American economic intervention: Cavalry to the rescue (book review)
The original story is linked here.
Mar 19th 2009
From The Economist print edition
IN THEIR collective mythology, Americans owe their wealth to an entrepreneurial spirit which government has usually only served to suppress. More so than any other society, Americans give private enterprise the benefit of the doubt. Even now, though outraged at the excesses that led to the current financial crisis, they are deeply cynical about the spending, bailouts and interventions that form the government’s response.
Yet the mythology is based on a selective interpretation of history. Felix Rohatyn demonstrates this by recounting ten episodes of significant and ultimately beneficial economic initiatives taken by past American governments.
Mr Rohatyn, now aged 80, is best known as the former investment banker who helped rescue New York City from bankruptcy in the 1970s. This is his first book written for a popular audience and it is an engaging and easy read. It has no footnotes and relies mostly on secondary sources. Mr Rohatyn does not explicitly draw parallels between his episodes and the present but they are inescapable. Like the current $700 billion Troubled Asset Relief Programme, Herbert Hoover’s Reconstruction Finance Corporation (RFC) aimed to stabilise the banking system by injecting capital into banks. Conservatives attacked it as “the beginning of state socialism” while voters were outraged that it “willingly lent bankers fantastic sums while millions of unemployed Americans starved.” Hoover’s own ambivalence about its role restrained the RFC’s potential until the Depression was much deeper and Franklin Roosevelt was president.
Private investors are much better than the government at sniffing out high returns, but they often failed to finance what turned out to be immensely profitable projects. Burnt in early canal investments, they refused to back the Erie Canal to connect the Great Lakes to New York City; the job fell to the state of New York. Similarly, federal construction of the Panama Canal began where a failed private French consortium left off. Private utilities were hostile to Roosevelt’s proposal to extend electricity to rural America. It was eventually accomplished by farmers’ co-operatives, municipalities and public utilities backed by federal loans whose default rate was less than 1%.
Like Barack Obama, Mr Rohatyn is an unabashed advocate of more public infrastructure spending and has proposed a National Infrastructure Bank to finance it. Not surprisingly, he does not discuss the many disasters that dot the history of public intervention (the Army Corps of Engineers and flood control come to mind). Still, he does not gloss over the seamy side of his episodes. Self-dealing and corruption were rife among the companies entrusted by the federal government to build the transcontinental railway. The presidents who willed many of these projects into existence were often cavalier about their legality. Thomas Jefferson went ahead with the Louisiana Purchase even though he was not sure the constitution permitted it. Theodore Roosevelt fomented Panama’s secession from Colombia when the latter refused to let him build his canal.
Many of these projects were driven by their backers’ experiences. Dwight Eisenhower’s support for the Interstate highway system was rooted in a disastrous transcontinental convoy that bogged down on dilapidated roads early in his army career. It turns out that Mr Rohatyn’s advocacy also has personal roots. His family were refugees from Hitler. Yet in 1946 he was nearly forced to leave his college fraternity for being Jewish. Two army veterans kicked out the fraternity representatives with the admonition that they had not fought the Nazis to see racial laws enacted at home. Like millions of veterans, the two went to college under the GI Bill, the subject of one of Mr Rohatyn’s chapters.
Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now.
By Felix Rohatyn.
Simon & Schuster; 259 pages; $26