FHWA > Policy > Economic Returns From Transportation Investment
A national debate is gathering momentum over whether the U.S. economy can grow faster than it has over the past two decades. During the 1970s and 1980s, the
FHWA > Policy > Economic Returns From Transportation Investment
A national debate is gathering momentum over whether the U.S. economy can grow faster than it has over the past two decades. During the 1970s and 1980s, the economy's rate of growth slowed dramatically from its historical average. Between 1870 and the early 1970s, the best data show that the American economy grew at an average rate of nearly 3.5% a year. Since 1973, the economy has grown at only 2.4% a year.
Whether the nation is better off in the future depends on whether the rate of growth of productivity can be raised. Productivity is the main source of economic growth and a rising standard of living. Its growth has slowed even more dramatically over the past two decades than did overall growth. Labor productivity — the output of goods and service per hour of work — grew at a rate of more than 2% a year since just after the Civil War. Since 1973, it has managed to grow at only 1% a year. Total factor productivity—the output per unit of labor and capital—has slowed down to a similar degree.
Had productivity grown at its long-term rate since 1973, another $13 trillion in national income would have been produced by the economy. As a consequence, tax revenues would have risen so much that there would be no federal deficit today. In fact, at current levels of federal spending, there would be a substantial budget surplus.
Investments in infrastructure, particularly transportation projects, may have significant impacts upon economic productivity. Governments make investments in transportation facilities to support development, to spur economic growth, to alleviate existing deficiencies, or to increase public convenience. In the 19th century, the large positive economic value derived from investments in transportation systems was taken to be self-evident, and major investments in roads, railroads, and canals were made on this basis. As the U.S. developed, transportation investments were used to transform the economic environment profoundly. Similarly, historians attribute the Industrial Revolution to various transportation investments that preceded it. Today, developing nations view transportation investments as key ingredients for economic development and growth.
No one living in contemporary America can overlook the profound changes brought about by the Interstate Highway System on where people live, work, and shop. It has expanded the range over which goods can be marketed, has created opportunities for economies of scale and for increased specialization, and has brought the efficiencies of just-in-time inventory systems to businesses across the land. Although the impacts of the system surround us, few attempts have been made to estimate the overall, program-wide economic value of public investments in transportation facilities.
Rodney Slater discusses the rates of return from transportation investments
Because of the importance of productivity growth to the economy, and in anticipation of the reauthorization of the nation's surface transportation programs next year, the Federal Highway Administration (FHWA) and the American Association of State Highway and Transportation Officials (AASHTO), through the National Cooperative Highway Research Program (NCHRP), asked the Eno Transportation Foundation to call a conference of transportation experts and policy makers from the public and private sectors and academia to discuss whether transportation infrastructure investment can play a critical part in improving America's productivity.
(L to R) Jose Gomez-Ibanez of Harvard University, Beth Pinkston of the Congressional Budget Office, and Theresa Smith of FHWA
In the 1950s, the rate of growth of highway capital surged. After declining slightly in 1950 and 1951, the capital stock grew at an annual rate of 6.2% until 1959. But beginning in the 1960s and on through the 1970s, the rate of growth slowed continuously. Since 1982, highway capital stock has been growing at an average rate of 1.2% a year.
This increased rate of growth has not kept pace with the increase in demand for highway transportation. The slow rate of investment has contributed to increased congestion and poor maintenance. It has also resulted in fewer large-scale transportation projects, and required proportionately more funding from state and local levels of government for transportation improvements.
But has the lower rate of investment in transportation infrastructure since the 1950s contributed significantly to the general slowdown in productivity growth? Can raising the rate of investment in transportation infrastructure enhance overall productivity for the entire nation? The Eno policy forum addressed these fundamental questions.
The starting place for this discussion was a new econometric study by M. Ishaq Nadiri of New York University and the National Bureau of Economic Research and Theofanis P. Mamuneas of the University of Cyprus. It is a comprehensive analysis of how investment in highway infrastructure affects the nation's output, the commercial sector's costs of doing business, and private sector productivity in general. The expert participants agreed that the Nadiri model had corrected the most important flaws of earlier studies on this subject. The general consensus, among both skeptics and supporters of this type of analysis, was that Nadiri's analysis was one of the most comprehensive pieces of work that has been done in the infrastructure area in the last ten years, which is when the main growth of literature has occurred.
Approximately thirty-five professionals from academia and the private and public sectors participated in the forum, including top government officials, academic leaders, and industry executives. There were three general areas of discussion. The first concerned Professor Nadiri's model, and an interpretation of its