Uncle Sam Can’t Count – A History of Failed Government Investments, from Beaver Pelts to Green Energy
Report by Betty Sakai
Have you ever wondered about government stimulus and subsidies, about where the power to take money from the people’s treasury comes from? The colorful history of government investments in America is not generally included in text-books. Few are aware that government investments have been occurring since the early days of our nation. Dr. Burton Folsom, the Charles Kline Professor of History and Management at Hillsdale College, honored the Conservative Forum by returning to speak about his most recent book, co-authored by his wife Anita Folsom, discussing failed government investments since the days of George Washington. All subsidies except for investments in national security such as the secret Manhattan Project were trumped by solutions provided by private enterprise. In an animated speaking style, Dr. Folsom evoked audience participation and laughter throughout his presentation. He repeatedly inquired of the audience’s experience, pausing to say …. “And I have a question for you….”
Farm subsidies were ludicrous he said, conceived by a Harvard college professor who reasoned that if you pay farmers not to produce, this will naturally raise the price of food. While farmers liked receiving the money, farm subsidies were being proposed during the Great Depression, a time when the American people had little food and had to stand in bread lines for a meal. Farm subsidies have been in existence since the days of Franklin D. Roosevelt. During one election, farmers feeling threatened by Republicans wanting to “manage” farm subsidies helped FDR win by a land-slide. Another counter-productive subsidy program in existence for the past eighty (80) years, Dr. Folsom noted, has been the welfare program.
There remains a question about the Constitutional basis for the majority of subsidies. Politically speaking, subsidies are very popular. Except for perhaps the broadest, most liberal definition of “general welfare” in Article 1, Section 8, the U. S. Constitution provides a very limited role for the federal government, a narrow definition of how money from the federal government can be used. The founders of our nation desperately tried to stop subsidies as they empower government and endanger the freedom of the people.
Dr. Folsom speaks from a wealth of knowledge and experience. He is a frequent columnist in the libertarian Freeman magazine and also contributes to other publications, writing in favor of free market economics and limited government. In 2011 in conjunction with Lawrence Reed, Dr. Folsom published a compilation of their columns from the Freeman, entitled: A Republic If We Can Keep It, published by the Foundation for Economic Education. He has appeared on countless television and radio programs, including FOX and Friends, Glenn Beck, Michael Bloomberg, and others. He has authored seven (7) books, including Myth of the Robber Barons: A New Look at the Rise of Big Business in America(1991), now in its seventh edition, New Deal or Raw Deal?: How FDR’s Economic Legacy Has Damaged America (2008). In 2011, Burton Folsom and Anita Folsom published FDR Goes to War. Their work has appeared in major newspapers and magazines including the Detroit News, The American Spectator, and the Wall Street Journal. Dr. Folsom and Anita Folsom blog at BurtFolsom.com. On April 15, 2014, their latest book will be released: Uncle Sam Can’t Count: A History of Failed Government Investments from Beaver Pelts to Green Energy (Harper-Collins, available on Amazon).
Citing examples of failed subsidies, from the first days of the Republic, historian Burton Folsom points out, market entrepreneurs have clashed with political entrepreneurs fighting for the heart and soul of America. In 1806 after the Louisiana Purchase, Congress voted to fund a National Road to expand west of the Mississippi and justified that expenditure for purposes of national defense and as a postal service road. The road fell to the detours of political entrepreneurs and cost $13,000 per mile as opposed to what it cost market entrepreneurs to build the Lancaster Turnpike at a cost of $7,500 per mile. Also, as no one individual owned the National Road, it was built poorly and required frequent repairing, disintegrating rapidly.
The children of this Republic’s founders still were not convinced that private industry could manage inventions better than government. In 1836 Samuel Morris invented the telegraph and Morris Code and when he applied for a federal subsidy to help him put in miles of poles and wire, a Democrat from Maine demanded a one-fourth (1/4) stake in the company for his influence, and the Postmaster General argued the telegraph was so powerful for good or evil that it could not safely be left in the hands of private individuals uncontrolled by law. Morse agreed that government should operate the telegraph in the national interest. Thereafter, bureaucrats, having no stake in making it operate efficiently and caring not to improving service nor to attract new customers, drove costs up dramatically. By 1845 costs had soared and in 1846 government had turned the telegraph business over to private industry to develop its usage. Privatizing the telegraph caused market entrepreneurs in the media, banking, stockbrokers, steam-ship companies, and in law enforcement to expand usage dramatically and cost-efficiently.
All this happened before the time of FDR. Government intervention was infrequent and subsidies were uncommon. But during the Great Depression, Roosevelt declared war on businessmen and on the industrialists, believing that only benevolent government experts could “build that” and run society better than free markets could. FDR believed that market entrepreneurs were not capable of restoring prosperity in the public interest – a position he softened only when World War II began.
Dr. Folsom cited government’s failed intervention in the fur industry. In 1816 President James Monroe appointed ideologue Thomas Mc Kenney, a Washington merchant, to take charge of the Office of Indian Affairs to help expand the government’s fur factory business.
Mc Kenney wanted American Indians to change from being hunters and gatherers to being farmers, to exchange their pelts for plows. His ideas were a disaster and government regardless of volume of trade had no incentive to change tactics. Private traders like John Jacob Astor, son of a German butcher, came to the United States in 1784 to join his brother in selling violins and flutes, but soon became enchanted by the fur trade. Astor was a private man and showed his ability to risk with foresight and perseverance by founding the American Fur Company in 1808. Astor’s agents differed from Mc Kenney’s by meeting Indians on their terms, where they live. Indians wanted guns and blankets and Astor supplied them at a nominal cost. Mc Kenney was frustrated by the Indian culture and he wanted to change it. He refused to sell liquor, urging Indians to be sober, virtuous, and industrious. Britain’s Hudson Bay Company trappers supplied the Indians with so much liquor, Folsom noted, that they could have created another Great Lake. Although Astor did not like providing liquor, preferring to deal with sober Indian trappers, he was a realist. Astor outmaneuvered the government factories with his market savvy, knowing where to sell his furs at the highest prices possible. By 1808 Astor had surpassed the government factories.
Mc Kenney continued to lobby to put Indians under the control of government so they could be protected. Congress ended up abolishing the factory system in 1822 as Astor successfully showed factory costs were high and that Indians disliked trading with them. Mc Kenney’s subsidy of $300,000 became $56,038.15 when government auctioned off the inferior goods remaining in the factories. The Committee concluded that the factory system was not only a matter of curious history but a lesson for succeeding legislators. By the time of his death in 1848, John Astor had accumulated $10 million in assets. Mc Kenney was fired as Superintendent of Indian Affairs and he spent the remainder of his life trying to get back into government. He had trouble managing money. He published his memoirs and history of Indian Tribes in North America but sold only a few copies. He died destitute in 1859 at the age of seventy-three (73) in a Brooklyn boardinghouse.
Dr. Folsom discussed examples of ill-fated government investments. In the early 1800s, Congress invested in the steam-ship industry. Subsidy recipient Edward Collins refused to use metal in the hull of the ships and continued using the more expensive wood which upon occasion caused the vessels to be lost to icebergs. Congress thereafter invested in the Transcontinental Railroad. Abraham Lincoln said that creating access to the west was so important that he counseled Congress to spend $60 million. In 1860 the entire national debt was $60 million, which were Dr. Folsom added jovially the “good old days”. The government funded railroad went broke, was crooked, and did not function well. Finally, an immigrant built a railroad without federal aid and it was successful. He never went broke, never received a subsidy, and his railroad functioned well.
After the Civil War, the United States had twenty-eight (28) years of annual budget surpluses. Two-thirds (2/3) of the national debt was cut and federal subsidies were avoided. This lasted until the airplane was invented. There had been big failures in the fur trade, steam-ships, and the transcontinental railroad. Political entrepreneurs argued that the airplane was so important that it could not be left to private enterprise. The argument was that the United States has no-one working on it but the French, Germans, and British do. If these nations invent a flying machine first, they could fly across the Atlantic and drop bombs on us and we would still be waiting for someone to invent it. Congress was urged to be proactive, to find the most qualified person and fund the creating of a flying machine that could defeat the Europeans. This argument was so powerful that they found an expert, Samuel Langley, who was head of the Smithsonian Institution. He had written a book on aerodynamics and had tested a miniature version of an aeroplane that had flown across the Potomac River in Washington, D. C. Langley had honorary degrees from Oxford, Cambridge, Harvard, and Yale. He volunteered to receive the subsidy. His theory was that if you shoot it out fast from a catapult, like a giant sling shot, it would continue to glide along. Langley’s first attempt was short-lived, a projection pulled down by gravity. The Washington Post commented that any stout boy of fifteen (15) could have skimmed an oyster shell farther than Langley’s aeroplane. Langley was undaunted and responded that failures are to be expected. Flight #2 came in December, 1903. It was a wintery day. The same pilot came back for more. The second flight ended the same, crashing into the Potomac River. After the second attempt, some of the comments were considered cruel. The Boston Herald suggested Langley give up his quest for flight and switch to submarines. The New York Times editorialized that Man’s ability to fly will not be achieved for another million years. Dr. Folsom turned to his audience and confided that the New York Times was off by 999,999 years and 356 days because just nine (9) days after Langley’s failure, in December, 1903, two unknown bicycle mechanics from Dayton Ohio with a home-built engine and $2,000 of their own money flew the first successful flight at Kitty Hawk. California’s San Francisco Chronicle stated, “The destruction of Langley’s machine should put an end to Congressional appropriations of any kind in every field of experiments which properly belong to private enterprise.” The Congressional response was that they cannot pick winners and losers. But the truth is Congress had a history of picking losers.
Many Americans were very patriotic in 1903. Oroville and Wilbur Wright exemplified virtue and respect for others. They mirrored the Tea Party Patriots of today. They were ministers and never drank. They dressed well and never swore. The media missed the point by not comparing government investment to private enterprise investment. The media did not say much about Langley because they felt it was messy and did not wish to humiliate him.
Congress debated on whether or not to buy the Wright Brother’s Flying Machine. They decided against paying $25,000 for it and instead invested in a French helium balloon. They reasoned that Wright’s invention was new-fangled and feared it would not work for them. So the Wright Brothers continued to work to improve their invention. They took it to France and flew for over an hour dazzling the French who wanted to sign up right away. Only then did the United States government decide to buy an aeroplane, but not until after Langley and the Wright Brothers competed for the purchase. Langley accused the Wright Brothers of being “out for a profit”, pleading that his aeroplane would belong to all the people. There were people who stood up for Langley.
After telling this part of the story, Dr. Folsom turned to his audience and asked, “…and I have a question for you… Did our adept politicians buy Wright’s Flyer or Langley’s Aeroplane?” The answer this time was that Congress got it right and bought the Wright Brother’s airplane.
Dr. Folsom noted that these stories are not in the textbooks. Teachers don’t have the opportunity to teach these lessons to their students nor to the adults who will be their representatives in Congress. Politicians like subsides because when they give a subsidy to a constituent, they receive in return funding for their campaign. Because the lessons of failed government subsidies were not learned in the 1930s, 1940s, and 1950s, Congress passed a Bill that allows the Reconstruction Finance Corporation, separate from Congress, to award subsidies. The Small Business Administration does this same thing.
One example of the market working out solutions is Henry Ford who believed that ethanol would win the battle over gasoline as the cheapest fuel. He built his engine to use gasoline or ethanol. The market decided that gasoline was best, not Congress. But political entrepreneurs continued to interfere. Democrat Dwayne Andreas spent most of his life lobbying Congress for corn-based ethanol. Secret Nixon Tapes revealed that in 1972 Andreas gave Richard Nixon a suitcase full of money to use in his re-election campaign.
Solyndra’s Green Energy is one example of a failed government subsidy. It also ranks as one of government’s largest financial disasters. Between 2000 and 2012, the Open Books Report shows that subsidies cost the U.S. taxpayer $3,000 per second. And the only way the people can find their way out of this mountain of debt is to learn the truth.
Anita Folsom joined Burton Folsom on stage to answer questions. Forum President Jerry Mungai asked a rhetorical question, “Is it greedier to make a profit, or to tap that profit and stand on a program to attract votes?”
Burton and Anita agreed that politicians like to drum up emergencies like man-made global warming – which is completely ridiculous. Questions from the Forum audience focused on the subsidies of (1) the Tesla automobile in which the receiver does things that doesn’t make it profitable, (2) Obama-Care which was not a national emergency, examples poor leadership, and is a shining example of what makes health care not work, (3) NASA’s Apollo 13 which had problems in flight with non-standardized parts as one company received the subsidy for the lunar module and another company received the subsidy to build the rocket, (4) the super-secret Manhattan Project – in response to a true national emergency -- was the only subsidy that deserved funding, and (5) the entrenched public education system subsidy hitting low-income families hardest is not working. One public school district in Atlanta Georgia it was noted passed students on into college totally unprepared. Students and their parents are the victims and they must demand accountability from teachers. Hillsdale College maintains a list of charter schools should anyone inquire.
Dr. Folsom pointed out that Charles Lindberg’s success netted him a $25,000 prize, not a subsidy. In all his years of teaching history, Dr. Folsom said that one (1) out of fifty (50) students, approximately 2% of the population is a gifted risk-taker with a creative mind.
He also noted that after WWII, the tax rate in America was 94% over $200,000. After the tax rate was cut to 38%, the inventors and market entrepreneurs produced things like television, the ball-point pen, and the Xerox machine. It’s important Americans keep what they create and risk to produce because this is what defines American Exceptionalism.
The United States is no longer free in its tax policy. During the Great Depression in the 1930s, no great inventions were developed. The high taxes promoted by FDR stifled the inventor. Entrepreneurs do not develop their ideas when faced with restrictive litigation and regulation, prohibitive fees, and high taxation.
The evening was very productive with Dr. Burton Folsom and Anita Folsom providing many insights. Forum President Jerry Mungai thanked the Hillsdale College supporters for providing hor d‘oeuvres, complimentary beverages, and chocolate cake for dessert. A book signing followed.
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