Burt Folsom: Why Doesn't Government Control Work?

[Burt Folsom is professor of American history at Hillsdale College]

In the debate over universal healthcare, one question has rarely been asked of its supporters: “What examples from U. S. history support the transfer of funds and power from private to government control?” In other words, do we have historical precedents for subsidizing businesses, or having them taken over by government, which then improved American lives?

I know of no peacetime example that would encourage those who want to put our healthcare system–roughly one-sixth of the U. S. economy–under government direction. No supporter of healthcare has come forth with a single example of such a transfer improving the quality of American society.

Let’s review some historical examples. President George Washington experimented with government control when he advocated federally funding a new fur company to occupy the northwest territory and thereby help prevent the British from encroaching on U. S. land through their large Hudson Bay Company. Unfortunately, Indians and trappers alike despised the inefficient government fur company, and under President Monroe the U. S. disbanded the near bankrupt company, sold its assets, and allowed the more competent private U. S. companies to do all the nation’s fur trading.

During the Civil War, President Lincoln signed a bill to build the country’s first transcontinental railroad from Omaha, Nebraska to Sacramento, California. The federal government would do the financing. After granting roughly $60 million in land and another $60 million in federal loans, the bureaucrats were in dismay. The Union Pacific and Central Pacific had done a poor job of construction, and the road went bankrupt several times by the end of the 1800s.

Airplanes were another example. By 1900, some Americans worried that Europeans would invent the airplane and possibly use it to dominate others (including the U. S.) militarily. Government support, so the argument went, was therefore essential to stimulate Americans to inventive greatness. Samuel Langley, head of the Smithsonian Institution, received a federal subsidy to continue his research into manned flight. Langley conducted two public experiments with his federal dollars–launches right outside of Washington, D. C. Unfortunately, both flights crashed ignominiously into the Potomac River. Within two weeks after the second launch, the Wright Brothers–two bicycle mechanics from Dayton, Ohio–flew the first successful airplane in North Carolina, financing the venture with $2,000 of their own money.

For some reason, federal subsidy and control often diminish the chance of an enterprise being successful. In some cases, this occurs because federal officials do not have the same abilities as entrepreneurs–or the same incentives, to make an enterprise run efficiently and profitably. Another reason is federal control equals political control of some kind. What is best for politicians politically is not often what is best for businesses economically. Polticians want to win votes, and they can do so by giving targeted voters benefits while dispersing costs to others.

During the New Deal era of the 1930s, for example, some observers were amazed that in the midst of massive government programs to build bridges, erect school buildings, and conserve forest land, that unemployment fluctuated and remained at more than 20 percent in 1939–ten years after the Great Depression began. Why, in the midst of such visible job-creation, was unemployment so inflated?

First, President Roosevelt was targeting these jobs to districts he wanted to carry politically. The money was not necessarily going where it was most needed. Second, to get these federal dollars, they had to be taken from taxpayers and in doing that, the top marginal tax rate jumped from 25 to 63 percent in 1932; then to 79 percent in 1935; and finally–in the midst of World War II–to 94 percent in 1945. What incentives do businessmen have to invest when most of their profits are confiscated by government? Thus, politicians not only misuse much of the money to secure votes, but they stifle entrepreneurs from starting new businesses that would employ Americans and end high unemployment.

That oddity of massive government job-creation leading to higher unemployment brings us to the present and helps explain why President Bush’s “stimulus package” of $154 billion actually helped lead to increased unemployment and why President Obama’s $787 billion stimulus package last year led to even more unemployment. The created jobs were often political rewards; key parts of the economy remained unstimulated, and entrepreneurs–with the prospect of new taxes–had no incentive to invest and create the real jobs this country needs.

Asking the right questions focuses attention in the right direction: What federal subsidies and takeovers have ever improved the prosperity or quality of life for most American citizens? Until health care advocates, cap and trade supporters, and stimulus package gurus can answer that question clearly and with persuasive evidence we should reject further federal intrusion in the U. S. economy.

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