III. THE MAIN FINDINGS OF THE 1996 REPORT
The 1996 examines the contribution of two alternative types of highway capital
to output growth and productivity of thirty-five U.S. industrial sectors individually
and of the economy as a whole. . Two measures of highway capital are used in
this study. The first is total highway capital, which includes roads under federal,
state, and local government jurisdiction. The second is the stock of upper level
roads excluding local government investments in roads and streets, which is
commonly referred to as the non-local highway system (NLS). The NLS includes
the federal-aid highway system, with the exception of expenditures on secondary
rural roads, and represents approximately 70 percent of total highway capital
stock. The purpose of incorporating the NLS stock in the analysis was to examine
the impact of a highway network consistent with the underlying definition of
the National Highway System (NHS). We also wanted to see whether the rate of
return on the NLS stock of highway capital was different from that of the total
highway capital. Furthermore, we wanted to test the sensitivity of the model
estimates to different measures of highway capital stock.
The relevant policy issues addressed in the 1996 report are:
- The effect of highway capital on the private sector's total cost and demand
for labor, capital, and intermediate inputs;
- The marginal benefits to specific industries and the economy as a whole
of an increase in highway capital;
- The contribution to productivity growth of highway capital and the overall
social rate of return to this type of capital; and
- Any evidence of over- or under-supply of this capital in the post-war period
and whether a shortage of highway capital can explain some of the decline
in the aggregate productivity growth.
To answer these questions an analytical framework possessing several advantages
over existing models reported in the literature was developed and estimated
using a comprehensive body of data covering thirty-five industries and sectors
of the US economy for the period 1950 to 1989. The basic elements of this analytical framework were:
- The effect of aggregate demand on the productive behavior of individual
industries; that is, the effects of changes in aggregate income and population
on industry demand which in turn affect the output and productivity growth of the industry;
- The contribution of changes in real factor prices, including wages and capital
rental prices, on productivity growth;
- The impact of highway capital, both the total stock and the NLS, on the
demand for labor, materials and private sector physical capital;
- The marginal benefits of highway capital to various industries and sectors
of the economy and its contribution to the output and productivity growth
at the aggregate economy level; and
- The externality effects, the calculation of the social rate of return of
highway capital, and the comparison of the contributions of private and highway
capital to economic and industry productivity growth.
The main results of the 1996 report can be briefly summarized as follows:
- Total highway capital and NLS capital contribute significantly to economic
growth and productivity at the industry and national economy levels. Their
contributions vary across industries and over time. The magnitude of the elasticity
of output with respect to total highway capital at the aggregate level is
about 0.05, which is much smaller than comparable estimates reported in previous
literature which are about 0.39.6
- The contribution of highway capital to TFP growth is positive in almost
all industries, except in some non-manufacturing industries. The magnitudes
of the contribution vary across industries, although the most significant
contribution is to the productivity of manufacturing industries. At the aggregate
level, highway capital contribution to TFP growth is about 0.17. One possible
explanation for the negative result in some of the non-manufacturing industries
could be that the supply of highway capital exceeds what the industries are
willing to pay at that price.
- There is evidence of increasing returns to scale both at the industry level
and the national level. At both levels, the contribution of private capital
to economic output is about four times that of total highway and NLS capital.
This result stands in sharp contrast to those reported in earlier literature.
The estimates of the parameters of the model did not significantly change
whether total highway capital or NLS capital were used as the measure of public
capital. Some evidence exists that the elasticities of cost and factors of
production are somewhat higher when the NLS is used as the measure of public capital.
- Both total highway capital and NLS capital have significant effects on employment,
private capital formation and demand for materials and inputs in all industries.
The results suggest that an increase in total highway capital or NLS capital
leads to a reduction in demand for all inputs in manufacturing, while in non-manufacturing
industries the pattern is mixed. The magnitude of these effects varies across
the three inputs in a given industry and among the industries. These results
were based on assuming the level output fixed. The effect of output expansion
induced by lower costs due to increase in highway capital was not considered in 1996 report.
- The marginal benefits of total highway capital and NLS capital at the industry
level are calculated by using the estimated cost elasticities. The marginal
benefit of highway capital varies across industries. The marginal benefits
are negative for non-manufacturing industries, but their magnitudes are small
suggesting that the demand for highway capital services at the price these
industries were willing to pay is slightly less than the available supply.
- The results indicate that net social rate of return on total highway capital
was high (about 35 percent) in the 1950s and 1960s, then declined considerably
up until the 1980s to about 10 percent. The same pattern holds for NLS capital,
although the current net social rate of return is higher for NLS, approximately
16 percent. In the 1980s the rates of return on total highway capital and
private sector capital seem to have converged considerably.
- The main contributors to productivity both at the industry and aggregate
levels are exogenous factors that shift industry demands such as aggregate
income and population growth. Relative prices and technical change also contribute
to the growth of TFP, but their contributions are generally smaller and vary
across industries. Highway capital contributes to long run trend TFP growth.
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