Chip Taylor

Highway spending and productivity

In her "Economic Scene" column, Virginia Postrel discusses research on the productivity effects of highway spending:

To political analysts, the highway bill is a popular program that has fallen prey to partisan, and intraparty, bickering. Lost in the dispute is the economic question: What are we getting for our money?

Unlike such transfer programs as Medicare or Social Security, which redistribute existing income, the money the government spends on infrastructure isn't supposed to simply shift resources from one group to another. It's meant as public investment: spending that enhances productivity and thus increases the country's future income, making everyone better off.

The returns on those investments don't come back to the Treasury directly, the way private-sector returns do to investors. But in theory, infrastructure investments benefit taxpayers indirectly by increasing the nation's wealth.

How effective is the investment?

In an article in the March issue of The Journal of Urban Economics, two economists look at exactly how highway spending increases productivity - by lowering businesses' inventory and logistics costs - and calculate how the returns on highway spending have changed over time.

To make that calculation, Chad Shirley of the RAND Corporation and Clifford Winston of the Brookings Institution used census data on the inventory levels at 50,000 to 75,000 individual plants from 1973 to 1996. They looked at how infrastructure investment, both within each plant's state and across state lines, affected those costs, holding constant other influences like interest rates and changing inventory practices.

The results are striking. Infrastructure spending does indeed lower inventory and logistics costs, increasing productivity. But the rate of return plummeted over time, from more than 15 percent in the 1970's to less than 5 percent in the 1980's and 1990's. (These figures are corrected for inflation.)

There's a logical reason for those diminishing returns.

"By the late 1970's, the Interstate highway system was substantially completed," the economists write. "During the past two decades, the primary objective of highway spending has shifted from expanding the nation's capital stock to maintaining it. Undoubtedly, the improvement in costs and service from such investments and the concomitant reduction in plants' inventories cannot compare with those produced by the construction of thousands of miles of new roads."

In other words, spending to put a highway where there wasn't one before produces more benefit than just spending to maintain that highway once you have it.

There's more; read the whole thing.