X. SUMMARY, CONCLUSIONS AND DIRECTIONS FOR FUTURE RESEARCH
X. 1. Summary and Conclusions
The main goal of this report and the 1996 report is to analyze and measure
the contribution of highway capital to private sector productivity growth. The
approach developed here explicitly incorporates demand and supply forces, including
the contribution of highway capital, which may affect productivity performance.
We estimate the model using disaggregated data composed of 35-sectors in the
U.S. economy for the period 1950-1991. The data include measures of gross output,
material inputs (inclusive of energy), and private capital and labor. We also
estimate demand and supply (cost) functions for each industry. We identify the
determinants of productivity growth for each industry, including the contribution
of highway capital, and we measure specifically the marginal benefit of highway
capital to each industry.
To generate aggregate measures for the whole economy, we use a weighted sum
of individual industry elasticities to obtain the aggregate elasticity measures
for the whole economy. Using these estimates, we decompose total TFP growth
into its various components and calculate the net social rate of return to highway
capital. The rates of return on highway capital are compared to that of private sector capital.
In this report, we modify our 1996 analysis in several ways. First, we extend
the sample period to cover the period 1950-91. The data set for the 35 sectors
which comprises the entire US economy were revised significantly and in principle
lead to a new set of estimates and results. Second, we explicitly introduce
other infrastructure capital as another unpaid input in the production structure.
We explicitly take into account the interaction of this type of capital with
private sector inputs and highway capital at the industry and macroeconomy levels.
Again, this innovation may lead to results different from those in our 1996
report.23 Finally, we use a different
functional form for the cost function, i.e. a translog instead of the Normalized
Symmetric MacFadden functional form. We do this because it is now easier to
empirically evaluate a more complicated and expanded model.
The specific quantitative results of this report are briefly summarized as follows:
- There is evidence of a mild degree of increasing returns to scale in most
industries and at the national level. The marginal products of labor, capital
and intermediate inputs vary across industries. The output elasticity of materials
is in general the largest, followed by that of labor and capital inputs. More
importantly, at both the industry level and the national level, the elasticity
of private capital is larger than that of total highway capital by a factor
of two times for the entire period and by a factor of about four times for
the period 1981-91. This result is in sharp contrast to those reported in
Aschauer (1990), Canning, Fay and Perotti (1993), and Fernald (1992). All
of those studies imply that an additional dollar of public investment is substantially
more productive than a corresponding dollar of private investment.
- Total highway capital contributes significantly to economic growth and productivity
at the industry and national economy levels. This contribution varies across
industries and over time. The magnitude of the elasticity of output with respect
to total highway capital at the aggregate level is about 0.08, which is much
smaller than comparable estimates reported in the literature and somewhat
larger than our previous results.
- An increase in highway capital has an initial productivity effect: it reduces
total cost for a given level of output for all industries and at the aggregate
economy level. This productivity effect induces output expansion in all industries
which in turn increases costs by requiring increases in input demands. When
output level is allowed to vary, the productivity gains of highway capital
offset the cost increases required by the output expansion.
- Total highway capital has a significant effect on employment, private capital
formation and demand for materials inputs in all industries. The magnitude
of these effects varies among the three inputs in a given industry and across
industries. Given a level of output, an increase in highway capital leads
to a reduction in demand for labor and materials and an increase in demand
for private capital in all industries. This result differs from those stated
in the 1996 report. There, we found that the effect on the demand for inputs
differed for manufacturing and non-manufacturing industries. When the output
level is allowed to increase in response to the costs saving effects of an
increase in highway capital investment, the direction of the effects on the
demand for labor, capital, and materials remain the same as noted earlier.
However, the magnitude of negative elasticities of demand for labor and materials
are substantially reduced in each industry. The elasticity of private capital
to highway capital increases significantly due to the induced output expansion effect.
- The marginal benefits of highway capital are positive in all but three fairly
small industries. The magnitudes of these benefits, which can be interpreted
as a measure of producers' "willingness to pay", varies considerably
across industries and over time. We observe that the average sum of marginal
benefits across all industries is about 0.294. This is somewhat higher than
the figure reported in our 1996 report. However, the individual industry marginal
benefits are much smaller than previously reported. In the current study,
there are very few negative marginal benefits at the industry level, which
accounts for the larger sum of marginal benefits for the entire economy than
our previously reported results.
- We calculate the net social return to total highway capital by using the
industry marginal benefit calculations and the cost of highway capital, while
taking into account the distortionary effects of taxation to finance highway
capital. The results indicate that the net social rate of return on total
highway capital is high during the 1950s and the 1960s, but declines considerably
in the 1980s. In the 1980s, the rates of return on total highway capital and
private sector capital seem to have converged.
- The contribution of highway capital to TFP growth is positive in all industries.
In our previous results, highway capital increased productivity growth mainly
in manufacturing industries, but not in non-manufacturing industries. Our
recent results show a more pervasive influence on TFP growth. However, the
magnitudes of the contribution of highway capital to productivity growth varies
across industries. At the aggregate level, highway capital's contribution
to TFP growth is about 0.25. Compared with estimates previously reported in
the literature, this figure is relatively small. However, this contribution
is somewhat larger than the estimate provided in our 1996 report. The decomposition
of TFP growth confirms previous results that the main contributor to productivity
growth both at the industry and aggregate levels is exogenous demand (representing
the effect of aggregate income and population growth). Relative prices and
technical change also contributed to the growth of TFP as well, but their
contributions are generally smaller and vary across industries.
X. 2. Directions for Future Research
There are a number of important issues that require further research:
- In this study, we estimate the demand and cost function for each industry
separately. A step forward would be to estimate the two functions jointly
and explicitly account for cross equation restrictions.
- Finding measures to account for quality changes in highway capital stock
and intensity of use of the capital stock are the other considerations for
future research. The quality adjustments require a careful analysis of the
highway capital stock series taking into account the vintage and depreciation
of different components of the highway capital. As far as the utilization
of the highway capital is concerned, the challenge is to find ways to convert
the stock of highway capital to service measures. This requires adjustments
for utilization of the highway capital taking account of factors such as congestion,
intensity of use of highway capital by industry, and level of business activity.
These adjustments could have important effects on the results reported. Finding
proper adjustments for the degree of utilization of the highway network is
challenging work. There are conceptual and measurement issues that need to
be addressed. However, it is likely that the averages and time profile of
the industry marginal benefits as well as the rate of return on highway capital
will be substantially affected by adjustments for the degree of utilization
of the highway capital stock.
- Another issue is to examine more closely the depreciation rate estimates
that are used to generate the total highway capital. If the depreciation rates
are not well measured then the results on marginal benefit, net social rate
of return and productivity contribution of highway capital reported here will
be affected. Analytical models are available to estimate the depreciation
rate from available investment data.24
In addition, availability of data on maintenance expenditures and other relevant
data may allow estimating a more precise measure of the depreciation rate
and thus better measures of highway capital stock.
- A careful analysis is required to examine further the size and pattern of
the implied taxes. What is important to note is that the benefits of highway
capital vary across industries. The needs of different industries for highway
services diverge over time and the degree of benefits of new highway capital
expansion may differ considerably across industries. That is, public highway
capital creates important distributional effects across industries. These
effects need to be further examined to ascertain the sign and magnitudes of
the industry marginal benefits. There are a number of possibilities to explore
in the future. One possibility is to classify industries into more detailed
categories to capture the inherent diversity within each sector. Another possibility
is to refine highway capital data in such a way to incorporate the adjustments
for quality and degree of congestion.
- Finally, in this study we have concentrated on the benefits of highway capital
to the production side of the economy. The welfare benefits of highway capital
services to the consumers have not been addressed in this report. The magnitude
of these benefits are likely to be significant. Efforts to account for the
total effect of highway capital requires modeling the consumption sector of
the economy and integrating it with the production sector in a general equilibrium
model. Such an attempt, though extremely important, at present remain outside
the scope of our research.
Chapter 9 | Appendix 1
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