How Big Government Infrastructure Projects Go Wrong

Lessons from the Tennessee Valley Authority

Jim Powell | March 2, 2009

The recently enacted $787 billion "stimulus" program appears to be the down payment on a sweeping "new New Deal" that will include many other ambitious government programs—including the possible nationalization of health care.

Given the size and scope of such interventions into the economy, it's important to remember that big government programs often have results that are very different than what was intended. We can gain particular perspective by reflecting on the experience of President Franklin D. Roosevelt's most ambitious infrastructure program, the Tennessee Valley Authority (TVA).

It was heralded as a program to build dams that would control floods, facilitate navigation, lift people out of poverty, and help America recover from the Great Depression. Yet the reality is that the TVA probably flooded more land than it protected; much of the navigation it has facilitated involves barges of coal for coal-fired power plants; people receiving TVA-subsidized electricity have increasingly lagged behind neighbors who did not; and the TVA's impact on the Great Depression was negligible. The TVA morphed into America's biggest monopoly, dominating an 80,000 square mile region with 8.8 million people—for all practical purposes, it is a bureaucratic kingdom subject to neither public nor private controls.

Back in 1933, David Lilienthal, one of the founding directors of the TVA, vowed, "The Tennessee Valley Authority power program is not a taxpayers' subsidy. It is a business undertaking." In fact, for more than 60 years, Congress appropriated funds to cover the TVA's losses.

Although the TVA no longer receives congressional appropriations, it continues to receive large subsidies. The TVA pays none of the federal, state, and local taxes that private businesses pay. A 1993 study by Putnam, Hayes & Bartlett, a consulting firm retained by investor-owned utilities, estimated that annual cost-of-capital subsidies exceeded $1.2 billion, including the taxes that the TVA avoided. As a government-backed entity similar to Fannie Mae and Freddie Mac, the TVA can borrow money cheaper than private businesses. Currently, the TVA has about $26 billion of debt.

Moreover, the TVA doesn't have to incur the costs of complying with myriad federal, state, and local laws. Energy consultant Dick Munson reported that the TVA is exempt from 137 federal laws, such as workplace safety and hydroelectric licensing. The TVA can set electricity rates without oversight by the Federal Energy Regulatory Commission, which has jurisdiction over private utilities. The Securities & Exchange Commission has only limited jurisdiction to oversee the TVA. On top of that, the TVA is exempt from federal antitrust laws and many federal environmental regulations. It's also exempt from some 165 laws and regulations in Alabama and hundreds more laws and regulations in other states in which it operates. When the TVA wants to acquire more assets, it doesn't have to haggle, because unlike private businesses, it has the power of eminent domain. More than 15,000 people were expelled from their property to make way for the TVA.

Established by President Roosevelt in May 1933 as part of his first 100 Days, the TVA's roots actually go back to 1918 when President Woodrow Wilson decided that the federal government should get into the gunpowder business after German submarines sank several ships bringing nitrates from Chile. At the same time, E.I. du Pont de Nemours, the world's most experienced gunpowder manufacturer, wanted to build a gunpowder manufacturing facility at Muscle Shoals, Alabama, on the banks of the Tennessee River, and his company proposed building a hydroelectric plant to provide the power that was needed.

"Progressive" politicians were wary that du Pont might make money on the deal, so the decision was to have two gunpowder manufacturing facilities: one built by du Pont and the other by the federal government. The du Pont facility was finished for $129.5 million and produced 35 million pounds of canon powder before the Armistice (November 1918), while the government's facility produced nothing at all. Wilson's Muscle Shoals project became the starting point for the TVA.

It's run by three directors, each appointed by the president to staggered nine-year terms. Although the directors are sure to be political supporters, the unusual length of their terms gives them considerable independence, and they're not subject to constraints by investors, customers, or voters.

As a remedy for the Great Depression, the TVA didn't work. It created no new wealth and, through taxation, transferred resources from the 98 percent of Americans who didn't live in the Tennessee Valley to the two percent who did. Any spending that happened in the Tennessee Valley therefore was offset by the spending that didn't happen elsewhere. Those taxes reduced net incomes.

Much like any other complex public works project, it took an inordinate amount of time to build the TVA. Only three TVA dams were completed during the 1930s. The dams themselves were small—with less than one-twentieth the power-generating capacity of big western dams like Grand Coulee. Although the building process provided work for engineers and skilled construction workers—who earned above-average incomes—the dams simply came too late to have much impact on most people in the Tennessee Valley during the Great Depression.

To the degree that the TVA had any impact, it appears to be negative. The most important study of the effects of the TVA, conducted by energy economist William Chandler, estimated that in the half-century after the TVA was launched, economic growth in the Tennessee Valley increasingly lagged behind non-TVA southern markets. Chandler concluded, "Among the nine states of the southeastern U.S., there has been an inverse relationship between income per capita and the extent to which the state was served by the TVA...Watershed counties in the seven TVA states, moreover, are poorer than the non-TVA counties in these states."

In the non-TVA southern markets, there was a greater exodus of people out of subsistence farming into manufacturing and services, which offered higher incomes. Ironically, electricity consumption has grown faster in the non-TVA southern markets, because it tends to correlate with income. Subsistence farmers might be able to afford light bulbs, but they could not afford the electrical appliances that people in non-TVA southern markets were buying. Furthermore, despite the vast sums spent building TVA dams, water usage grew faster in the non-TVA southern markets.

In any case, it was a delusion to believe that there was one "key" (such as TVA-subsidized electricity) to eradicating poverty. Subsistence farmers needed equipment such as tractors, trucks, and hay bailers (which are powered by diesel fuel, not electricity). They needed to develop more skills, more sophisticated farming practices, and so on.

Backed by the power of the federal government, the TVA promoted electricity for home heating--even when oil and natural gas were cheaper. To the extent the TVA's home heating campaign was successful, it still squandered resources.

Comments

|3.2.09 @ 4:44PM|#

The TVA morphed into America's biggest monopoly, dominating an 80,000 square mile region with 8.8 million people-for all practical purposes, it is a bureaucratic kingdom subject to neither public nor private controls.

It started as a massive land-grab by the FedGov under the pretext of creating jobs (temporary, with dubious added value).

But, hey, the infrastructure added "value" to the economy, Joe dixit. Or it is another example of the Broken Window fallacy in all its grand empirical manifestation, for all to admire in awe.

|3.2.09 @ 4:54PM|#

Here is 1 million more jobs. (Whether is a school, a highway, or bridge, or any other Public Project).
RE: All Public Works Construction Projects in US.
1. No bidding. No profit. Wages only. No exuberant profit to principals of construction companies.
2. No contractor shall be paid more than $150,000 per year in wages.
3. Uniform Costs Estimating. (Real costs are known in the Industry - labor cost known of approx. 50%).
4. Assuming $300 billion in Public Construction Projects, $150 billion is for labor, thus at $150,000 per contractor, amounts to 1 million more jobs. (In lieu thereof that amount in the pockets of the Prime Contractors).
Exemplary: I am a licensed architect and a general building contractor, with 40 years of experience in design-construct projects and can indubitably get the job done for only $75,000 in wages per year. (After all, it is the Taxpayers money).

SIV|3.2.09 @ 4:58PM|#

The TVA essentially has a license to print money yet they lose it every year.Only a government sponsored utility could find a way to lose $$$ The dams and architecture are really cool though.

|3.2.09 @ 5:06PM|#

Damned good article.
All hail FDRs new deal.
Let's do it again.

DADIODADDY|3.2.09 @ 5:20PM|#

worked on some TVA projects, those clowns could fuck up a wet dream

|3.2.09 @ 5:21PM|#

My grandmother worked for the TVA. They had her sitting next to the big printing presses and made her nearly deaf at a relatively young age.

|3.2.09 @ 5:40PM|#

If I was trying to come up with the worst possible way to do an infrastructure project, I would be hard pressed to beat

(1) No Bid. Gosh, was it only last year that "no bid" contracts were widely derided as conduits for corruption?

(2) No Profit. Yeah, they'll be lined up for those. The only companies that would sign on for a guaranteed "no-profit" contract are the ones that can't run a project on time and under budget - just the ones you want to give access to "no-bid" taxpayer money.

Kolohe|3.2.09 @ 5:48PM|#

Although the TVA no longer receives congressional appropriations, it continues to receive large subsidies. The TVA pays none of the federal, state, and local taxes that private businesses pay

Interesting that not paying taxes is now equivalent to a taxpayer subsidy.

Among other things, this has raised environmental concerns. Ralph Nader charged that the TVA "has the poorest safety record with [nuclear] reactors."

Interesting that what Ralph Nader says is now taken at face value.

To the degree that the TVA had any impact, it appears to be negative. The most important study of the effects of the TVA, conducted by energy economist William Chandler, estimated that in the half-century after the TVA was launched, economic growth in the Tennessee Valley increasingly lagged behind non-TVA southern markets.

Interesting that correlation now equals causation.

Interesting that what is not mentioned that the REA and various other non-TVA federally sponsored cooperatives are also pretty significant thorought the south. Interesting also that the TVA watershed is still mostly rural and poor. The rest of the rural south also tends to be equally poor. The areas of the south that are no longer poor are no longer that rural. The correct baseline for determining whether or not the TVA was worth it is not whether the Tennesee valley is richer than the rest of the South, but whether if its richer than if the TVA never existed. Which of course, can never be done, so the best case is to compare it with the old cotton belt, not with Atlanta, Charlotte or the entire state of Florida.

Also, dams displace people. Always have. It would be impossible to build any hydroelectric without some form of eminent domain. And emininent domain tends to hit poor people hardest. And being black in the south in the 30's was a shitty situation any way you slice it. The argument that 'thousands of people were forced out of their homes' is a convenient emotional argument unless your willing to exand to a general principle that eminent domain and/or hydroelectric power should no longer be used.

Not to say that the TVA is not an org with real problems, and it may be appropriate to either transform it or end it. The latest catastrophic retaining pond break shows some serious mismanagement (although in being bigger than the Exxon Valdeez, it damaged a total of twelve homes iirc - albeit the downstream affects are going to be bad from the arsenic contamination).

But imo the author makes several arguements he wouldn't make if the TVA were an entirely private company.

|3.2.09 @ 6:06PM|#

Although the TVA no longer receives congressional appropriations, it continues to receive large subsidies. The TVA pays none of the federal, state, and local taxes that private businesses pay

Interesting that not paying taxes is now equivalent to a taxpayer subsidy.

If Ford gets a tax break (exemption being quite a break) and GM, Chrysler, Toyota et al don't, what would you call it?

Among other things, this has raised environmental concerns. Ralph Nader charged that the TVA "has the poorest safety record with [nuclear] reactors."

Interesting that what Ralph Nader says is now taken at face value.

Even a blind pig ... Besides, lefties love themselves some Ralph Nader. It makes a good argument when arguing with Obamaniacs.

To the degree that the TVA had any impact, it appears to be negative. The most important study of the effects of the TVA, conducted by energy economist William Chandler, estimated that in the half-century after the TVA was launched, economic growth in the Tennessee Valley increasingly lagged behind non-TVA southern markets.

Interesting that correlation now equals causation.

It means that for it's primary purpose, economic developement - TVA gets a grade of FAIL!

|3.2.09 @ 6:10PM|#

The most important study of the effects of the TVA, conducted by energy economist William Chandler, estimated that in the half-century after the TVA was launched, economic growth in the Tennessee Valley increasingly lagged behind non-TVA southern markets.

Interesting that correlation now equals causation.

Also interesting is that the absence of correlation definitely proves the absence of causation. In the TVA's case, there is a marked absence of correlation between a large government monopoly and economic growth.

Whatever else you can say about the TVA, Kolohe, wouldn't you say that it falsifies the assertion that TVA-type projects/organizations benefit society as a whole?

|3.2.09 @ 6:11PM|#

Dammit J sub! You know I don't like people making points sooner and better than I do!

|3.2.09 @ 6:14PM|#

Dammit J sub! You know I don't like people making points sooner and better than I do!

Did you like my professional looking use of blockquotes?

Paul|3.2.09 @ 6:26PM|#

More than 15,000 people were expelled from their property to make way for the TVA.

I take it you didn't get the memo. That's called 'progress'.

Kolohe|3.2.09 @ 6:47PM|#

If Ford gets a tax break (exemption being quite a break) and GM, Chrysler, Toyota et al don't, what would you call it?

Pretty close to recent US policy regarding the auto industry? (except swap the order of Ford with GM/Chrysler and take Toyota off the list.)

Kolohe|3.2.09 @ 7:07PM|#

btw here is the full Nader quote taken from an article which was used as a source for Mr. Powell's.

TVA's nuclear program has been so plagued with safety and economic problems that consumer activist Ralph Nader in 1998 declared: "The TVA is by any measure the worst nuclear project in the country, has the most expensive set of nuclear reactors, has a debt of $29 billion, has the poorest safety record with TVA reactors spending more time on the Nuclear Regulatory Commission's watch list than any other utility."

Keep in mind that Public Citizen is not too keen on nuclear power and would just as soon do away with it entirety. Keep in mind that this critique also includes the side issue of how economical these plants are. Keep also in mind that the 'watchlist' thing was done away with in 1999 because people were incorrectly using it as a metric to assess 'the worst power plants'.

|3.2.09 @ 8:01PM|#

Wilson's Muscle Shoals project became the starting point for the TVA.

Keep the government out of my swamp hooks!

Robert|3.2.09 @ 8:13PM|#

But at least by reducing DuPont's profit incentive, they prevented a second world war.

Ever see cannon grade black powder? It's gravel sized.

Charles|3.2.09 @ 8:26PM|#

It's hard for me to get upset about the TVA the way I can about, say, the Agricultural Adjustment Act. The rural South was in terrible, terrible shape, and almost any change would have been a change for the better.

Stephen Gordon|3.2.09 @ 9:02PM|#

As a resident of the area and unhappy consumer of TVA services, here are two quick points:

1) Interruptions in power are so common here that I don't use digital clocks and use universal power supplies for all of my vital electronic equipment. Generators are a must in these parts.

2) My great-grandfather was a farmer in the Tennessee Valley and they didn't even have electricity until the '50s.

Stephen Gordon|3.2.09 @ 9:10PM|#

Also, the best thing that ever came out of Muscle Shoals had absolutely nothing to do with government, but music. From the Rolling Stones to Little Richard (and Wilson Pickett, Aretha Franklin, Otis Redding, Joe Tex, The Allman Brothers Band, Clarence Carter, Candi Staton, Mac Davis, Paul Anka, Tom Jones, Etta James, Andy Williams, The Osmonds, Shenandoah) and many, many more -- we've managed to produce some great music without any sort of government bailout.

Well, not all of the music was great...

SIV|3.2.09 @ 11:46PM|#

I like the architecture around Wilson Dam.
Fontana is my favorite one though.Norris is really cool as well.The newer ones kinda blow.I'm not a "fan" of the TVAs operations despite them paying me more than a bit of cash repeatedly over the years but I like the lakes,dams and architecture a lot.Pathetic motherfuckers can't run a profitable utility to save their lives though.

Rimfax|3.3.09 @ 8:21AM|#

And without the TVA, the phrase "fly ash flood" might not be autotext in the google search bar.

Sean Scallon|3.3.09 @ 11:40AM|#

"Too bad today's advocates of a new New Deal seem determined not to learn from their predecessors' mistakes."

The next time Mitch McConnell complains about socialism, ask him whether he thinks the TVA should be privatized. I'm sure you'll get an interesting answer.

I'll believe the Republicans have become fsically responsible the day Republicans in the TVA states are willing to part with the family jewels bequeathed to them by hte New Deal. So far they have not and that's why the GOP Revolution of 1994 failed.