The Myth-Busting Economist by Larry Malone

Positive Externalities

My last column celebrated the bicentennial of the Erie Canal. This one goes deeper into the ways government action can create prosperity for all of us. This flies in the face of being fed a constant diet of myths that any government actions and policies send us down the path to socialism.

Thirty-five years ago I published my second book, “Opening the West: Federal Internal Improvements Before 1860.” The book challenges our understanding of westward expansion in the United States before the Civil War. Rather than attributing the settlement and development of the American frontier to “rugged individualism,” I showed how the federal government played a prominent role by investing in infrastructure—building roads, clearing rivers and constructing harbors—to open the west for migration from the east.

The study was initially conducted for my PhD dissertation, and it took four years of investigation to complete. Using accounting records from the federal government, I managed to track how transportation expenditures for projects in frontier regions from 1800 to 1860 laid the groundwork for settlers to move westward. The states I closely investigated were Arkansas, Michigan, Wisconsin, Iowa and Minnesota.

The investigation busts the romantic myth that courageous Americans moved west, on their own, with rifles on laps in Conestoga wagons. The truth is quite the opposite—the federal government used troops to mark and clear roads into the lands of Native Americans, terminating at a point where a fort was constructed. In this way, in 1831 the earliest road that bisected what is now Wisconsin cost just $232.00, a measly sum that paid for liquor rations to the troops clearing the paths for its construction. Similarly, Lyman Dillon of Cascade, Iowa was contracted by the federal government in 1839 to plow an 86-mile-long furrow into prairieland to mark a route between what became the towns of Iowa City and Dubuque.

So where is this history lesson headed? It’s simple to see, when we revisit the case of the Erie Canal. When the federal government refused to construct the canal, the state provided $7 million in funding and the 363-mile-long canal was completed in 1825. The financial commitment by the government created The Empire State—the richest in the union.

As the federal government built roads westward in the decades afterward, that effort used the Army to push Native Americans out of lands to be occupied by predominantly white settlers. That important part of American history is not a myth that needs further busting. We will turn instead to some of the ways government now acts to benefit the economy, and us all.

Economists acknowledge that government can spark economic activity, where it is absent or stalled, by setting positive externalities in motion. A positive externality occurs when an action by an individual, business or government creates economic benefits for others. For example, if a local foundation or community organization pays to beautify the Main Street of a village or town, that action can attract more visitors and traffic to local businesses.

In the case of government, and reminiscent of the positive externalities released by the Erie Canal, we need look no further than the construction of Interstate 88 in the 1970s. Business owners in Albany, Cobleskill, Oneonta, Sidney and Binghamton were never going to form a group to contribute the tens of millions of dollars needed to complete the original 118-mile, four-lane highway. Nor would they have contributed the $64 million that paid for the recent reconstruction and repaving of 48 miles that runs through Schoharie and Otsego counties.

Instead, government stepped in, for the benefit of all, to create and maintain the highway and set loose the positive externalities that create economic activity that wouldn’t have otherwise happened. Would major hotel chains build on Oneonta’s Southside or Route 28 south of Cooperstown if travel between Binghamton and Albany was restricted to Route 7? Hardly. Would folks from this part of the state shop or visit the Capital District or Southern Tier as often if Route 7 was the only option for travel? Hardly, doubled.

Interstate 88, like the Erie Canal, is an obvious example to better understand how government spending, funded by taxes, brings positive externalities for the benefit of all. Despite perhaps unsettling the minds of some readers, I’ll return to this theme in future columns, and Bust more Myths about the oft-villainized government. And I just might also explain how, along with Warren Buffet, I take pride in paying my fair share of taxes.

Larry Malone is professor emeritus of economics at Hartwick College.