David Frum likes Jean Edward Smith’s biography of Eisenhower. I mostly enjoyed it myself, but Frum agrees with Smith’s claim the Interstate Highway Act was a Keynesian stimulus program to deal with the end of the Korean War. That seems mostly wrong when I look at the dates.
Smith wrote that “the [economic] danger signs were evident as early as February 1954.” Well, I don’t doubt that signs were evident because according to the Bureau of Economic Analysis, the United States had already been in recession since July of 1953. The economy returned to growth by June of 1954 – a full two years before Eisenhower signed the Interstate Highway Act.
Smith also wrote that “By the Summer of 1954, it was clear that an economic crisis was at hand. Unemployment rose, and a recession seemed just around the corner.” According to the Bureau of Labor Statistics, the unemployment rate peaked at 6.1% in September of 1954 and was down to 5.0% by the end of the year. What any of this has to do with the Interstate Highway Act is anybody’s guess, but Smith then made a very large claim.
Smith’s argued that “when unemployment rose and recession threatened in the aftermath of the Korean War, he {Eisenhower] nipped it in the bud with the interstate highway program – the mother of all stimulus programs.” The dates are all wrong here. Later in the same book, Smith wrote that Eisenhower signed the Interstate Highway Act into law in June 1956. The most recent American recession had ended a full two years earlier. One can argue about the Keynesian multiplier, but I have never heard a reputable economist argue that this multiplier is able to travel backwards in time to retroactively shorten recessions that had already ended. Perhaps Smith had a different public works program in mind, but he specifically mentioned the “interstate highway program.”
Smith could hardly mean that the Interstate Highway Act prevented a recession in the year it passed. The unemployment rate that year never rose above 4.3%. It is not easy to link to the Bureau of Labor Statistics Excel chart, but GDP growth for the two years preceding the passage of the interstate highway act were -o.6% for 1954, and 7.2% for 1955. The first two years from the signing of the Interstate Highway Act saw GDP growth of 2% per year and the economy then saw negative economic growth in 1958 – and it was a deeper recession than the one that occurred in 1953-1954.
This isn’t to say that there weren’t sound economic arguments for the Interstate Highway Act. There is probably a strong argument to be found that faster and cheaper transportation contributed to the spectacular economic growth that occurred in the 1960s. The problem is that Smith thinks he is making an argument for economic “stimulus” that is undermined by his own (and government) data. It doesn’t make the argument for fiscal stimulus wrong. I keep wondering if Smith is referring to a set of facts not in evidence. If Smith really is mistaken, how did this get past the fact checkers?
December 26th, 2012 | 10:45 pm
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December 27th, 2012 | 2:38 am
Good catch Pete. I tend to think that is entirely a false claim. Almost the opposite of the truth. If Economists are “gods”, which to be clear they are not, it would be blasphemy.
It might be able to be fit into some sort of narrative as weaponized Keynesianism (as the stated policy goal, and Eisenhower was an honest president, was essentially national security). I would give such a story a C.
On the other hand we also have Eisenhower reminding us of the perils of the military industrial complex (nudging large projects). Make that a D.
Eisenhower was for the most part a very ballanced budgets person. This made a lot of sense because he was operating under Bretton Woods (The U.S. was not fully monetarily sovereign, a budget deficit results in a run on the bank(from foreign nations) seeking redemption for gold, the dollar is not yet floating, but is pegged to gold.)
Eisenhower did not fund the highway system out of the general budget. If he had used the general fund of the treasury, and had as a result run a budget deficit I would allow the Keynesian claim. Just examine the last time we ran a budget surplus…1956, 1957!
A progressive Keynesian would actually argue that Eisenhower engaged in a regressive tax upon the poor (gasoline tax) in order to facillitate trade and commerce the bennefits of which fell more to the rich. (In fact the historical record shows them argueing just this).
I agree with you that “There is probably a strong argument to be found that faster and cheaper transportation contributed to the spectacular economic growth that occurred in the 1960s.” In fact I had a book, I will have to find by a Keynesian who made this point(I used for a labor law paper). He made it on the Keynesian grounds that it represented a public good that he loosely associated with “tech” showing that it put us on a higher indifference curve, and then applied the standard Hicks treatement to argue that the Highway system as a public good was not Hicks neutral (that is it priveledged capital/trade over local community/labor). It essentially set us up for urban sprawl and WalMart(the author was an urban economist…using also the standard gas price model).
You can’t use a regressive tax to pay for something and call it stimulus. Ballanced budget Keynesianism doesn’t exist (and it never can). Keynesianism was doomed to kill Bretton Woods, and this is why Keynes himself prefered bancor, but the americans not the brittish won! Keynes knew the French would just request gold for dollars all over again! (they did!) I digress…
In fact the highway system has never even been close to a stimulus project. The Highway trust fund has (almost) always paid for itself from gasoline taxes. During Clinton’s term the trust fund was ever redirected to pay down the deficit!
“If Smith really is mistaken, how did this get past the fact checkers?”
LOL pete, the fact checkers are engaged in politically useful copyright, which I suppose is a whole other way of looking at macroeconomics, and one not suprising to a Keynesianism partially rooted in Mandeville.
As an additional arguement a Keynesian might argue that Eisenhower’s dedication to ballanced budget in fact caused the downturn that coincided with his un-fiscally-stimulative (but nevertheless good public good, in terms of indifference curves/efficiency, but not in terms of hicks neutrality) Interstate Highway act.
That is consider that in 1955 the government ran a deficit, in part because it was collecting the GDP growth receipts from 1954, but in 1956 the goverment ran a surplus (and all the deficit hawks lived happily ever after) because in 1955 the economy grew by 7.2%. So in 1956 the US Surplus was essentially what soaked money out of the economy. So 1956 is the definition of anti-Keynesian, anti-surplus, anti-stimulus.
How is this stimulus? I am very glad I can agree with you that it isn’t! In fact what is the Keynesian prediction for 1957? It is that the economy (measured in dollars) will contract. i.e. it is true that if you found a Keynesian (once he gets done analysing the trade surplus/deficit and the marginal propensity to save) he is predicting I think that the economy is about to go down!
But maybe the Keynesian logic is solid but the timming is off because even after seeing slowed growth and after the tax revenue from the highway trust fund kicks in the U.S. runs a budget Surplus again in 1957!
Now Pete let me just say point blank… In a room with 10 aitheistic Keynesian macro-economists all 10 will agree that there is more proof for the virgin birth of Jesus Christ, than there is for true keynesian stimulus when the national account is registering a budget surplus.
The simple fact that this occured in 1956, and 1957 and that in my opinion Eisenhower is the most moderate most ballanced budget president who feared more than anything the cojoining of essentially opaque (due to classification/classified information) military spending with Keynesianism that he put it in his farewell address…(i.e. military industrial complex) I mean Eisenhower is literally shiting bricks over Dick Cheney’s weaponized Keynesianism(and this was before Bretton woods was removed as an obstacle).
So basically I completely agree with you from a Keynesian perspective.
December 27th, 2012 | 2:49 am
[...] David Frum likes Jean Edward Smith’s biography of Eisenhower. I mostly enjoyed it myself, but Frum agrees with Smith’s claim the Interstate Highway Act was a Keynesian stimulus program to Source: Postmodern Conservative [...]
December 27th, 2012 | 4:04 am
I agree with you. Smith is absolutely wrong. The Interstate Highway act was never a stimulus act, let alone a Keynesian stimulus act.
In fact analysis of the history shows why Keynesians are correct.
If the Interestate Highway act was paid out of the general fund of the U.S. treasury and resulted in deficit spending then I accept that it was a Keynesian stimulus act. It was not.
Eisenhower’s honest stated policy reason for the Interstate Highway act was military. But Eisenhower more than any republican since was fiercely opposed to weaponized Keynesianism. Eisenhower’s farewell address was not a self interested diatribe with the intent of somehow increasing his stature in posterity or helping the development of his “Library”. Rather it was a serious warning about combining the opaque and necessarily classified nature of military projects with a Keynesian argument. Eisenhower fully funded the Interstate Highway Act with the tax upon gasoline.
As you note pete I think a Keynesian would be perfectly happy to make the argument that the Interstate Highway Act made for faster and cheaper transportation and contributed to the spectacular economic growth that occurred in the 1960s!
Keynesian Urban economists in fact make this argument and develop from it a model describing Urban development and sprawl(using gasoline taxes+prices…on a micro level even contrasting New Jersey policy with New York policy). I digress…
The Keynesian critique of the public good is two fold. 1) It was not in fact stimulative, but was offset by a regressive tax upon gasoline.
2) viewed as Hicks(a Keynesian) viewed technological change a study of the highway system reveals that it was not even close to being Hicks Neutral. It had a powerful effect upon land use and development and urban sprawl and tended to give economies of scale to Capital vis a vis labor, thus encouraging and paving the way (literally) for Wal mart.
The Keynesian conclusion, it put us on a higher indifference curve while making the middle class poorer and seriously disrupting land use. A classic example of a Public good that was not Hicks Neutral, and to add insult to injury paid for by a regressive tax (this part is controversial).
I absolutely agree with your timming objections. The Keynesian Urban macro-Economist, agrees that it is a public good, and agrees that it is infrastructure, he disagrees that it is Hicks Neutral, and he disagrees that the tax that paid for it was not regressive, and he disagrees that it was in any sense stimulative in the fiscal realm.
We know it was not stimulative in the fiscal realm, not only because the Highway Trust fund has almost always raised more than it spent, and thus does not meet the threshold criteria of being deficit spending, but in fact was used under Clinton to pay down the deficit (an absurd idea on Keynesian grounds).
In fact applying Keynesian analysis to the time frame we can show that it wasn’t stimulative and that such spending decisions on the part of the very much pro-balanced budgets Eisenhower in fact brought about the recession in 1958!
The first thing a deficit owl Keynesian does when he sees a budget surplus is shriek and claim the economy is going to melt down like the Wicked Witch of the West after dorothy doused her with water in the Wizard of Oz. Needless to say there is no such thing as fiscal stimulus when the government runs a budget surplus.
So you are absolutely correct that in 1955 the economy (denominated in dollars no doubt) grew 7.2%. This of course caused the first budget Surplus in a long time (and all the deficit hawks cheered and lived happily ever after), all the Keynesians cried bloody murder and after calculating the budget surplus and the marginal propensity to save predicted very evil and wicked things for the economy in 1956 (1957 tax year).
But the Keynesians sucked at timming markets back then. So after the budget surplus in 1956, 1957 was followed by an even bigger budget surplus, leaving asside the Highway Trust Fund which was also in surplus itself! It wasn’t a fiscal stimulus it was a revenue raising regressive tax on gasoline (that in terms of efficiency was obviously outweighted by reduced travel times, (but lets focus on fiscal?).
Note also that the Keynesian moralist urban economists claim that an externality of the Highway Trust fund is the decline of small town america and familly values. Putting this on a Hicks model is controversial to say the least.
In any case the keynesians predict negative fiscal growth for 1958, because prices are sticky and the marginal propensity to save doesn’t decline much, but imports are about to get cheaper (because of transportation costs) and we are about to see a moral and an economic display of rabid Ricardoism, but essentially if we import more and export less then if our marginal propensity to save remains the same we must run a budget deficit. If we run a budget surplus, we are soaking money out of the economy so we know something like 1958 has to give.
So 1958 happened because the interstate Highway act was not deficit spending and thus not Keynesian Stimulus.
But 1958 might have happened anyways because a highway changes the ricardo trade ballance equation/mobility of capital. It might also reduce the marginal propensity to save. Plus Keynesians could be good at predicting but bad at policy back then because our currency was not sovereign or floating but subject to bretton woods. So all deficit spending would have put pressure on bretton woods and either something like the current deficit hawk dogma would have applied(bankrupcy/austerity), or else Nixon would have avoided bankrupcy by shutting it down(the gold window), which he did anyways.
That is once you have the highway system, you change the marginal propensity to save and the marginal propensity to import/export, this in turn directly impacts the deficit(which impacts the viability of Bretton Woods) At least this is what I get from Keynesian Macroeconomics.
So if you are really bold you might try to argue that by paving the way for the destruction of Bretton Woods (which Keynesians view as unstable, Keynes himself argued for Bancor instead, but the americans won.) The development of the Interstate Highway ends up being long run Keynesian Stimulus. (Albeit the idea of a backwards looking long Run Keynesian Macroeconomics is quite odd, and certainly outside the realm of the reputable or the academic.)
December 27th, 2012 | 11:42 am
Take a look at the compelling research done by David Aschauer on the economic impact of infrastructure investment in roads and bridges. While there are shorter-term economic impacts in terms of construction jobs and the multiplier effect of these, the longer-term benefits are often overlooked. These include freight hauling costs, reduced travel time, and improved travel safety. A limitation of this kind of analysis of highways investments, however, is neglect of the environmental costs that are real though typically not visible through market mechanisms. In facilitating motor vehicle use and dependence, these investments contribute to the health costs, borne most directly by those with cardio-pulmonary illnesses, associated with air pollution, environmental impacts from both air and water pollution. One day conservative intellectuals will confront these real-world complexities without ideological binders. That day has not yet arrived.
December 27th, 2012 | 12:25 pm
The third word in the last sentence of my post above should of course have been “blinders”, rather than the typo put in its place.
December 27th, 2012 | 1:05 pm
[...] Jean Edward Smith, Eisenhower, and Stimulus – Pete Spiliakos, PoMoCon [...]
December 27th, 2012 | 1:21 pm
According to the History of Public Works in the United States the New York World’s Fair of 1939 had a Futurama exhibit showing a controlled access highway system, which attracted so much public attention that FDR created a commission to explore the possibilities. The US Army wanted such a system for defense, which is perfectly in accord with the Constitutional directive for the building of national roads. 40,000 miles were authorized in 1947, but not until the 1952 Federal Aid Highway Act Was enough money allocated for a 50-50 fed/state cost-sharing project. General Lucius Clay headed the committee, because bolstering national defense was an objective. We were worrying about the Union of Soviet Socialist Republic more than socialist-type employment projects.
December 27th, 2012 | 1:45 pm
Mr. Kott seems to be suggesting that we may well be better off without the interstate highway system. As with any undertaking of this size, there were obviously trade-offs involved in building the interstate system (particularly in disruption of local economies and neighborhoods and destruction of natural topography). No doubt the project was pushed through without much consideration of these costs. It seems pretty far-fetched, though, to suggest that the interstate highways have worsened pollution or pulmonary disease – our air is cleaner now than it was before the interstate highways were built. And, as far as I know, every highly developed society now has a similar high-speed motor highway system. Certainly, our contemporary nationwide market economy would be inconceivable without the interstate system.
Also, the interestate system was a bipartisan project, supported by politicians across the political spectrum, not some sort of rightwing corporate plot.
December 27th, 2012 | 3:07 pm
The Interstate Highway program did bring both benefits and costs, far beyond the upfront construction expenses, wages, and profits. The situation for the cities was decidedly mixed too, as Tom Lewis discussed in his fine book, Divided Highways. The history of neighborhood displacement, for example, is well known. As to air quality these days, that situation is also mixed, as reported, say, by the American Lung Association. The benefits of cleaner internal combustion engines have mostly been erased by the persistent long-term rise in vehicle miles of travel, whether measured per driver, per vehicle, or per household. Then there is the whole problem of rising greenhouse gas emissions and their effects. Market-based solutions, congestion-based road pricing being one, are well known. Whether conservative intellectuals are ready to think these problems and possible solutions through carefully is not known as yet.
December 27th, 2012 | 3:50 pm
The short-term stimulus effects of the Interstate Highway Act could not have been large. The law was signed in 1956. The next year saw economic growth of 2% and the next year a -.9 decline in GDP. The recovery from the 1958 recession follows the exact same V-pattern as the recovery from the 1953-1954 recession that ened long before the passage of the highway act. The highway system probably played a role in the higher trend economic growth from 1962 – through the end of the decade.
December 27th, 2012 | 4:33 pm
Mr. Kott apparently believes that it is only conservatives and free-market types who advocate for policies while ignoring the costs those policies will impose on society. First of all, politicians and activists, from all points on the political spectrum, almost never give a fair accounting of the costs of the policies for which they advocate. If one is talking about scholars and opinion journalists, I think those on the right are far more intellectually honest than those on the Left, who almost never admit that there is any downside (other than “making the rich pay their fair share,” blah, blah, blah) to the patent medicine they peddle to the public (e.g., the steaming, stinking heap of refuse and offal known as the Affordable Care Act).
Also, it seems that Mr. Kott wishes that America’s patterns of living, working, travel and commerce had remained frozen in time as of about 1950. Perhaps this would have been possible – if the country had been placed under the control of the East German communist party. Apart from the lack of realism, we are given no reason to believe that the costs of buidling the interstate highway system ultimately outweigh the benefits realized from it.
December 28th, 2012 | 8:10 am
I never bothered to read an Al Gore biography, but I wonder if he took an interest in environmental issues in part because of the large role his father played in the Interstate Highway act. Loosely speaking we could say that Al Gore senior helped create a highway system for the flow of goods and services and Al Gore helped create a highway system for intellectual property (i.e the internet). That is quite an unpredictable and probably controversial macro-economic footprint!
In terms of taxes it is interesting to note that the gas tax was created to fight the deficit, in 1933 it was 7.7% of total IRS debt collection.
No part of the history of the gas tax is Keynesian, IMO. You also have to figure in toll roads and other receipts as part of the Trust Fund. When budgeted for it anticipated 38.5 billion in revenues for 37.3 billion in expenditures.(interesting story how that turned out) In the early part of the 16 year history of the Interstate Highway act raised(taxed, took out) more money than it spent(put in).
This is why I say that it contributed the negative economic growth in 1958. Which I suppose is debateable. I also suppose that somehow or another a good chunk of the history is being nudged in a particular direction, because the Interstate Highway Act, its trust fund, gasoline taxes, and everything we casually talk about actually have experts and interested parties.
January 8th, 2013 | 7:30 am
[...] Jean Edward Smith, Eisenhower, And Stimulus I mostly enjoyed it myself, but Frum agrees with Smith's claim the Interstate Highway Act was a Keynesian stimulus plan to deal with the finish of the Korean War. That would seem primarily …. So 1956 is the definition of anti-Keynesian, anti-surplus, anti … Read much more on First Issues (blog) [...]
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