals the vast array of “strategic misrepresentation” that has allowed rail backers to spend billions on plans almost totally divorced from reality. These include ridership forecasts that were double actual usage; the understatement of costs by an average of 40 percent, using misleading time and distance comparisons (such as falsely assuming the relevant trip is train station to train station, rather than from where people start to where they want to go); and vast overstatement of savings in congestion and pollution.

O’Toole then uses three core principles—a system’s users should finance it, negative effects should be dealt with cost-efficiently, and new technologies must be allowed to expand options and lower mobility costs—to point to far better possibilities that are now foreclosed by government control of transportation.

Gridlock combines a mastery of the details of transportation planning and funding with insightful and accurate analysis. It unveils abysmal realities of transportation policy that have long been hidden from public view behind an array of acronyms, misrepresentation, and outright lying, and contrasts them with what common-sense principles would dictate.

My one complaint with Gridlock is inherent in its attempt to reform government. O’Toole believes that the ultimate solution to transportation problems is to “privatize our roads and transit systems,” and allow voluntary market solutions to work. I agree. But after declaring that approach politically impractical, he focuses instead on incremental changes to improve our transportation system. His proposals could generate significant gains, but the same special-interest, bureaucratic, and political pressures that created our current gridlock would almost certainly prevent such efficiency-enhancing reforms from being implemented. Instead, we should work toward the goal of a separation of transportation and State.

According to the Associated Press:

Vowing to find new ways to stimulate the sputtering economy, President Barack Obama will call for long-term investments in the nation’s roads, railways and airports that would cost at least $50 billion, administration officials said.

The infrastructure investments are one part of a package of targeted proposals the White House is expected to announce in hopes of jump-starting the economy ahead of the November election.

The $50 billion in “front-loaded” spending likely means Obama will direct money quickly to those states and congressional districts where the Democratic incumbents are in trouble. Furthermore, since it was a Labor Day announcement, no one should be surprised that this new money is aimed at employing people who are part of organized labor: “In a Labor Day interview on CBS’ ‘Early Show,’ Labor Secretary Hilda Solis said the plan Obama was to unveil Monday would ‘put construction workers, welders, electricians back to work … folks that have been unemployed for a long time.”

While this initiative clearly is political, it is nonetheless important to take a harder look at this whole infrastructure argument. On the surface it seems to make some sense. Good roads, bridges, water, public transportation (including new passenger rail lines), and sewer systems would seem to benefit commerce wherever these things exist. How could these things be malinvestments if they appear useful?

Proponents claim that such aggressive infrastructure programs create win-win scenarios since they create present employment and they leave something useful behind. Only a skinflint (or an Austrian economist) can be against that.

Austrian analysis, however, should prompt us to question such projects, which lead to lower standards of living even as the government claims to create prosperity. Leaving aside whether projects like these should be undertaken by private enterprise, one easily can make a case that, as President Obama conceives them, they are little more than boondoggles that would use scarce resources in wrongheaded ways.

First, as pointed out, the bulk of this new spending would like be aimed at buying votes in districts where incumbent Democrats could lose in the November elections. The projects won’t be selected by economic criteria  — even if they could be. Forcing wealth transfers to create political benefits for others is standard practice with politicians, and this latest initiative seems to be right in that category.

Second, while government-created roads and bridges around the country really are in dangerous disrepair, the economy is not in peril because of that. It is in peril because the government, having created boom-and-bust conditions, now refuses to permit the necessary economic liquidations to occur while piling debt, bloated military spending, and other politically oriented expenses on top of any remaining healthy economic entities. So-called infrastructure spending does not begin to address this very real issue; it only adds to the economic burden.

Furthermore, we have an example of vast sums spent on infrastructure to stave off recession and failing miserably: Japan. The New York Times (whose editorial board, ironically, calls for such programs here) reports:

Japan’s rural areas have been paved over and filled in with roads, dams and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s. During those nearly two decades, Japan accumulated the largest public debt in the developed world — totaling 180 percent of its $5.5 trillion economy — while failing to generate a convincing recovery.

Unfortunately, the wrong lessons are being learned. American officials are claiming that Japan’s example is proof that infrastructure funds should be better targeted. Once again we see that those who refuse to learn the lessons of history are doomed to repeat them.

Tracy’s book also discussed the nature and economic effect of government. And how refreshingly lucid is his treatment! It makes most modern descriptions of government look childish by comparison.

Government Consumes Wealth

Today mainstream observers regard government as a source of investment in society. Across the political spectrum, overlooking differences in detail, one finds agreement that government spending, at least at some level, creates value.

Tracy did not see it that way. Like other liberal, free-market economists of early nineteenth-century France, Tracy saw the State essentially as a predator, a destroyer of value, and the source of class conflict. (Which is not to say he thought government should be abolished.)

“In every society the government is the greatest of consumers,” he wrote. This puts him at odds with most of what is believed about government now. Government spending, he insisted, does not create wealth.

Nor does it stimulate others to create wealth, a belief that is dominant today. Prosperity cannot be achieved through consumption, he held, and he didn’t buy the “multiplier.”

“[T]hose who persuade themselves that consumptions can be a cause of direct riches, maintain that the levies made by government, on the fortunes of individuals, powerfully stimulate industry; that its expenses are very useful, by augmenting consumption; that they animate circulation; and that all this is very favourable to the public prosperity. To see clearly the vice of these sophisms, we must always follow the same track, and commence by well establishing the facts.”

He then proceeded to refute Keynes—a mere 119 years before publication of The General Theory of Employment, Investment, and Money.

“The expenditure [government] makes does not return into its hands with an increase of value. It does not support itself on the profits it makes. I conclude, then, that its consumption is very real and definitive; that nothing remains from the labour which it pays; and that the riches which it employs, and which were existing, are consumed and destroyed when it has availed itself of them. . . .” (This and all other emphases are added.)

In other words, real investment in a free market, which is driven by entrepreneurs’ attempts to satisfy consumers who—crucially—are free to say no, produces value, as indicated by the resulting profit. Thus we know that the output is esteemed more highly than the untransformed inputs. Government spending is not of that nature.

But what about government spending on infrastructure, those “shovel-ready projects” so beloved by the champions of government “stimulus”? Tracy cleverly pulls the rug out from under the argument by seeming at first to approve of such spending. Unlike the waste of other government spending, he says,

“It is quite otherwise with funds employed in public labours of a general utility, such as bridges, ports, roads, canals, and useful establishments and monuments. These expenses are always favourably regarded, when not excessive. They contribute in effect very powerfully to public prosperity.”

And yet, “they cannot be regarded as directly productive, in the hands of government, since they do not return to it with profit and do not create for it a revenue which represents the interest of the funds they have absorbed. . . .”

Besides, Tracy wrote, even government projects aiming at valued outcomes crowd out private efforts that would have been more efficient.

“[W]e must conclude that individuals could have done the same things, on the same conditions, if they had been permitted to retain the disposal of the sums taken from them for this same use; and it is even probable that they would have employed them with more intelligence and economy.”

Even spending on science would be better left to private entrepreneurs.

“Finally, we may say the same things of what the government expends, on different encouragements of the sciences and arts. These sums are always small enough and their utility is most frequently very questionable. For it is very certain that in general the most powerful encouragement that can be given to industry of every kind, is to let it alone, and not to meddle with it. The human mind would advance very rapidly if only not restrained; and it would be led, by the force of things to do always what is most essential on every occurrence. To direct it artificially on one side rather than on another, is commonly to lead it astray instead of guiding it.”

Sterile and Unproductive

Now Tracy goes in for the kill:

“From all this I conclude, that the whole of the public expenses ought to be ranged in the class of expenses justly called sterile and unproductive, and consequently that whatever is paid to the state, either under the title of a tax or even of a loan, is a result of productive labour previously executed, which ought to be considered as entirely consumed and annihilated the day it enters the national treasury. Once more I repeat it, this is not saying that this sacrifice is not necessary, and even indispensable. . . . But [every citizen] should know that it is a sacrifice he makes; that what he gives is immediately lost, to the public riches, as to his own; in a word, that it is an expense and not an investment.”

The upshot? For Tracy it is that government should be kept small and inexpensive. Note the jab he gives to “the greatest politicians”:

“Finally, no one should be so blind as to believe that expenses of any kind are a direct cause of the augmentation of fortune; and that every person should know well that for political societies, as well as for commercial ones, an expensive regimen is ruinous, and that the best is the most economical. On the whole, this is one of those truths which the good sense of the people had perceived for a long time before it was clear to the greatest politicians.”

Tracy’s book discussed both the nature and economic effect of government. And how refreshingly lucid is his treatment! It makes most modern descriptions of government look childish.

Today most mainstream observers regard government as a source of investment in society. Across the political spectrum, overlooking differences in detail, one finds agreement that government spending, at least at some level, creates value.

Tracy did not see it that way. Like other liberal, free-market economists of early nineteenth-century France, Tracy saw the State essentially as a predator, a destroyer of value, and the source of class conflict. (Which is not to say he thought government should be abolished.)

“In every society the government is the greatest of consumers,” he wrote. This puts him at odds with most of what is believed about government now. Government spending, he insisted, does not create wealth.

Nor does it stimulate others to create wealth, a belief that is dominant today. Prosperity cannot be achieved through consumption, he held, and he didn’t buy the “multiplier.”

[T]hose who persuade themselves that consumptions can be a cause of direct riches, maintain that the levies made by government, on the fortunes of individuals, powerfully stimulate industry; that its expenses are very useful, by augmenting consumption; that they animate circulation; and that all this is very favourable to the public prosperity. To see clearly the vice of these sophisms, we must always follow the same track, and commence by well establishing the facts.

He then proceeded to refute Keynes – a mere 119 years before publication of The General Theory of Employment, Investment, and Money.

The expenditure [government] makes does not return into its hands with an increase of value. It does not support itself on the profits it makes. I conclude, then, that its consumption is very real and definitive; that nothing remains from the labour which it pays; and that the riches which it employs, and which were existing, are consumed and destroyed when it has availed itself of them…. [This and all other emphasis added.]

In other words, real investment in a free market, which is driven by entrepreneurs’ attempts to satisfy consumers who — crucially — are free to say no, produces value, as indicated by the resulting profit. Thus we know that the output is esteemed more highly than the untransformed inputs. Government spending is not of that nature.

But what about government spending on infrastructure, those “shovel-ready projects” so beloved by the champions of government stimulus spending? Tracy cleverly pulls the rug out from under the argument by seeming at first to approve of such spending. Unlike the waste of other government spending, he says,

It is quite otherwise with funds employed in public labours of a general utility, such as bridges, ports, roads, canals, and useful establishments and monuments. These expenses are always favourably regarded, when not excessive. They contribute in effect very powerfully to public prosperity.

And yet, “they cannot be regarded as directly productive, in the hands of government, since they do not return to it with profit and do not create for it a revenue which represents the interest of the funds they have absorbed….”

Besides, Tracy wrote, even government projects aiming at valued outcomes crowd out private efforts that would have been more efficient.

[W]e must conclude that individuals could have done the same things, on the same conditions, if they had been permitted to retain the disposal of the sums taken from them for this same use; and it is even probable that they would have employed them with more intelligence and economy.

Even spending on science would be better left to private entrepreneurs.

Finally, we may say the same things of what the government expends, on different encouragements of the sciences and arts. These sums are always small enough and their utility is most frequently very questionable. For it is very certain that in general the most powerful encouragement that can be given to industry of every kind, is to let it alone, and not to meddle with it. The human mind would advance very rapidly if only not restrained; and it would be led, by the force of things to do always what is most essential on every occurrence. To direct it artificially on one side rather than on another, is commonly to lead it astray instead of guiding it.

Now Tracy goes in for the kill.

From all this I conclude, that the whole of the public expenses ought to be ranged in the class of expenses justly called sterile and unproductive, and consequently that whatever is paid to the state, either under the title of a tax or even of a loan, is a result of productive labour previously executed, which ought to be considered as entirely consumed and annihilated the day it enters the national treasury. Once more I repeat it, this is not saying that this sacrifice is not necessary, and even indispensable…. But [every citizen] should know that it is a sacrifice he makes; that what he gives is immediately lost, to the public riches, as to his own; in a word, that it is an expense and not an investment.

The upshot? For Tracy it is that government should be kept small and inexpensive. Note the jab he gives to “the greatest politicians.”

Finally, no one should be so blind as to believe that expenses of any kind are a direct cause of the augmentation of fortune; and that every person should know well that for political societies, as well as for commercial ones, an expensive regimen is ruinous, and that the best is the most economical. On the whole, this is one of those truths which the good sense of the people had perceived for a long time before it was clear to the greatest politicians.

Next week: Tracy on government borrowing.

Moreover, as power is centralized, those further down the chain of command, who are nominally responsible for maintaining government assets, have less and less authority to do so. Since nobody really owns government assets, nobody has a personal stake in protecting their value. Consider a few cases.

Why Can’t Government Maintain New Orleans’s Levees?

The nearly half-million people of New Orleans wanted to live in their big bowl below sea level, and they entrusted politicians with the job of maintaining more than 125 miles of levees. These large walls, typically made of earth and/or stone, surrounded the city to keep out water from the Mississippi River (to the south and southeast of the city), Lake Borgne (to the east), Lake Pontchartrain (to the north), and various canals. Since water continuously leaked into the city, there were floodwalls, about 200 floodgates, plus pumps and drainage canals for additional protection.

Then Hurricane Katrina hit. It crossed Florida on Thursday, August 25, 2005, as a Category 1 (weakest category) hurricane, then gathered strength as it reached the warm waters of the Gulf of Mexico. Wind velocities accelerated, and by Sunday, August 28, Katrina was a Category 5. It weakened somewhat to a Category 4 when it made landfall east of New Orleans the next day, with winds of up to 145 miles per hour. We all know what happened next.

But why did it happen? There seemed to be problems almost everywhere in New Orleans’s levee system. Dr. Peter Nicholson, associate professor of civil and environmental engineering at the University of Hawaii, headed a study of the levee failures on behalf of the American Society of Civil Engineers. He reported, “We found literally dozens of breaches throughout the many miles of levee system. A number of different failure mechanisms were observed.” Ivor van Heerden, deputy director of Louisiana State University’s Hurricane Center, criticized the design and suggested that inadequate construction could also be an issue. Forensic teams that studied these levees generally agreed with the assessment.

Who was responsible for the failure of the levees?

They needed maintenance because everything needs maintenance and because each year the city was sinking about an inch deeper into the Mississippi River mud. Although New Orleans politicians’ most important job was public safety and the levees obviously affected public safety, politicians seemed to believe doing maintenance work–which would probably go unseen–wouldn’t serve their personal interests (especially getting reelected).

The state had established the New Orleans District Levee Board in 1890 to be responsible for maintaining the levees around the city. But the board members, a majority of whom are appointed by Louisiana’s governor, pursued their interests by expanding their power, gaining jurisdiction to develop properties around the levees. Board members spent time on such matters as licensing a casino, leasing space to a karate club, and operating an airport and marinas. The Senate Homeland and Governmental Affairs Committee reported, “A review of the levee-district board minutes of recent years revealed that the board and its various committees spent more time discussing its business operations than it did the flood-control system it was responsible for operating and maintaining.”

James P. Huey, who had been on the board for 13 years and served as its president for nine years, blamed the state legislature. He claimed that the board had to generate money from those time-consuming extraneous businesses because the state legislature had cut the board’s revenue in half. So even though members of the board knew that a levee in New Orleans East was three feet below its design height–which would affect its ability to withstand a storm surge and therefore jeopardized the people in the city–they didn’t get it fixed because they were squabbling about who would pay for it. The Army Corps of Engineers refused. The board wrote letters to their members of Congress asking Washington for money, but they were busy with other things. And the Flood Control Act, which Congress passed in 1965, sent a clear signal that the federal government would bail out people who wanted to live in flood-prone areas like New Orleans.

The U.S. Army Corps of Engineers handled design and construction of the levees, as it handled flood-control projects throughout the United States. But its budget consisted almost entirely of “earmarks,” assuring that appropriations would be spread around congressional districts. That gave incumbents something to brag about during their election campaigns. The problem was that spending a lot more money on New Orleans flood protection wasn’t the top priority for the state’s politicians. J. Bennett Johnston Jr., for example, when he was a Louisiana senator, secured appropriations for four new dams on the Red River between Mississippi and Shreveport, costing $2 billion.

Bottom line: Nobody in the city, state, or federal governments wanted responsibility for maintaining the levees.

Why Can’t Government Maintain Public Housing?

Because poor people tend to live in poor housing, many people thought it would be a good idea for government to build housing. This started during the New Deal and accelerated after World War II as the federal government subsidized municipalities. Public housing projects were given names–like Cochran Gardens, Maplewood Court, Henry Horner Homes, and Rockwell Gardens–that suggested they might be charming.

A guiding principle of the time was that housing projects should be massive. In part this reflected the influence of the Swiss-born architect Charles-Édouard Jeanneret-Gris–later known as Le Corbusier–who urged during the 1920s that people be concentrated in big buildings consisting of cell-block apartments. The buildings were set pieces, surrounded by empty parks and separated from their neighborhoods. Bigness became a kind of architectural cult, embraced by Soviet mass murderer Joseph Stalin and others during the mid-twentieth century. Like so many Soviet buildings, U.S. housing projects tended to be big and ugly.

Consider the experience of the Chicago Housing Authority, the third-largest public-housing bureaucracy in the United States. It built a four-mile stretch of housing projects. Just one of them, the Robert Taylor Homes, included a couple dozen 16-story buildings containing 4,400 units altogether. It was reportedly the world’s largest housing project.

These monstrosities quickly deteriorated. “The buildings in its enormous family developments are literally crumbling,” reported housing analyst Susan J. Popkin in 2000. “They are relatively old; most construction occurred during the 1950s and early 1960s. The original materials were cheap and have not held up well over time. Further, the buildings are poorly designed, with exterior hallways and elevators that have proven extremely difficult to maintain.” The government couldn’t begin to take care of this development. Popkin went on, giving a litany of problems familiar to many residents of “the projects” across the country:

Because the hallways of the high-rises are covered with metal grates, the buildings look like prisons. Many apartments (and some entire buildings) are boarded up because their major systems–plumbing, heating, electrical–have failed. The grounds and hallways are often filled with refuse and reek of human waste. The buildings are infested with vermin, including rats, mice, roaches, and even feral cats. Lights in interior hallways, elevators, and stairwells are vandalized regularly, leaving these areas dark twenty-four hours a day. The buildings’ exteriors, halls, and stairwells are often covered with graffiti or, in the better-maintained developments, the evidence of the janitors’ attempts to paint over the mess.

Without constant vigilance it is nearly impossible to keep the units clean. In addition to the dirt that blows in from outdoors, it is not uncommon to see apartment walls literally crawling with roaches. Most apartments also have serious maintenance problems, owing to years of neglect and failed structural systems. For example, in some units, it is impossible to turn off the hot water in the bathrooms, so the walls now have severe moisture damage.

Despite spending millions of dollars on law enforcement in the housing projects, neither the federal government nor the city have been able to maintain public safety. Maintenance people were afraid to enter the housing projects, which contributed to their deterioration.

During the 1980s real estate developer Vincent Lane became chairman of the Chicago Housing Authority and ordered police to “sweep” through public housing projects, ejecting people who weren’t legitimate residents. But the American Civil Liberties Union challenged these sweeps, and evidently they were discontinued. Moreover, they were expensive–about $175,000 per building–and Lane became embroiled in conflict-of-interest scandals involving security service contracts. The Chicago Housing Authority had trouble securing enough funding for its operations, and by the 1990s it had ceased making major repairs.

The next short step was to demolish the disastrous housing projects. The last tower came down in 2007. The city of Chicago began building townhouses, some of which were sold to middle-income private buyers, while others were reserved for former tenants in the projects. Applicants were screened in an effort to avoid drug users or those with criminal records. But construction is likely to proceed slowly and accommodate a fraction of the people who had lived in the projects.

Perhaps the most notorious of all housing projects was Pruitt-Igoe in St. Louis, designed by Minoru Yamasaki, winner of a number of architectural awards and praise in Architectural Forum. Pruitt-Igoe included 33 11-story buildings on 57 acres in DeSoto-Carr, a poor section of the city. There were 2,870 apartments.

The project was finished in 1956. “Only a few years later,” reported Alexander von Hoffman of Harvard’s Joint Center for Housing Studies, “disrepair, vandalism, and crime plagued Pruitt-Igoe. The project’s recreational galleries and skip-stop elevators, once heralded as architectural innovations, had become nuisances and danger zones. Large numbers of vacancies indicated that even poor people preferred to live anywhere but Pruitt-Igoe. The St. Louis Housing Authority spent $5 million trying to fix the problems but failed.” In 1972, three of the 16-year-old Pruitt-Igoe buildings were demolished. The following year, the U.S. Department of Housing and Urban Development agreed Pruitt-Igoe was hopeless, and the rest of it came down.

Similar public housing projects across the country were just as wretched. Joseph Petrone, a former maintenance supervisor with the Philadelphia Housing Authority, recalled: “I’d go to work at Schuylkill Falls [a PHA project] with a .38-caliber revolver in my belt and a big stick in my hand. The stick was for the German shepherds people kept tied to their doorknobs. The halls were covered with trash because the dogs would tear up the trash bags. We’d find bodies in the elevator shafts; the kids would play there, get stuck, and fall or get crushed.” The government was incapable of maintaining anything it built.

Why Can’t Government Maintain National Parks?

More than a century ago, “Progressives” promoted the idea that only government could be trusted to take care of natural wonders like Yellowstone and the Grand Canyon. Things have worked out rather differently. Apparently when politicians began considering the idea of national parks, nobody thought much about maintenance. For example, Congress was assured Yellowstone wouldn’t cost Washington anything once the initial roads and buildings were constructed. In 1916 Stephen Mather, who managed the national parks, reported, “The revenues of several parks might be sufficient to cover the costs of their administration and protection and Congress should only be requested to appropriate funds for their improvement.”

Over the years, presidents have bragged about how much they added to the National Park Service. Now it includes some 6,000 historic structures, 8,500 monuments, 2,000 bridges and tunnels, 4,300 employee housing units, and 27,000 campground sites, as well as docks, parking areas, and other assets. But it wasn’t until 2002 that the National Park Service began to assess their condition.

Since the federal government “owns” the national parks, their funding depends on Washington politics. The prevailing policy has been that most revenue generated in the parks goes to Washington. As a consequence, the parks have had to lobby politicians for appropriations. But over the years the biggest increases in federal spending have involved wars and social programs. The National Park Service has had a hard time competing for funds with the likes of Social Security, Medicare, and Medicaid. It’s a small pig at the trough. There has been a big backlog of deferred National Park Service maintenance jobs that lacked funding. Roads are sometimes hazardous because of potholes. Visitor facilities are falling apart. Historic structures are in jeopardy. Sewage systems have broken, causing pollution.

Why Should Government Start Something It Can’t Maintain?

Government cannot be counted on to maintain anything well because there’s no political glory in maintenance. Those who sign major laws, who launch new government programs, and who cut the ribbons for new government buildings can brag about their exploits during reelection campaigns. But politicians don’t seem to gain any credit with voters when they maintain programs that somebody else started. In many cases, like adding more cement to New Orleans levees, maintenance work is invisible.

Since taxpayer money is wasted when it’s spent on projects that subsequently suffer from inadequate maintenance, and often much harm is done, government should be limited to projects it might be able to maintain. If this means government ends up doing little, so be it.

But an even bigger problem is the use of the term “fundamentalist.” I understand Christian fundamentalists to be people who, as Bryan Caplan writes in The Myth of the Rational Voter, “ignore or twist the facts of geology and biology to match their prejudices.” So wouldn’t a market fundamentalist be someone who distorted facts to make the case for markets? We can certainly imagine such a person, but I’m not one—nor are many of the people who are strong advocates of free markets. It’s not that I think markets will always work perfectly. It’s just that they work so much better than the coercive solutions that are proposed by those who call me a “market fundamentalist.” Of course, there are times when standard free markets might not work well, but in many of those cases, voluntary charitable activity and simple fellow feeling fill the gap. We don’t think of it as a market transaction, for example, when a stranger in a strange city gives me directions to my hotel. But it certainly is an exercise of his freedom, and it generally works pretty well.

Government Fundamentalists

What should we call people who seem to regard government as the solution regardless of the evidence? I propose the term “government fundamentalists.” How would you identify a government fundamentalist? One characteristic would be a tendency, after the person points out market failures, to argue for government intervention as the solution. Rarely does anyone who proposes a government solution spell out how the incentives will be set up so that the government will actually solve the problem. Even many economists who are strongly committed to free markets will agree that economic freedom can underprovide defense from foreign attackers because of the notorious free-rider problem: Those who refuse to pay will get the same defense as those who pay, giving all an incentive not to pay. The possible result is that national defense is underprovided. But I’ve yet to find an advocate of government provision of defense who can explain how incentives will be set up so that government actually defends us and doesn’t simply engage in national “offense,” picking fights with a dictator in Iraq or a demagogue in Panama, to cite two examples of the U.S. government’s so-called defense.

But given that even some passionate advocates of economic freedom approve of government solutions to problems caused by market failure, we need another characteristic to distinguish government fundamentalists. Here’s the characteristic I propose: a tendency to advocate government solutions even in the face of evidence that those very solutions have not worked.

Take the tax on gasoline. The original idea for taxing gasoline was that users of roads would pay for them. Even at its best, though, the gas tax was not a great solution. The revenues were put in a big pool and politically allocated. There was no necessary connection between where people valued having roads and where roads were built, a connection that automatically would have existed had the revenues been collected with tolls. Tolls, after all, are prices not taxes.

It got worse. In the late 1960s, governments started diverting some gasoline-tax revenues to other uses. The first big diversion was to government-run mass transit that couldn’t survive on its own without subsidies. Later, more funds were diverted for bicycle lanes and lanes on roads and freeways that were dedicated to money-losing bus service. So the whole idea of user-supported roads has been steadily undercut.

Moreover, in response to higher gasoline prices, people have reduced their driving and shifted towards higher-fuel-economy vehicles. Because the federal tax on gasoline is in cents per gallon, revenues fell slightly, from $21.053 billion in fiscal year 2007 to $20.982 billion in fiscal year 2008, a drop of $71 million. In most years, by contrast, revenue grows as the number of drivers grows.

What should be done? If you notice how politicized road construction is, if you notice that a gasoline tax that was supposed to be used only for roads is now used for other things, and if you notice that the shift to higher fuel economy is reducing the growth of revenues for road-building, you might consider a market solution. You might consider taking the issue out of politics, allowing private entrepreneurs to build roads and charge tolls for their use. You might realize that doing so would forever free road construction and maintenance from the vicissitudes of gasoline tax revenues and from the politically powerful governments that grab the funds for their money-losing projects.

More Government Will Fix Failed Government?

But what do many people advocate when they notice this problem? Higher gasoline taxes. If you assume that government solutions are better than free-market solutions, you would naturally conclude that the gasoline tax should be increased. But if you are to avoid being a government fundamentalist, shouldn’t you actually look at the evidence on how well or badly gasoline taxes and government provision of roads have performed? Shouldn’t you also look at the how well or badly toll roads work?

That’s not what many people have done. Take political writer Thomas Frank. In a January 28 article in the Wall Street Journal, “Toll Roads Are Paved with Bad Intentions,” Frank wrote that few state governments “are willing to raise the gasoline taxes which pay for the repairs” to government-owned roads. In other words, Frank sees that there is no necessary connection between the need for repairs and the willingness to raise gasoline taxes. Isn’t this failure to fund roads a strike against government-funded roads? Not in Frank’s mind. He points out a problem with an incomplete system of toll roads: Tolls will price some drivers out, and some of these drivers will then spill over to nontoll roads. But this wouldn’t be a problem if all roads were toll roads. Frank, though, does not consider such a system.

Economist Jeff Hummel recently captured the essence of government fundamentalism this way: If markets don’t work, have government intervene. If government intervention doesn’t work, have government intervene further.

Notice the irony. Many free-market economists like me are quite willing to admit that markets don’t work perfectly and to examine and accept government solutions if their advocates can show how governments can be motivated to actually carry them out. And yet we are called market fundamentalists. On the other hand, many people who call us that are unwilling to change any of their views about the efficacy of government intervention no matter how badly the intervention works. Who are the fundamentalists here?

Continuing in the spirit of his earlier The Myth of the Robber Barons, historian Burton Folsom has written another engaging book about American entrepreneurs. Empire Builders is an excellent piece of research and writing, bringing to life a key period of American business history while dispatching socialistic misconceptions about entrepreneurs and the world of business.

Folsom, senior fellow in economic education with the Mackinac Center for Public Policy in Midland, Michigan, concentrates on the lives and contributions of Michigan entrepreneurs. He includes the men you would expect—Henry Ford, William Durant, Will Kellogg—as well as some that are relatively unknown, such as Henry Crapo, timber magnate and later governor who staunchly defended limited government. Each of the seven chapters is rich in detail and valuable lessons.

Did you know that George Washington promoted federal involvement in the fur trade? He did not believe that the fur trade could be carried on by private enterprise, and backed a plan to subsidize government “factories” that would trade goods to the Indians in exchange for furs. That put the government in competition with John Jacob Astor, who followed the dictates of the market, risked his own funds, and operated profitably. The government’s factories lost money and needed subsidies year in and year out. Through political machinations, the beneficiaries of the federal subsidies tried to eliminate free-market competitors but failed. Eventually, during Andrew Jackson’s presidency, the government’s factories were closed down and their assets sold at a big loss. A delightful story.

Shortly after Michigan’s statehood in 1837, its “boy governor,” 26-year-old Stevens T. Mason, concluded that the state needed a network of canals and railroads planned and financed by the government. The success of the Erie Canal had convinced many Americans that governmental infrastructure investments (as they’d now be called) were the fast track to prosperity. The countervailing idea that huge spending programs undertaken by officials who stood to lose nothing if they were wrong in their judgments did not raise any caution flags. Mason plunged ahead with his dreams.

The results, as Folsom recounts, were disastrous. The losses were astounding: one canal project managed to squander $350,000 in capital in exchange for revenues of $90 before being abandoned. The government’s railroads fared little better. Eventually, Mason saw the light. The state’s malinvestments were sold off, and he denounced his own folly. The lesson was not lost on the real losers, the people of the state. The 1850 Michigan Constitution included language that forbade governmental investments of these kinds. (Unfortunately, that language is no longer in the constitution. It’s time to put it back.)

Folsom includes an interesting appendix on the treatment of the canal and railroad fiascos in history textbooks. As you might expect, the books from which many students learn about Michigan’s history don’t grasp the point that the key flaw was in the very idea that politicians could do a better job of directing and optimizing investment than could private investors. Instead, the textbooks pin the blame on extraneous factors.

Another intriguing story is the one about Herbert Dow’s battle with foreign (mainly German) chemical cartels in chlorine, bromine, and dyes. Dow’s firm had “broken the rules” by selling products in the European market, which by convention was off-limits to Americans. When German industrialists told Dow to cease, he refused, triggering a price war. The Germans wanted to ruin Dow, so they began selling at a loss in the United States, while keeping prices high in “their” market.

They underestimated Dow’s ingenuity. He secretly purchased vast quantities of the cheap imports here, and shipped the goods back to Europe to be sold at a handy profit. The cartel members accused one another of cheating on their agreement to keep prices high and output low, never realizing that Dow was wrecking their plan. Finally, the Germans caved in. Predatory pricing, that old antitrust bête noir, had utterly failed to do anything except enrich some chemical users and shippers.

I hope that this nicely written and illustrated book finds a wide audience. In particular, I would like to see it get into the hands of young people, because it will teach them a lot about entrepreneurship, the characteristics needed to succeed in business, and the importance of leaving resource allocation to the free market.