FHWA > Policy > Economic Returns From Transportation Investment

Summary

Economic productivity is key to maintaining the nation's global competitiveness and a rising standard of living. However, productivity, along with overall economic growth, has slowed considerably in the U.S. since the 1970s. Investments in transportation infrastructure benefit economic productivity by allowing more efficient processes, economies of scale, changes in distribution or logistics patterns, and reduced costs. Although the impacts of the system surround us, few attempts have been made to estimate the overall, program-wide economic benefits of public investments in transportation facilities.

Recently, Dr. Ishaq Nadiri, an economist at New York University, has found that there has indeed been a significant positive rate of return from public investment in highways in the United States in recent decades, although the magnitude of this return tapered off in the 1980s. As the nation prepares to design highway legislation for the next five years, the implications of this most recent work on economic returns could have major implications.

The Eno Transportation Foundation convened a public policy forum to discuss the economic return on transportation investment. About 35 people with varied perspectives on this issue attended this day-long discussion on July 23, 1996.

The Federal Highway Administrator, Rodney Slater, opened the forum by saying that the FHWA has made fostering productivity growth through investment in highways one of its primary goals. He emphasized the importance of high-quality economic research to find the linkage between highway investments and economic performance.

Professor Nadiri described that there has indeed been a significant positive rate of return from public investment in highways in the United States in recent decades, although the magnitude of this return has tapered off in later decades. During the 1950s and 1960s, the social return on those investments – the total return to business less depreciation — far exceeded those earned on private capital. During the 1980s, these returns were roughly equivalent to the rate of return earned on private capital investment over the same period. Investment in national systems in particular, which usually involve larger networks of roads and highways than local projects, had a higher rate of return than private capital over this period.

The high rates of return in earlier years and their rapid decline in subsequent years were largely the result of at least three factors. First, in the 1950s and 1960s, transportation demand was strong as the American economy expanded rapidly. The investments in the Interstate Highway System naturally produced high returns because the rapid growth in the post-war economy required an expansion in infrastructure to accommodate it. Second, unlike for private capital, the benefits of public investment in transportation were shared by many industries. Third, as initial needs were met and the highway system matured, it was only natural that subsequent investments produced lower rates of return. Nevertheless, recent returns, although lower, are positive and significant.

Nadiri also concluded that investment in highway capital made a significant positive contribution to the economy's rate of productivity growth. But the declining rate of growth in highway capital made only a minor contribution to the slow rate of growth in economic productivity in the 1980s. This refuted the conclusions of earlier studies which showed that there was a dramatically higher contribution to productivity from infrastructure investment than from private capital investment.

While existing studies generally report a positive contribution from infrastructure investment, there is a wide variety of results. Rates of return on public infrastructure investment clearly vary significantly over time, place, and according to the economic context of the region or nation in which the investment is made. Future research should be directed towards determining which kinds of infrastructure investment will make the largest contributions to aggregate and sector productivity growth.

An overriding issue is how to continue to make significant investments in transportation infrastructure in an era of scarce public resources. The use of public-private partnerships may be able to make up for shortfalls in new capacity in the federal, state and local transportation programs. Innovative financing methods involving both public and private sectors may also be effective in a time of more limited public resources.

In general, forum participants agreed that a public awareness must be created for thinking about how infrastructure investment can promote the growth of the nation's productivity. These impacts are significant and of a national, not local, character. They should be at the center of the debate, yet public policy discourse does not yet take into account these far reaching impacts. Participants urged policy makers to apply the results of new economic research to their decision-making processes and to develop new ways to present the case to legislators and to the public that infrastructure investment can improve productivity and economic growth.

While the results of the new research analysis are powerful and promising, it would be self-defeating to exaggerate the new research findings. The new research has corrected many of the flaws of earlier studies, but its results need to be presented cautiously and understandably.

Professor Jose Gomez-Ibanez, Chairman of the forum, summarized the main points of the forum as follows:

First, the Nadiri research shows that there have been significant returns to public highway investment. While these returns have declined over time, they are still significant. They are the equivalent of returns to private capital.

Second, these returns vary significantly, and we do not always understand why this is so. They vary over time. In the 1950s and 1960s, the interstate highways replaced the open-access roads that came before them, which may explain much of the decline in returns. But they also vary according to place. Additional highway investment may be useful in some regions or areas and not in others.

Returns can also appear to vary according to where in the overall sequence they are made. The first roads or highways in a region appear to generate higher returns than subsequent ones.

Returns can also vary depending on the institutional context. If trucking in a nation is a monopoly, the benefits of infrastructure investment will accrue to truckers rather than the economy as a whole. So, for the potential returns of transportation to be fully realized, the context must permit the interacting institutions to exploit new efficiencies.

Infrastructure investments can produce sizable returns, but only if they are the right investments at the right time — investments that create growing room. The fact that policy makers appear to have selected such investment in the 1950s and 1960s does not tell us much about what the best opportunities are today.

Third, we may never know the full effects of highway investment on productivity. This is not merely because our statistical tools are not perfect. New infrastructure creates a context for further innovation that cannot usually be predicted. People are enabled by the new infrastructure to create different ways of doing things that are subtle and have long lead times. They are the sorts of things that can never really be traced out beforehand—or sometimes even after the fact. For example, we still have difficulty disentangling the effects the railroads had on 19th century America.

Finally, how can the new research be used? To be valuable to policy makers it must be phrased in plain English and must not exaggerate findings, which would undermine their credibility. It must also communicate a vision or story that is credible, specific, and moves beyond the abstraction inherent in measures like the rate of return. Such a vision may be more complex and harder to communicate than the case made to justify the interstate highway system in the 1950s. Nevertheless, the public may be prepared for a more sophisticated vision than they were a generation or two ago.