The Interregional Impact of Infrastructure Capital

Abstract

Increasingly, economists and state and local policymakers see a broader link between declining regional competitiveness and the deterioration of highways, bridges, water and sewer systems, and other public infrastructure. Supporters of active industrialization policies point out that one way a region can regain its competitive edge is to upgrade its infrastructure. The Clinton Administration, citing the lack of infrastructure investment as a cause of sluggish national economic growth, advocates massive spending hikes to repair existing public capital and to invest in new public capital. The groups supporting this approach rely on recent empirical evidence showing that public infrastructure investment generally makes a significant contribution to productivity and output [2; 4; 5; 12; 16; 18]. Existing studies, however, report disparate results about the size of the effect of public capital on economic growth. Aschauer [2], using aggregate time-series data, estimated output elasticities with respect to public capital ranging from 0.39 to 0.56. Munnell [18] updated Aschauer's study and reported an elasticity of 0.33 for labor productivity with respect to public capital. The magnitude of the estimated elasticities and the associated marginal product of public capital in these two pioneer studies are generally accepted as extraordinarily large. The debate on their size is extremely lively. Two fundamental issues dominate the debate. First, Aaron [1] draws attention to the implausible nature of the earlier results by comparing the marginal productivities of public and private capital implied by these studies. He finds that the implied marginal productivity of public capital is five times greater than that of private capital. Second, McGuire [14] and Eisner [6] contend that the empirical evidence from the aggregate time-series data is not compelling. McGuire argues that the established statistical relationship may not imply a causal connection between infrastructure and economic performance. Eisner also questions the causal link by suggesting that one cannot

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