For almost five years now, President Obama has been making the argument that government “investments” in infrastructure are crucial to economic recovery. “Now we used to have the best infrastructure in the world here in America,” the president lamented in 2011. “So how can we now sit back and let China build the best railroads? And let Europe build the best highways? And have Singapore build a nicer airport?”
In his recent economic speeches in Illinois, Missouri, Florida and Tennessee, the president again made a pitch for government spending for transportation and “putting people back to work rebuilding America’s infrastructure.” Create the infrastructure, in other words, and the jobs will come.
History says it doesn’t work like that. Henry Ford and dozens of other auto makers put a car in almost every garage decades before the National Interstate and Defense Highways Act in 1956. The success of the car created a demand for roads. The government didn’t build highways, and then Ford decided to create the Model T. Instead, the highways came as a byproduct of the entrepreneurial genius of Ford and others.
Moreover, the makers of autos, tires and headlights began building roads privately long before any state or the federal government got involved. The Lincoln Highway, the first transcontinental highway for cars, pieced together from new and existing roads in 1913, was conceived and partly built by entrepreneurs—Henry Joy of Packard Motor Car Co., Frank Seiberling of Goodyear and Carl Fisher, a maker of headlights and founder of the Indy 500.
Railroads are another example of the infrastructure-follows-entrepreneurship rule. Before the 1860s, almost all railroads were privately financed and built. One exception was in Michigan, where the state tried to build two railroads but lost money doing so, and thus happily sold both to private owners in 1846. When the federal government decided to do infrastructure in the 1860s, and build the transcontinental railroads (or “intercontinental railroad,” as Mr. Obama called it in 2011), the laying of track followed the huge and successful private investments in railroads.
In fact, when the government built the transcontinentals, they were politically corrupt and often—especially in the case of the Union Pacific and the Northern Pacific—went broke. One cause of the failure: Track was laid ahead of settlements. Mr. Obama wants to do something similar with high-speed rail. The Great Northern Railroad, privately built by Canadian immigrant James J. Hill, was the only transcontinental to be consistently profitable. It was also the only transcontinental to receive no federal aid. In railroads, then, infrastructure not only followed the major capital investment, it was done better privately than by government.
Airplanes became a major industry and started carrying passengers by the early 1920s. Juan Trippe, the head of Pan American World Airways, began flying passengers overseas by the mid-1930s. During that period, nearly all airports were privately funded, beginning with the Huffman Prairie Flying Field, created by the Wright Brothers in Dayton, Ohio, in 1910. St. Louis and Tucson had privately built airports by 1919. Public airports did not appear in large numbers until military airfields were converted after World War II.
No matter where you look, similar stories come up. America’s 19th-century canal-building mania is now largely forgotten, but it is the granddaddy of misguided infrastructure-spending tales. Steamboats, first perfected by Robert Fulton in 1807, chugged along on all major rivers before states began using funds to build canals and harbors. Congress tried to get the federal government involved by passing a massive canal and road-building bill in 1817, but President James Madison vetoed it. New York responded by building the Erie Canal—a relatively rare success story. Most state-supported canals lost money, and Pennsylvania in 1857 and Ohio in 1861 finally sold their canal systems to private owners.
In Ohio, when the canals were privatized, one newspaper editor wrote: “Everyone who observes must have learned that private enterprise will execute a work with profit, when a government would sink dollars by the thousand.”
In all of these examples, building infrastructure was never the engine of growth, but rather a lagging indicator of growth that had already occurred in the private sector. And when the infrastructure was built, it was often best done privately, at least until the market grew so large as to demand a wider public role, as with the need for an interstate-highway system in the mid 1950s.
There is a lesson here for President Obama: Government “investment” in infrastructure is often wasteful and tends to support decaying or stagnant technologies. Let the entrepreneurs decide what infrastructure the country needs, and most of the time they will build it themselves.
Law of Markets 