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March 16, 1990
"Public Payback - Prosperity Depends Upon Re-investing in the Infrastructure"
San Jose Mercury News
By Timothy Taylor
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IF 130 pages can be condensed into a single sentence, here's the thrust of the national transportation policy statement released last week by President Bush and Transportation Secretary Samuel Skinner: An improved transportation system is important, but paying for it is not a federal responsibility.

This approach to transportation policy is less inconsistent than it might seem at first glance, since local governments have always paid the lion's share for public infrastructure. Last year, for example, total federal spending on all transportation was $28 billion, while state and local spending on highways alone came to nearly $60 billion.

Moreover, the federal share of spending on transportation and public infrastructure has been declining. In 1970, 40 percent of total government spending on infrastructure was local; a little more than 30 percent was state spending; and a little less than 30 percent was federal spending. Today, local government accounts for over half of public infrastructure spending, with state and federal government accounting for a bit less than one-fourth each, according to the Population Reference Bureau.

The idea of having state and local government shoulder more of the burden for transportation infrastructure is old news. Bush and Skinner were simply endorsing an ongoing trend.

The real transportation problem is not a squabble over which level of government should pay, but the more fundamental problem that not enough is being spent. It may seem obvious that an improved and modern infrastructure of roads and airports will lead to more productivity and economic growth, but it's only in the last year or so that economists have come up with numerical estimates of just how important it is.

The total capital stock of the United States was worth $6.4 trillion in 1987, according to the U.S. Bureau of Economic Analysis. About 63 percent of that total ($4.1 trillion) is owned by private businesses. Seven percent ($.4 trillion) is government military capital. The remaining 30 percent ($1.9 trillion) is accounted for by highways, airports, bridges, mass transit, hospitals, schools, sewage treatment plants, and all the other things that generally go under the name of infrastructure.

David Aschauer, a senior economist at the Federal Reserve Bank of Chicago, has published several papers in the last year examining the link between overall economic productivity and the level of investment in the "core infrastructure" of roads, highways, airports, mass transit, port facilities, and so on. His statistical tests found that a sharp decline in public spending on core infrastructure was a major cause of the sharp fall in U.S. productivity that occurred around 1973.

Aschauer also found that while U.S. public spending on new infrastructure has averaged about 1 percent of GNP over the last 25 years, Japan's public spending on new infrastructure has averaged about 5 percent of GNP. During some years in the late 1970s and early 1980s, when the United States wasn't even investing enough in infrastructure to offset the natural costs of wear and tear, Japan's spending on core infrastructure was at its highest.

Alicia Munnell, a senior vice president at the Federal Reserve Bank of Boston, has built on Aschauer's work to calculate the potential benefits of rebuilding America's core infrastructure. Her figures show that until 1973, public investment in core infrastructure was growing about 2 percent per year more rapidly than the labor force. On average, each American worker had 2 percent more public capital at his disposal each year.

But since then, growth in infrastructure has lagged behind growth in the labor force. On average, American workers of today are supported by a lesser investment in roads and airports than workers of a generation ago.

Munnell calculates that investing enough in public infrastructure to keep pace with growth in private capital spending could increase labor productivity by nearly 1 percentage point per year. Over a decade or two, that additional growth would compound into a substantially higher standard of living.

Bush and Skinner's transportation policy statement emphasizes toll roads, gasoline taxes, charges on airport users, and similar ways of financing transportation spending. Many of these steps are worth taking on their own merits.

But I fear that these steps by themselves won't provide the needed boost in infrastructure spending.

State and local governments will spend money on transportation as their constituents demand it, but a better transportation system in one city or state provides (sometimes indirect) benefits to consumers and workers and travelers all around the country. States and localities will tend to underinvest in transportation, because they have little reason to take these benefits to non-constituents into account. The interconnected system of roads and airports is worth more than the sum of its parts.

Bush and Skinner's transportation statement shows little awareness of the important role that the federal government has to play in overseeing the entire grid of transportation, and in helping to fund it. The federal government doesn't need to put up all or even most of the money, but federal financial incentives can have a big effect on the willingness of state and local governments to undertake such projects.

Reducing the federal budget deficit is tremendously important, but rebuilding and improving America's core infrastructure may be one of the few federal spending programs that is even more important for long-run economic health.

From the end of World War II until 1973, the public infrastructure of highways, mass transit, airports, ports, and so on increased more rapidly than the American labor force. Since then, however, the labor force has grown more rapidly than the infrastructure. This chart shows the average annual change in non-military public capital and in the labor force.

Years public Change in

Change in
labor stock

1948-53 3.2% 1.4%
1953-60 4.1% 0.4%
1960-69 4.7% 1.9%
1969-73 2.8% 1.5%
1973-79 1.6% 2.1%
1979-87 1.0% 1.4%

Source: Alicia H. Munnell, "Why Has Productivity Growth Declined? Productivity and Public Investment," New England Economic Review, January-February 1990.

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