Tax Day: The Government-Enterprise System

Facing the prospect of April 15 focuses the mind on what the government that does with those tax dollars.

One common view is that it doesn’t do much, except perhaps get in the way of the “free enterprise system.” Indeed, the Texas Board of Education has gotten  attention recently (for example, here and here) for its revisions of history teaching, including its insistence that textbooks celebrate free enterprise – a term members prefer to “capitalism” – for making America’s economic success.

If the board really wanted to be true to American history, however, it would modify the term to the “government-enterprise system,” because the American people, through their taxes, borrowing, handouts, laws, and regulations – that is, through their government – deserve at least half the credit along with “enterprise.”

The list of the critical contributions that federal and state governments made to enable American economic development is long. Here is just a sample.

• Start with the early public road system, paid for out of taxes. We take for granted that we do not have to pay somebody every time we pull out of driveways onto the street. That is because governments uses taxes to subsidize our driving. They started doing so from the earliest days precisely in order to support commerce.
• The Erie Canal, which opened up the American hinterland to commercial farming, was a project of the State of New York – done on credit.
• The corporation as a vehicle for reducing the risk of investing was elaborated and protected by legislation. Similarly, signing a contract made sense only because a government would enforce it.
• National banks made it possible to circulate reliable and trustworthy cash throughout the nation. Imagine trying to build, say railroads, with barter or sketchy credit notes.
• Early American industries got off the ground in part because the federal government violated principles of free enterprise and imposed protective tariffs on competing imports.
• Urban growth was central to economic development. Cities could grow in the late 19th and early 20th centuries only because local and state governments took over critical services like distributing water, removing wastes, and running streetcars from failing private entrepreneurs.
• Here’s an example that is obvious only after one mentions it: Through government, we all pay to train workers for employers (although probably not as well as we should.) We take it for granted that businesses do not need to teach their employees to read, write,  calculate, or “play well with others.” We started requiring every child to learn those skills in the late 19th century. Teaching all that costs money. Who pays?
• The greatest economic success story in America is the farm story: It became possible to produce so much food so cheaply that fewer than two percent of Americans now need to farm; now we worry about overfed Americans rather than starving Americans. Government plays a big role throughout this story, for example:
  • giving away land to settlers
  • setting up land-grant colleges to research farming techniques
  • sending out agricultural extension agents to teach those methods
  • subsidizing infrastructure, such as irrigation systems and electrification
  • providing crop supports
• The government agencies and rules which arose in the Progressive and the New Deal eras, however much some businessmen complain about them, have provided shock absorbers dampening down the wilder ups-and-downs of the business cycle. Predictability is critical for investment. (The slackening of these systems in the 1990s and 2000s contributed to the plunge of the current crisis.)
• Final example: The Internet emerged out of Defense Department research in the 1970s on the “Arpanet.” Computer industry entrepreneurs could take all that taxpayer-paid-for groundwork for free – and turn it into profit.

This short list of examples demonstrate that while enterprise was critical, alone it was insufficient without the will of Americans, acting through their governments, to create the conditions for economic success – the government-enterprise system.

Update 10/17/13

For a more recent article with data on how the federal government is the major engine of innovation, at least in the last half-century, see Jeff Madrick’s column in the November, 2013 Harpers (gated).