Highways and the Economy: Macroeconomic Perspectives

The link between public capital and private sector economic performance is important for the Federal Highway Administration and national transportation policy because street and highway capital constitute almost one-third of the public capital stock of the United States. Until the late 1980s, most work on the effects of public highway spending used benefit-cost analysis, techniques that examine the effects of a single project or group of projects on highway users. These studies have the disadvantage of leaving unexamined the overall national effects of highway investment while also ignoring the spillover benefits of highways for landowners and businesses among others. Consequently, several economists in the late 1980s and early 1990s began econometric evaluations of public capital investment, studies of immense interest to FHWA.

These early econometric studies such as those done by Aschauer (1989) and Munnell (1990) came under intense criticism for a variety of different reasons including spurious correlations, the double counting of benefits, and poor measures of the country's capital stock (see Hulten and Schwab [1991], for instance). To counter these criticisms and improve econometric studies of the effects of highway investment, FHWA sponsored two new research programs. First, FHWA set out to help develop a measure of highway capital stock that could be used in econometric studies. To that end, FHWA sponsored research by Barbara Fraumeni subsequently published in a number of papers and reports including Productive Highway Capital Stock Measures (1999). Second, FHWA sponsored new econometric research by M. Ishaq Nadiri and Theofanis Mamuneas.

Prior to the involvement of FHWA, Nadiri and Mamuneas had begun to develop new econometric techniques to examine the links between public infrastructure capital and economic development. This research was published in a 1994 paper entitled The Effects of Public Infrastructure and R&D Capital on the Cost Structure and Performance of the U.S. Manufacturing Industries. The paper looked at the effects of public infrastructure investment and R&D spending on the performance of 12 U.S. manufacturing industries. The results show that public investment yields lower cost structures, suggesting productivity gains. Furthermore, the research estimated the social rates of return on infrastructure and R&D capital to be 7 and 10 percent respectively. Nadiri and Mamuneas found that the marginal benefit of public spending on infrastructure and R&D varies widely between industries. In some instances one type of investment or the other may prove more effective than another depending on the industry.

Although this research was valuable, FHWA was more interested in examining the relationship between the economy and highway capital alone. To that end, FHWA sponsored further research by Nadiri and Mamuneas that was presented in a 1996 report Contribution of Highway Capital to Industry and National Productivity Growth. The research sought to answer questions about the effects of highway capital investment on private-sector production costs, the optimal level of highway capital investment as compared to contemporary levels, and the effects of capital expenditure on the national economy. Nadiri and Mamuneas expanded their model from 1994 in this report to include 35 U.S. industries that are representative of the national economy. Using that model, they examined the effects of total highway capital and non-local highway capital. The report compares the social rate of return on infrastructure investments by decade and examines why that return has declined from 35 percent returns in the 1950's and 60's to approximately 10 percent returns in the 1980's. The results of this study were explained in a non-technical booklet published the same year by FHWA entitled Productivity and the Highway Network: A Look at the Economic Benefit to Industry from the Investment in the Highway Network.

The research by Nadiri and Mamuneas posed several questions about highway investment and economic development. These included: what led to the extremely high returns in the 1950-1970 period and what future public investments in transportation infrastructure might have similarly massive impacts? Can public policy be targeted to produce such high returns in the future and continue to benefit the nation's economic health, its international competitiveness, and its quality of life? To explore these questions the FHWA helped sponsor a forum on July 23, 1996. A summary of the forum was subsequently published by the Eno Transportation Foundation (Economic Returns from Transportation Investment).

The interest stimulated by the research of Nadiri and Mamuneas, spurred FHWA to pursue some further improvements. This research was presented in a 1998 report prepared for FHWA: Contribution of Highway Capital to Output and Productivity Growth in the U.S. Economy and Industries. The report documents three main improvements on the earlier paper. First, underlying economic data are extended to include the period 1947 to 1991 and take into account recent revisions in national income accounting and industry reclassifications. Second, other types of public infrastructure capital are introduced into the model to address concerns about the effects of omitted explanatory variables. Third, assessments of highway capital's impact on the private sector demand for labor, capital, and intermediate goods are broadened to consider the output expansion effect of public road investments.

To explain the significance of the work by Nadiri and Mamuneas to a wider audience FHWA produced a synopsis entitled A Summary of "Contributions to Output and Productivity Growth in the U.S. Economy and Industries." The synopsis explains the transition from the 1996 to the 1998 paper and provides an explanation of the importance of such research. Also included is a summary of answers to questions posed by Nadiri and Mamuneas. Topics addressed in the summary include assessments of the marginal benefits of increased highway capital for industry, the sufficiency of the supply of highway capital stocks, and other related issues.

The following year, FHWA help sponsor another forum on public investment and economics with a focus on two main issues. The first was the need to improve the tools used to evaluate the relationship between transportation investment and economic vitality. The second was the need to improve communication of the output of those tools to policymakers. Another goal of the forum was to encourage researchers to tailor their future efforts to better address the questions that policymakers and the general public wanted answered. Since effectively communicating findings is crucial, forum participants advocated integrating the output of economic models with real world success stories in order to generate interest in highway investment. A summary of the forum was published by the Eno Transportation Foundation in Transportation Investment: New Insights in Economic Analysis.

Despite the success of the work by Nadiri and Mamuneas presented in the 1996 and 1998 reports to FHWA, the research still was only a partial measure of social welfare gain. Empirical estimates of consumer benefits of road infrastructure provision were needed for a full accounting. To that end, FHWA sponsored another project to take into account the impacts on consumers that result from infrastructure investments by estimating consumer' willingness to pay for highway services. Most prior work that attempts to estimate consumer willingness to pay focuses on specific regions. The main finding of this study is that highway infrastructure investment increases consumer demand for durable and non-durable goods. An efficient highway network is found to be essential to the vitality of an economy; it provides access to a wide range of goods at comparatively lower costs. These benefits to consumers represent externalities of public infrastructure investment. The results of this project were presented in A Report on the Effects of Highway Capital on Consumption Demand.

The capstone of nearly a decades worth of research was delivered in 2003 when Mamuneas and Nadiri, again sponsored by FHWA, pulled together the effects of highway investment on producers and consumers in their report Production, Consumption and the Rates of Return to Highway Infrastructure Capital with estimated rates of return for highway capital investment for the period from 1949 to 2000. The rates of return account for the economic activity of both producers and consumers, as well as the distortions that result from financing infrastructure with taxes. Mamuneas and Nadiri estimate the average rate of return for highway capital to be 34% from 1949 to 2000. They find that toward the beginning of the period from 1949 to 2000, the return on highway capital far exceeded the yield on long-term bonds. Toward the end of that time period the two rates converge. The authors believe this indicates that no significant shortage of highway capital exists.

References

Aschauer, D.A. (1989). "Is Public Expenditure Productive?" Journal of Monetary Economics, 23, 177-200.

Hulten, C.R. and R. M. Schwab (1991). "Public Capital Formation and the Growth of Regional Manufacturing Industries." National Tax Journal, 43, 121-34.

Munnell, A.H. (1990). "Why has Productivity Growth Declined: Productivity and Public Investment?" New England Economic Review, January/February, 2-33.