Haw Daes Public Infrastructure Affec~ Regianal Ecanam~C Perf Armance ?

Haw Daes Public Infrastructure Affec~ Regianal Ecanam~c Perf armance ?

Aticia H. Munnell with the assistance of Leah M. Cook*

Bridge collapses and water main explosions focus national attention on the crumbling condition of the nation’s infrastructure. Catastrophic infrastructure failures are always a momentary spur to debate on the nation’s capital investment policies. But increasingly these negative developments have been accompanied by economists’ claims that public capital investment makes a significant contribution to national output, productivity, growth, and international competitiveness. These conclusions, which emerge from the work of Aschauer and others, have generally been based on observed patterns of national and international spending on public capital and various measures of economic performance. Reaction to these claims has been cautious; critics have charged that the empirical work overstates the impact on productivity by ignoring other factors, that the direction of causation between public investment and output growth is unclear, and that even if the historical empirical relationships were estimated correctly, they provide no clear indications for current policy. This paper is not designed to answer all the criticisms but rather to offer one more brush stroke to the emerging picture of the relationship between public capital investment and private economic activity. It does this by exploring the impact of public capital on output, employment growth, and private investment at the state and regional level. The

*Senior Vice President and Director of Research, and Research Assistant, respectively, Federal Reserve Bank of Boston. The authors would like to thank colleagues at the Boston Fed for valuable comments.

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Alicia H. Munnell

paper consists of four parts. Since no comprehensive measures of public or private capital are available at the state level, the first section explains the construction of such data and describes the...