The Obama Watch

Valley of the Dams

A lesson for Obama from the New Deal's biggest monopoly.

By 1.13.09

Send to Kindle

Mr. Obama has promised us a "New New Deal" as he prepares to launch his mega-billion-dollar infrastructure program, his plan for nationalizing health insurance, and other ambitious government programs.

We might get an idea of what's likely to happen by reflecting on experience with Franklin D. Roosevelt's most ambitious infrastructure program -- the Tennessee Valley Authority. 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.

Back in 1933, David Lilienthal, one of the founding directors of the TVA, vowed that "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 stopped requesting such appropriations a decade ago -- perhaps to avoid Congressional scrutiny -- it continues to be heavily subsidized. The TVA pays neither federal, state nor local taxes that private businesses must pay; and as a government entity similar to Fannie Mae and Freddie Mac, it can borrow money more cheaply than private businesses. Currently, the TVA has about $26 billion of debt.

The TVA also doesn't have to incur the costs of complying with myriad federal, state and local laws. By one researcher's count, 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 that has jurisdiction over private utilities. The Securities and Exchange Commission has limited jurisdiction for oversight of the TVA. The TVA is the biggest New Deal monopoly, but is exempt from federal antitrust laws. It is exempt from many federal environmental regulations, as well as from hundreds more state laws and regulations. When the TVA wants more assets, it doesn't have to haggle, because unlike private businesses, it has the power of eminent domain.

The Tennessee Valley Authority was established by Franklin D. Roosevelt in May 1933 -- one of his Hundred Days measures -- but it really goes back to 1918. Woodrow Wilson decided that the federal government should get into the gunpowder business because German submarines had sunk some ships bringing nitrates from Chile. 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 the 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), but the government facility didn't produce anything at all. The Muscle Shoals project became the starting point for the TVA.

As a remedy for the Great Depression, the TVA didn't work. No new wealth was created. Through taxation, the TVA transferred resources from the 98 percent of Americans who didn't live in the Tennessee Valley to the two percent who did. Money spent in the Tennessee Valley was offset by spending that didn't happen elsewhere because taxes needed to pay for the TVA reduced people's net incomes.

The building of TVA dams, like any other complex public works projects, proceeded slowly. Only three TVA dams were completed before the New Deal period ended and war mobilization began in 1940. The TVA dams were small -- less than one-twentieth the power-generating capacity of big western dams. Although building TVA dams provided work for engineers and skilled construction workers, who earned above-average incomes, the dams really came too late to have much impact on most people in the Tennessee Valley during the Great Depression.

To the degree the TVA had any impact at all, it appeared to be negative. The most important study of the effects of the TVA, by energy economist William Chandler, estimated that in the half-century after the TVA was launched, economic growth in bordering states, where people didn't get TVA-subsidized electricity, equaled or surpassed economic growth within the Tennessee Valley. 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 states, there was a greater exodus of people out of subsistence farming into manufacturing and services, which offered higher incomes. Ironically, electricity consumption grew faster in the non-TVA southern states, because it tends to correlate with income. Subsistence farmers might be able to afford light bulbs but not the electrical appliances that people in non-TVA southern states were buying. Furthermore, despite the millions spent building TVA dams, water usage grew faster in the non-TVA southern states.

In any case, it was delusional to believe that TVA-subsidized electricity was the one "key" to eradicating poverty. There never was a single key. Subsistence farmers needed equipment like tractors, trucks and hay balers, 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 squandered resources.

As for flood control, the TVA seems to have flooded more land (behind the dams) than it protected downstream. One economist estimated that TVA dams flooded about 730,000 acres -- more land than there is in Rhode Island. Most directly affected by TVA flooding were the 15,654 people who were forced out of their homes to make way for dams. Farm owners received cash settlements for their condemned property, but black tenant farmers got nothing.

As one might expect with a monopoly that can ignore so many laws, there have been reports of waste and possible corruption at the TVA -- lucrative executive perks, cozy consulting contracts, costly building leases and much more, according to the TVA's own inspector general. The TVA spent $15 billion building nine nuclear power plants, and none of them worked. The TVA hired a former Navy admiral to fix them, but he was charged with cronyism and bad judgment. There were congressional investigations.

Although the TVA was established to build dams, it has expanded relentlessly as bureaucracies do, and it went on to operate 11 coal-fired power plants and three nuclear power plants as well as 49 dams -- apparently with ambitions to expand the TVA's power-generating monopoly beyond the Tennessee Valley. Among other things, this has raised environmental concerns. Ralph Nader charged that the TVA "has the poorest safety record with [nuclear] reactors." On December 22, 2008, at the TVA's Kingston, Tennessee coal-fired plant, the dike of a 40-acre holding pond broke, spilling as much as a billion gallons of coal sludge with elevated levels of arsenic. The sludge covered some 300 acres up to six feet deep, damaging homes and wrecking a train. This spill reportedly was more than 50 times bigger than the oil spill from the Exxon Valdez tanker that went aground in Alaska.

As experience with the TVA suggests, what voters think they're signing off on with a big new government program can end up being very different from what they actually get. A program expands over the years, it morphs into a powerful interest group and becomes politically unstoppable despite harm done. The TVA might be compared to the kudzu vines it imported and urged farmers to plant for controlling erosion. Kudzu turned out to be among the most invasive weeds, growing a foot a day, a pest that is almost impossible to get rid of -- surviving fire and poison, and often reappearing after it was thought to be gone.

Like this Article

Print this Article

Print Article
About the Author

Jim Powell, the Hoiles senior fellow at the Cato Institute, is author of FDR's Folly (2003), Wilson's War (2005) and Bully Boy: The Truth About Theodore Roosevelt's Legacy (2006).