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FHWA > Policy > Transportation Investment: New Insights from Economic Analysis

Summary

In the early 1990s, academic research proposing a vital connection between public infrastructure investment and "productivity growth rate" coincided with an economic recession, sparking great interest in the potential for investment in transportation as a way to spur economic growth. However, the strong claims of the initial research, put forward most notably by David Aschauer, now of Bates College, and later by Alicia Munnell of the Boston Federal Reserve Bank, came under attack in the research community. Plans to dramatically increase public infrastructure spending instead bowed to pressures to reduce the sizable federal budget deficit. With the decade drawing to a close, national fiscal pressures have been relieved, yet researchers still grapple to reach a consensus on the effects of transportation investment on the economy.

On February 23, 1999, 35 academic, government, and private-sector leaders met in Washington, DC, to discuss the importance of transportation investment for the future of the American economy. The one-day conference, sponsored by the Eno Transportation Foundation, focused on two issues:

Ishaq Nadiri of New York University and the National Bureau of Economic Research presented the results of his most recent national study, Contributions of Highway Capital to Output and Productivity Growth in the U.S. Economy and Industries. This work offers solid support for the value of transportation investment. Analyzing the costs of 35 different industry groups over a 40-year period, Nadiri finds that greater investment in transportation infrastructure leads to lower business costs in almost all of the industries studied. The average rate of return for these transportation investments throughout the study period is at or above the average rate of return for private-sector investments. The corresponding implication is that the government's expenditure of tax money on transportation infrastructure has been an economically worthwhile activity. However, the most recent average returns have been the smallest of the past 40 years, indicating that the current highway system may have reached maturity.

Ishaq Nadiri and the forum participants identified several areas for future research. While Nadiri's study effectively captured the national effects of building the Interstate Highway System, the effect of such investment on a more local scale needs to be analyzed. One important area for future research is to incorporate the level of use of transportation infrastructure into studies. Trucking deregulation, enacted in the early 1980s, and increases in traffic congestion are believed to have profound effects on the use and value of roads and highways. But these effects have not been fully measured. Understanding the importance of capacity utilization will go a long way to clarifying the benefits of new policies such as the intelligent vehicle highway system ("smart highways") or research and development of other capacity-enhancing developments.

Photo of Curtis Wiley and Ishaq Nadiri

Curtis Wiley, Indiana Department of Transporation, Forum Chair (left), and Ishaq Nadiri, New York University

Participants also identified other ways to improve the tools of economic analysis. Several members of the group expressed a desire to measure benefits from transportation investment beyond the typical cost reductions for industry. The economy also benefits when transportation improvements increase the attractiveness of tourism and passenger safety. Arthur Jacoby of the Federal Highway Administration and Charlie Han of the Bureau of Transportation Statistics offered evidence that industries with higher proportional logistics costs derive greater benefit from transportation investments. Their work suggests that more attention needs to be paid to the specific mechanisms through which transportation investment benefits industry. Barbara Fraumeni from the Bureau of Economic Analysis offered recommendations for ways to more accurately measure the productive nature of highway capital.

Clyde Pyers of the Maryland Department of Transportation and Greg Bischak from the Appalachian Regional Commission presented state and regional case studies of highway investment programs. These studies showed reasonable rates of return to recent highway investments, relative to promoting short-term job creation, providing construction spending benefits, reducing longer-term industry costs, and affording net travel savings to the public. A few participants questioned whether these regional investments created benefits at the expense of economic activity in other areas. But the more widely held view was that these improvements do not constitute a zero-sum game. Further work could better identify the interrelations between localities and help to resolve the "net benefit" question.

While analytical improvements to better measure the relationship between transportation and growth is a vital activity, effectively communicating results to policymakers and the public is an equally important challenge. Miles Friedman of the National Association of State Development Agencies and Terrence Mulcahy from the Wisconsin Department of Transportation led the group to a number of insights. Rate of return measures of the kind generated by Nadiri's work provide justification for implementing transportation investment policies. At the same time, such returns alone may not be sufficiently compelling to the general public and legislators. Case studies and individual stories often provide much more effective calls to action. Effectively communicating results becomes a question of how to tie together local impacts, anecdotal evidence, and program-wide estimates.

One solution is to use stories and studies in tandem. National and state studies may reinforce and provide context for local anecdotes, and they can provide a starting point for local discussions of the pros and cons of specific projects. Conversely, stories of successful transportation projects can provide the edge needed to generate wider appeal for infrastructure investments.

Another solution is to make the results more closely address the questions that policymakers and the public want answered. People want to know about transportation's relationship not only with growth, but also with quality of life, community development, and local commerce. Because of its role as a facilitator of activity, states and regions should incorporate transportation analysis into their strategic planning and tie it into the area's economic development plan. Different regional development priorities will lead to different research needs—urban versus rural areas, manufacturing versus service sector businesses, retail versus wholesale trade, and tourism versus job access.

Overall, the conference offered several studies supporting the value of recent highway investment and identified a number of ways to improve future work in this field. By continuing to refine our tools to understand the mechanisms of growth and by using these tools to address a wider set of public concerns, we can more clearly illuminate the ways in which transportation investments change lives.


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