Public Investment and Economic Growth

By Cullison, William E. | Economic Quarterly - Federal Reserve Bank of Richmond, Fall 1993 | Go to article overview

Public Investment and Economic Growth


Cullison, William E., Economic Quarterly - Federal Reserve Bank of Richmond


In the years following World War II, the papers of any major city . . . told daily of the shortages and shortcomings in the elementary municipal and metropolitan services. The schools were old and overcrowded. The police force was under strength and underpaid. The parks and playgrounds were insufficient. Streets and empty lots were filthy, and the sanitation staff was underequipped and in need of men. . . . Internal transportation was overcrowded, unhealthful, and dirty. . . . The discussion of this public poverty competed, on the whole successfully, with stories of ever-increasing opulence in privately produced goods.

J. K. Galbraith (1958), p. 253

After a lively debate in the late 1950s and early 1960s about the merits of John Kenneth Galbraith's theory of social balance (The Affluent Society), the economics profession dismissed (or forgot) Galbraith's admonitions about the perils of neglecting the public infrastructure. David Aschauer, however, rekindled a great deal of interest in the efficiency of public capital spending by showing that additional spending by governments for nondefense capital goods apparently had a very large positive effect on private productivity and, hence, output.

Although economists were not surprised that public infrastructure spending could promote private output growth, the magnitude of the effect found by Aschauer was startling to most. Aschauer estimated that additional public capital spending would increase the output of private firms by more than 1-1/2 times as much as would an equivalent dollar increase in the firms' own capital stock.

A Congressional Budget Office (CBO) study of the effects of public infrastructure spending concluded that Aschauer's results merited some skepticism because "the statistical results are not robust [and] there is a lack of corroborating evidence" (CBO 1991, p. 25). The CBO observed that other empirical research, including cost-benefit studies, found private output to be more responsive to investments in private capital than to investments in public capital. There were a number of other studies in response to Aschauer.(1) Some of the studies found the effects of public investment on economic growth to be smaller than Aschauer found them to be.

Alicia Munnell, formerly of the Federal Reserve Bank of Boston, tried a different statistical approach to measuring the productivity of government spending. Although Munnell (1990), like Aschauer, used a production function approach to evaluate the effects of government infrastructure spending, she approached the problem by estimating her production functions from cross-sectional state-by-state data.

Munnell (1990) used estimates of gross state product and of private inputs of capital to develop estimates of public capital stocks for 48 states over the 1970-86 time period. She then used the state-by-state data to estimate the production functions, concluding that "the evidence seems overwhelming that public capital has a positive impact on private output, investment, and employment" (p. 94).

Munnell's (1990) estimates of the relative effects of public investment were smaller than those made by Aschauer. Hulten (1990), commenting on Munnell, observed that her findings of smaller relative effects were consistent with other studies that analyzed state data but that her findings differed sharply from the results of studies that were based upon time series.

The CBO (1991), in summarizing the results of cost-benefit studies, noted that there has been little support for the view that across-the-board increases in public capital programs have remarkable effects on economic output. Rather, they concluded that "cost-benefit analysis paints a fairly consistent picture of high returns to maintaining the existing stock of physical infrastructure and to expanding capacity in congested urban highways and runway traffic and air traffic control at major airports" (p. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Public Investment and Economic Growth
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.