Academic journal article Federal Reserve Bank of New York Economic Policy Review

Infrastructure and Social Welfare in Metropolitan America

Academic journal article Federal Reserve Bank of New York Economic Policy Review

Infrastructure and Social Welfare in Metropolitan America

Article excerpt

* Infrastructure investment may indirectly affect firm productivity and household welfare through its impact on the location of economic activity.

* State infrastructure policies currently favor decentralization--the opening of new territory to development and the movement of firms and households from dense urban environments to the surrounding suburbs.

* Recent research, however, suggests that the clustering of producers and consumers in a given geographic area is economically and socially beneficial.

* In light of this research, institutional reforms that would change the management and direction of public infrastructure investment may be in order. Agencies authorized to choose and finance investments that promote regional well-being would most likely target more investment to central cities and less to the surrounding suburbs.

Public infrastructure is an important part of a well-functioning urban economy. Such infrastructure--defined here as publicly owned and maintained physical capital--has historically played a central role in allowing cities to grow by mitigating or reducing problems such as congested roadways, potholes, water-main breaks, and overcrowded schools. Yet while the benefit of some public works can hardly be disputed, a key policy issue is whether additions to our stock of public infrastructure provide overall benefits that exceed their costs. (1) That is to say, is the amount of infrastructure we have sufficient, or would we benefit from an increase? Another important question is, do our institutional structures promote efficient infrastructure investment decisions?

As these questions suggest, the status of urban public infrastructure is an important topic. Education and highway facilities are being stretched to their limits in fast-growing cities and suburbs, while concerns are being raised about the level and physical condition of public works in slower growing, older central cities. (2)

No doubt, public investment is an important function of government, and it is particularly crucial at the state and local level. In 1999, states and localities invested more than $210 billion in equipment, software, and structures (Table 1). By combining this amount with the nearly $43 billion in nondefense investments made by the federal government, we see that new gross public investment in 1999 exceeded a quarter-trillion dollars, or 2.7 percent of GDP. Moreover, the stock of publicly owned nondefense capital in 1999 exceeded $4.5 trillion, or nearly 50 percent of GDP. (3)

Although complete data on the geographic distribution of this spending are not available, it is certain that a large share of these national totals, particularly the state and local portions, is going to public investment in and around America's metropolitan areas. More than 200 million people reside in these areas, and the public investments made there affect the lives of a large and growing share of the U.S. population. (4)

Accordingly, the question of whether we should increase the amount of infrastructure available has received much attention from economists. This article puts that research into a broad perspective, attempts to draw policy conclusions from what is known, and suggests some directions for further research.

Infrastructure investments can affect social welfare in two ways (see Appendix A). One way is by adding to economic growth. The relationship between infrastructure and economic growth has been the subject of intensive economic research over the past decade. The second way in which infrastructure investments can affect social welfare is by potentially improving the quality of life of those living in the invested area. For example, public parks, water systems, and other facilities can improve social welfare without having any effect on residents' incomes. This article also examines this second channel, which has received less attention in the research, in part because the value of quality-of-life improvements is difficult to measure. …

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