Work on the subway began in September 1949. A technique called “cut and cover” was employed. A large trench was dug into Yonge Street and steel beams were then laid across the trench and covered with dirt and asphalt, which allowed cars and pedestrians to keep using Toronto’s main thoroughfare while work proceeded under tires and feet. Fourteen thousand tons of steel, 1.4 million bags of cement, and five years later, there was a line that ran from Eglinton Station to Union Station, allowing more people to get to where they had to go more quickly and efficiently.3
The building of the highway system did essentially the same thing: it facilitated activity that produced goods and services of real value.
There is a great deal of confusion about how infrastructure spending creates wealth. Most people — mistakenly — believe that the value is in the work itself. Nothing could be further from the truth. The value of infrastructure spending is that it creates efficiencies that otherwise wouldn’t exist.
Imagine that there are three towns of equal size, located several hundred miles apart. Right now, it’s physically impossible to get from any of the three towns to any of the others. This means that each must be self-sufficient in producing what it needs. For example, Town One would have a small factory that makes furniture, a small factory that makes shoes, and a small factory that makes clothing. Let’s say that each factory employs twenty people. The same situation is true for Towns Two and Three. They have similar factories of similar size, and altogether 180 people work to make the necessary furniture, shoes, and clothing for the people of the three towns.
Then, a highway is built that joins them. You can now quickly get from Town One to Town Two, Town One to Town Three, and Town Two to Town Three.
Economies of scale are critically important in manufacturing — the opposite of diminishing returns. If it takes twenty people to produce one hundred pairs of shoes a week, it won’t take forty to produce two hundred — it might only take thirty. Instead of needing sixty people to produce the necessary shoes for all three towns, thirty-five might be enough.
Look what just happened. The same output is accomplished with thirty-five people, meaning that twenty-five can turn their energies to something else. This is the kind of efficiency that is fostered by the right kind of infrastructure spending.
Note — and this is important: It wasn’t the building of the highways that made Canada wealthier.
Again, a simple model helps make the point.
Let’s imagine that instead of building a highway that linked Towns One, Two, and Three, the same resources were spent on roads that went nowhere, that were never used by a single person. How can that possibly be understood as adding value? There would have been negative value, because the time and energy wasted could have been used for productive activity — that is, making more furniture, shoes, and clothing!
The subway system or any good public transit system impacts the real economy in a slightly different way. It makes it possible for the human capital of a municipality to be used in the most effective way possible.
Another example: I am a highly skilled carpenter who lives in the west end of a city. But all the factories that need my services are in the east end and I have no way to get there. Meanwhile, there is a highly skilled welder who lives in the east end of that city. But all the factories that need his services are in the west end and he has no way to get there. It might be that I’m okay at welding and the welder is okay at carpentry, so we are able to get jobs close to where we live. However, in this case, human capital is not being maximized.
Public transit systems that get people quickly to and from where they can add the most value are clearly accretive to growth. It’s not the spending on infrastructure, per se … it’s what the infrastructure facilitates that drives economic progress.
Infrastructure spending was key in propelling the Canadian economy forward in the 1950s. In addition, there was a great deal of attention paid to education, which improved the country’s human capital.
My mother graduated with a commercial certificate from an inner-city public high school, the equivalent of a Grade 10 education. She came from a family where neither of her parents were formally educated, and English was not spoken at home. By her own admission, she was an average student. From what I remember about my mother’s basic skills in the three Rs, her grammar and spelling were far better than mine … even with Microsoft’s assistance (if you doubt me on this one, please get in touch with my editor), and this after four years of university and a master’s degree in business administration.
But as excellent as my mother’s communication skills were, they paled compared to her math. I grew up in an era when Canada used the imperial system of measurement. Everything was in ounces, pints, and quarts. My mother grew up in a household where every penny mattered, and this was never lost on her. While she and my father worked as a team to provide wonderfully for me and my sister, my mother was acutely budget-conscious. I have distinct memories of grocery shopping at the local Loblaws, and as we walked the aisles, she would work out to a decimal place — in her head — where the best value would be found, comparing one brand’s thirty-two-ounce size with another’s forty-eight. If that doesn’t speak to the quality of public education at the time, I don’t know what does.
In 1955, there were 74,000 Canadians enrolled full-time in post-secondary institutions,4 which represented a very small fraction of the population. The vast majority of young Canadians (and this included my mother) joined the workforce after graduating from high school, equipped with the basic skills to add value immediately.
This was a good thing. Some more simple arithmetic: If you were born in 1930, life expectancy was sixty-one. If you started working straight out of high school at the age of eighteen, 70 percent of the years you had on this planet were spent in productive activity. If you started working after four years of university at the age of twenty-two, that dropped to 64 percent. Aggregate that across a population that numbered into the millions, and it adds up.
Remember Cobb-Douglas: Everything else being equal, more hours worked means higher economic growth.
Something else was going on during that decade. Even while government was ploughing huge amounts of money into infrastructure, the ratio of government debt to gross domestic product was shrinking spectacularly. In 1945, the last year of the Second World War, debt as a percentage of GDP stood at 160 percent. By the beginning of the 1950s, it had come down to a manageable 90 percent; then, ten years later, it was only 40 percent.5
How was that possible?
It’s easily explained. A growing economy meant that tax revenues were increasing, and given that government limited its role, things took care of themselves.
It’s almost impossible to overstate how important it is to minimize debt, whether it be for a household or nation. If you look at the budgets of most governments today, one of the biggest single line items is that for public debt charges. This year in Canada — at the federal level alone — interest payments will cost each Canadian close to $1,000.6 It was a different story in the 1950s. Even as government revenue was exceeding expenditures and debt was being reduced, even while the standard of living and quality of life of Canadians were improving, the personal savings rate was increasing. It ranged between 6 percent and 10 percent throughout the decade,7 and if there is one thing that history tells us — if we’re not blind to the obvious — it’s that there’s a positive correlation between savings and economic growth. In fact, higher savings rates drive higher growth.
Time for the next question … and this one is a lob ball.
QUESTION 14
Which economy experienced the higher rate of economic growth from 2000 to 2010?
☐ The United States of America.
☐ The People’s Republic of China.
According to the World Bank, the American economy grew by approximately 2 percent per year while China’s clipped