A New Challenge, But The Same Old Mistakes

Worth A Look, Climate, Frontier Centre

OTTAWA — U.S. railway magnate Thomas Clark Durant used to take congressmen and high-level bureaucrats to lunch. When building the Union Pacific railway in the 1860s, for example, he once took 150 of them halfway across the continent by train to show off the progress he was making.

He took along an orchestra, six cooks and a magician. He fed them Chinese duck, Roman goose, roast ox and antelope. He served expensive wines and fresh fruit. After dining, the legislators hunted buffalo from their coaches. As historian Burton W. Folsom Jr. observes in The Myth of the Robber Barons, an analysis of U.S. government subsidies in the 19th century, politicians were much more important to the railways "than either freight or passengers."

In the Canadian experience, with Canadian Pacific, the bribes took place more discreetly (though no less magnanimously). Sir John A. Macdonald, as Prime Minister, piled subsidy on subsidy, too, eventually giving the CPR the most generous land grants on the continent, a great deal of cash, a commitment that the railway would never have to pay taxes and a promise that no American railway would ever be permitted to compete with it. In exchange, he got the funds he needed to wage a national election and MPs got free train rides. As Sir John's "imperial highway," however, the CPR was impossibly uneconomic. It collapsed financially before construction even started.

In the American experience, with Union Pacific, President Abraham Lincoln awarded Mr. Durant the contract for the country's first transcontinental railway in 1862, six years after Mr. Durant first engaged him as his lawyer. Although Congress obliged the Union Pacific for years, piling subsidy on subsidy, Mr. Folsom says that the economic consequences could not be forever averted. "Aid bred inefficiency," he says in his popular 1980s book, now in an umpteenth printing. "Inefficiency created consumer wrath. Consumer wrath led to government regulation. And the regulation led to bankruptcy."

The Union Pacific collapsed in 1893 after three decades of stock manipulation and price fixing, fraud and bribery – and very flexible rates. When Congress established the Interstate Commerce Commission (ICC) in 1887, it instructed the commission to get rid of "discriminatory [railway] rates." In doing so, the commission imposed such rigid regulations that every major railway in the country went bankrupt – except James Jerome Hill's Great Northern, the one railway built without government subsidies.

Writing in The New Yorker in 2003, financial journalist James Surowiecki (author of The Wisdom of Crowds) explained with exquisite clarity why governments granted such huge subsidies to railroads in the 19th century: "Governments wanted transcontinental railroads more than investors did." This is precisely the case today with energy. Governments want wind power more than investors do. Governments want solar power more than investors do. Governments want geothermal power more than investors do. Substitute energy sources for railways and Mr. Surowiecki's explanation holds true.

The consequences will presumably ensue as they have in the past. Government subsidies will eliminate risk, making energy investment a sure thing. This guarantee of profit will attract sophisticated investors – T. Boone Pickens comes to mind – and reckless investors alike. It will probably take years to play out the drama but, judging by history, the final act will be tragic.

In the Union Pacific and the Enron scandals, the corporate executives used off-the-books subsidiaries to divert cash to themselves. The objectives in each case were the same: Offload the risks of the enterprise either onto the public or onto hapless investors – and make this investment a sure thing.

Enron offloaded in all directions. Enron was apparently one of the biggest recipients of trade subsidies in the U.S. throughout the 1990s, collecting more than $1-billion (U.S.) from the Overseas Private Investment Corporation (which often guarantees dubious deals with Third World countries) and more than $600-million from the Export-Import Bank (which lends money to foreign governments so that they can buy from U.S. companies) – to cite only two federal U.S. agencies. In the mid-1990s, President Bill Clinton intervened personally with the government of India to rescue an Enron deal gone awry.

Enron was an energy broker and – not coincidentally – an early corporate champion of the Kyoto Protocol. In a confidential e-mail message, CEO Ken Lay said that Kyoto would "do more to promote Enron's business than any other regulatory initiative … in Europe and the United States." Enron would presumably have become the principal trader of CO{-2} credits overnight had the U.S. ratified the Kyoto Protocol.

In the Enron case, as Mr. Surowiecki observed, "it was as if all the lessons that the scandals of 19th century had taught us had to be learned all over again." In our manic haste to save the planet, it looks now as though these lessons will need to be learned yet again.