Academic journal article Review - Federal Reserve Bank of St. Louis

Is an Infrastructure Crisis Lowering the Nation's Productivi

Academic journal article Review - Federal Reserve Bank of St. Louis

Is an Infrastructure Crisis Lowering the Nation's Productivi

Article excerpt

THE STATE OF THE NATION'S public capital stock and its importance to the nation's overall economic well-being have become the subject of widespread speculation, investigation and concern. This concern has been reinforced by a decline in the rate of growth of the public sector capital stock that began in the 1970s. This decline, some analysts argue, caused stagnation of U.S. productivity growth and a corresponding decline of the nation's standard of living and in its international competitiveness.(1) These analysts conclude that increased federal infrastructure spending is an urgent national priority with high expected returns. Their view is referred to as the infrastructure deficit hypothesis below. Candidates for the presidency in the 1992 elections lent credibility to this view and expressed strong commitment to boosting infrastructure spending.(2) (The Clinton Administration's infrastructure program, called "Rebuild America" and announced in February 1993, is described in the shaded insert on page 14.) This article reviews the claims made by proponents of the infrastructure deficit view and the evidence against it.

WHAT IS INFRASTRUCTURE?

Infrastructure refers to the relatively large physical capital facilities and organizational, knowledge and technological frameworks that are fundamental to the organization of communities and their economic development. It includes legal, educational and public health systems; water treatment and distribution systems; garbage and sewage collection, treatment and disposal; public safety systems, such as fire and police protection; communications systems, public utilities and transportation systems. The federal government's principal involvement in infrastructure formation involves the military, legislative and judicial functions. The components of infrastructure in these areas largely are not physical capital, nor is the largest physical component of public sector infrastructure, national defense, generally included in the discussion of the infrastructure deficit hypothesis. In this article, public infrastructure--or the public capital stock--is defined narrowly to include only tangible, nonmilitary public capital goods.(3)

The key word in describing infrastructure above is system. Infrastructure typically requires relatively large initial capital outlays to provide services potentially to all persons in a geographic area; its incremental services are relatively cheaply provided to any new household. In many cases, physical units of infrastructure capital come in relatively large and "lumpy" units, such as highways, plants and buildings.

Table 1 provides a detailed breakdown of the components of public capital at the end of 1992, measured in current prices. This measure of the capital stock, which is net of depreciation, is an estimate of the replacement cost of capital at current prices; it is prepared by the Bureau of Economic Analysis of the U.S. Department of Commerce.(Table omitted) The constant-dollar (1987 prices) net stock is used below to compare trends in the volume, or quantity, of public capital. The collection of public sector physical plant and equipment includes a broad range of capital goods, some of which, especially when held under private ownership, are not commonly thought of as infrastructure, and some which are not related to any special function of government.

PUBLIC VS. PRIVATE INFRASTRUCTURE

Much of the infrastructure in a highly developed market economy such as the United States' is privately provided and managed. Some examples include most electric and gas utilities; communications firms, such as telephone, radio, television and cable services; private educational institutions; and private providers of transportation services. Similarly, local governments have recently begun to privatize infrastructure by selling off public assets, contracting for the capital services (for example, private prisons or police), or mandating that private developers provide infrastructure capital to secure development approval. …

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