Academic journal article Economic Commentary (Cleveland)

Is Public Capital Productive? A Review of the Evidence

Academic journal article Economic Commentary (Cleveland)

Is Public Capital Productive? A Review of the Evidence

Article excerpt

In recent years, analysts and policymakers have voiced concern that public investment in the United States may be too low. In response, the Clinton administration's original economic strategy emphasized a plan to expand investment in public infrastructure.(1) Now, however, the Republican-controlled Congress is looking for ways to achieve a balanced budget by the year 2002. When the budget ax falls, will infrastructure programs be among those targeted for cuts? In making such decisions, policymakers need to consider the evidence regarding the productive effects of public capital on the U.S. economy.

What Is Public Investment?

Before examining the relationship between public capital and private-sector production, it is necessary to define what is meant by public investment. Investment can be defined as the expenditure of current resources to produce some future benefit. In contrast, consumption expenditures yield immediate benefits. By these definitions, we would classify public investment as any type of government outlay that provides economic benefits beyond the current budget cycle.

Although it is often difficult to quantify the benefits of government programs, there are basically three types of public outlays that can clearly be labeled as investment: physical infrastructure programs, human capital programs, and government-funded research and development (R&D). Infrastructure programs support the stock of physical public capital, such as transportation and environmental facilities. Human capital programs are aimed at increasing the skills and productive knowledge that people bring to their jobs. And government-funded R&D helps to expand the body of basic knowledge that drives technological progress. This wealth of knowledge can be viewed as the nation's stock of intangible capital.

The Rationale for Public Investment

There are various ways of rationalizing public investment programs. The standard "public good" argument states that the government should provide goods and services that would otherwise be underproduced by the private sector. For example, a private road-building firm may undertake too little highway construction because it fails to consider the economic benefits that accrue to communities outside the immediate vicinity of the road. Such logic has also been used to argue that highway construction should be funded at the federal government level, as opposed to leaving these decisions to state or local governments.

Another rationale is that the government has an advantage over individual firms in its ability to manage the risk associated with certain types of investment. The high-risk nature of R&D projects, for example, may cause private firms to devote fewer resources to this activity than is socially desirable. Finally. public investment programs may be rationalized as a means of achieving various social goals. Job training, for instance, can be viewed as a way to help reduce income inequality, since it improves the prospects of higher-paying jobs for the poor.

The Role of Public Capital in Production

While all three categories of public investment are quantitatively significant in the U.S. economy, this article will focus on the productive effects of physical public capital.(2) In the United States, the stock of physical public capital is about one-third the size of the private capital stock. The "core" infrastructure, which represents the largest single component of public capital, consists of streets, highways, bridges, airports, transit systems, public utilities, and the like. State and local governments own about two-thirds of public capital, while the federal government owns the stock of military capital, which represents about one-fifth of the total. The collective governments maintain and expand the stock of public capital with expenditures financed by taxes and borrowing.

There are straightforward reasons for believing that public capital is important to private production. …

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