Public capital is the aggregate body of government-owned assets that are used as a means for productivity.[1] Such assets span a wide range including: large components such ashighways,airports,roads,transit systems, andrailways; local, municipal components such aspublic education,public hospitals,police andfire protection,prisons, andcourts; and critical components includingwater andsewer systems,public electric andgas utilities, andtelecommunications.[2] Often, public capital is defined as government outlay, in terms of money, and as physical stock, in terms of infrastructure.
In 1988, the U.S.infrastructure system including all public and private non-residential capital stock was valued at $7 trillion, an immense portfolio to operate and manage.[3] And according to the Congressional Budget Office, in 2004 the U.S. invested $400 billion in infrastructure capital across federal, state, and local levels including the private sectors on transportation networks, schools, highways, water systems, energy, and telecommunications services. While public spending on infrastructure grew by 1.7% annually between 1956 and 2004, it has remained constant as a share of GDP since early 1980s.[4] Despite the value and investment of public capital, growing delays inair andsurface transportation, agingelectric grid, an untappedrenewable energy sector, and inadequate school facilities all have justified additional funding in public capital investment.
TheAmerican Society of Civil Engineers have continued to give low marks, averaging a D grade, for the nation's infrastructure since its inception of the Report Card in 1998. In 2009, each category of infrastructure varied from C+ to D− grades with an estimated $2.2 trillion of needed public capital investment. Theaviation sector remains mired in continued delays in the reauthorization of federal programs and an outdatedair traffic control system. One in four ruralbridges and one in three urban bridges are structurally deficient. States are understaffed and underfunded to conduct safety inspections ofdams. Texas alone has only seven engineers and an annual budget of $435,000 to oversee more than 7,400 dams.Electricity demand outpaces energy supply transmission and generation. Almost half of thewater locks maintained by theU.S. Army Corps of Engineers are functionally obsolete.Drinking water faces an annual shortfall of $11 billion to manage their aging facilities and comply with federal regulations. Leaking pipes lose an estimated 7 billion US gallons (26,000,000 m3) of clean drinking water a day. Under tightbudgets, national, state, and local parks suffer neglect. Without adequate funding, rail cannot meet futurefreight tonnage load.Schools require a staggering $127 billion to bring facilities to decent operating condition. Billions of gallons of untreatedsewage continue to be discharged into U.S.’ssurface waters each year.[5]
One of the most classicmacroeconomic inquiries is the effect of public capital investment oneconomic growth. While many analysts debate the magnitude, evidence has shown a statistically significant positive relationship between infrastructure investment and economic performance.[1] U.S.Federal Reserve economist David Alan Aschauer asserted an increase of the public capital stock by 1% would result in an increase of thetotal factor productivity by 0.4%.[6] Aschauer argues that thegolden age of the 1950s and 1960s were partly due to the post-World War II substantial investment incore infrastructure (highways, mass transit, airports, water systems, electric/gas facilities). Conversely, the drop of U.S. productivity growth inthe 1970s and1980s was in response to the decrease of continual public capital investment and not the decline of technological innovation.[1] Likewise, theEuropean Union nations have declined public capital investment through the same years, also witnessing decliningproductivity growth rates.[6] A similar situation emerges indeveloping nations. AnalyzingOECD and non-OECD countries’ real-GDP growth rates from 1960 to 2000 with public capital as an explanatory variable (not using public investment rates), Arslanalp, Borhorst, Gupta, and Sze (2010) show that increases in the public capital stock does correlate with increases in growth. However, this relationship depends on initial levels of public capital and income levels for the country. Thus, OECD countries witness a stronger positive link in the short term while non-OECD countries experience a stronger positive link in the long term. Hence, developing countries can benefit from non-concessional foreign borrowing to finance high-prospect public capital investments.[7]
Given this relationship of public capital and productivity, public capital becomes a thirdinput in the standard,neoclassicalproduction function:
where:
In this form, public capital has a direct influence on productivity as a third variable. Additionally, public capital has an indirect influence onmultifactor productivity as it affects the other two inputs of labor andprivate capital.[9] Despite this unique nature, public capital investment, used in the production process of nearly every sector, is not sufficient on its own to generate sustained economic growth.[6] Thus, rather than the ends, public capital is the means. That is, instead of being seen asintermediate goods used as resources by businesses, public capital should be seen as goods which are used to make thefinal goods and services to consumers-taxpayers.[2] Note that public capital levels should not be too high that it leads to financing costs and high tax rates issues which will negate the positive benefits of such investments.[7] Moreover, infrastructure services carry the market-distorting features of pure, non-rivalpublic goods;network externalities;natural monopolies; and thecommon resource problem such as congestion and overuse.[6]
Empirical models that attempt to estimate the public investment and economic growth link involve a wide variety including: theCobb-Douglas production function; a behavioral approachcost/profit function which includes public capital stock;Vector Auto Regression (VAR) models; and government investment growthregressions. These models nonetheless contend withreverse causality,heterogeneity,endogeneity, andnonlinearities in trying to capture the public capital and economic growth link.[6]New Keynesian models, though, analyze the effect of government spending through the supply side rather than traditionalKeynesian models that analyzes it through the demand side. Therefore, a temporary surge of infrastructure investment yields an expansion of output, and vice versa that dwindling infrastructure, like in the 1970s, hamper longer-term movement in productivity.[10] Furthermore, new research on regional growth (as opposed to national growth with GDP) shows a strong positive relationship between public capital and productivity. Bothfixed costs andtransport costs lower with expanded infrastructure in localities and the resulting cluster of industries. As a result, economic activity grows along its pattern of trade.[6] Therefore, the importance ofregional clusters andmetropolitan economies comes into effect.
Beyond economic performance, public capital investment yields returns inquality of life indicators such ashealth,safety,recreation,aesthetics, andleisure time and activities. In example, highways provide better access and mobility for increased discretionary time andrecreational outlets;mass transit can improve air quality with reduced number of private vehicles; improved municipal waste facilities reduces toxicgroundwater contamination and bettergreen space aesthetics such asparks; expanded water facilities aids in health and sanitation and environment such as reducing odor and sewer overflows.[1] Furthermore, infrastructure adds to community ambience and quality of place with livelierdowntowns, vibrantwaterfronts, efficientland uses, compact spaces forcommerce andrecreation.[11]
On the contrary, inadequate public capital impairs quality of life and social well-being. Over-capacity landfills lead to groundwater contamination, having deleterious effects on health. Deficient supply and quality of mass transit services impacts transit-dependents on their access to opportunity and resources. Increasing congestion in airports and roadways causes loss of discretionary time and recreational activities.[1] The lack of efficient U.S.freight andpassenger rail service will neither aid in handling the “perfect storm” ofenvironmental andenergysustainability nor meet the global competitive need of transporting goods and services at heightened speeds and times.[12] Also, the continued loss of footing inclean energy technology will contribute to U.S.’s future loss of prosperity on the global stage in terms of thecarbon footprint andeconomy.[11]
Perhaps the largest contribution to thepublic works system in the U.S. came out of PresidentFranklin D. Roosevelt’sNew Deal initiatives particularly the creation of theWorks Progress Administration (WPA) in 1935. At a time of a deep economic crisis, the WPA employed at its peak 3.35 million unemployed heads-of-households to work in rebuilding the country. The program helped construct millions of roads, bridges, parks, schools, hospitals, and levees while also providing educational programs, childcare, job training, and medical services. The overallpublic spending level for the program, unprecedented at the time, was $4.8 billion ($76 billion in 2008 dollars), and helped to stimulate the economy through public works projects.[13]
Since then, the U.S. has contributed to other large infrastructure programs including theInterstate Highway System, 1956-1990, with a dedicated financing system through the gas tax and a matching contribution between federal government and states at 90% to 10%.[14] Also, theEnvironmental Protection Agency's (EPA)Clean Water Act of 1972 provided a public capital investment of $40 billion in constructing and upgrading sewage treatment facilities with “significant positive impacts on the Nation’s water quality.”[1] Considered by theNational Academy of Engineering to be the greatest engineering achievement of the 20th century, theNorth American electric grid carries electricity over 300,000 miles (480,000 km) on high-voltagetransmission lines across the U.S. Though currently facing aging facilities and equipment, this public capital investment has ubiquitously reached millions of homes and businesses.[15][16]
Recently, theAmerican Recovery and Reinvestment Act (ARRA) is another example of large public capital investment. Of the $311 billion in appropriations, about $120 billion are set aside for crucial investment in Infrastructure and Science and Energy. Some of ARRA's aims includesmart grid technology,retrofitting of homes and federal buildings, automatedaviation traffic control, advancing freight and passenger rail services, and upgrading water and waste facilities.[17]
Worldwide, transformative public capital investments are taking place.China’s ambitious rapidhigh-speed rail program is estimated to extend 18,000 km by 2020. By the end of 2008, the country had a fleet of over 24,000locomotives, the most lines in the world, the fastestexpress train in service, and longest high-speed track in the world.[18]UK,Denmark, and other countries in northernEurope that surround theBaltic Sea andNorth Sea, continue to develop their rapid expansion ofoff-shore wind farms.[19] With continued expansion of terminals and connection to nation's comprehensive transport system, theHong Kong International Airport is one of the largest engineering and architectural projects in the world.[20] In the last decade,Chile installed fivecombined cycle gas-turbined (CCGT) power plants to meet its nation's growing energy needs.[21]
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