Product Code Database
Public capital is the aggregate body of government-owned assets that are used as a means for productivity.Aschauer, D. A. (1990). Why is infrastructure important? Conference Series Proceedings. Federal Reserve Bank of Boston. Pp. 21-68. Such assets span a wide range including: large components such as highways, airports, roads, , and railways; local, municipal components such as public education, public hospitals, police and fire protection, prisons, and courts; and critical components including water and sewer systems, Electric utility and gas utilities, and telecommunications.Tatam, J. A. (1993). The Spurious Effect of Public Capital Formation on Private Sector Productivity. Policy Studies Journal, Vol. 21. Often, public capital is defined as government outlay, in terms of money, and as physical stock, in terms of infrastructure.
The American 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. The aviation sector remains mired in continued delays in the reauthorization of federal programs and an outdated air traffic control system. One in four rural and one in three urban bridges are structurally deficient. States are understaffed and underfunded to conduct safety inspections of dams. 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 the water locks maintained by the U.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 of clean drinking water a day. Under tight budgets, national, state, and local parks suffer neglect. Without adequate funding, rail cannot meet future tonnage load. Public education require a staggering $127 billion to bring facilities to decent operating condition. Billions of gallons of untreated sewage continue to be discharged into U.S.’s each year.American Society of Civil Engineers. (2009). Report Card for America’s Infrastructure. Retrieved from
Given this relationship of public capital and productivity, public capital becomes a third input in the standard, neoclassical production function:
where:
In this form, public capital has a direct influence on productivity as a third variable. Additionally, public capital has an indirect influence on multifactor productivity as it affects the other two inputs of labor and private capital.Eberts, R. (1990). Public infrastructure and regional economic development. Economic Review (00130281), 26(1), 15. 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. Thus, rather than the ends, public capital is the means. That is, instead of being seen as intermediate goods used as resources by businesses, public capital should be seen as goods which are used to make the final goods and services to consumers-taxpayers. 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. Moreover, infrastructure services carry the market-distorting features of pure, non-rival public goods; Network effect; natural monopolies; and the common resource problem such as congestion and overuse.
Empirical models that attempt to estimate the public investment and economic growth link involve a wide variety including: the Cobb-Douglas production function; a behavioral approach Cost curve/profit function which includes public capital stock; Vector Auto Regression (VAR) models; and government investment growth regressions. These models nonetheless contend with reverse causality, heterogeneity, endogeneity, and Nonlinear system in trying to capture the public capital and economic growth link. New Keynesian models, though, analyze the effect of government spending through the supply side rather than traditional Keynesian 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.Crain, W.M. and Oakley, L.K. (1995) The Politics of Infrastructure. Journal of Law and Economics Vol. 38, no. 1 Furthermore, new research on regional growth (as opposed to national growth with GDP) shows a strong positive relationship between public capital and productivity. Both fixed costs and transport costs lower with expanded infrastructure in localities and the resulting cluster of industries. As a result, economic activity grows along its pattern of trade. Therefore, the importance of business cluster and metropolitan economies comes into effect.
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. The lack of efficient U.S. freight and passenger train service will neither aid in handling the “perfect storm” of Environmentalism and energy sustainability nor meet the global competitive need of transporting goods and services at heightened speeds and times.Puentes, R. (2008). A Bridge to Somewhere: Rethinking American Transportation for the 21st Century. Brookings Institution Metropolitan Policy Report: Blueprint for American Prosperity series report. Also, the continued loss of footing in clean energy technology will contribute to U.S.’s future loss of prosperity on the global stage in terms of the carbon footprint and economy.
Since then, the U.S. has contributed to other large infrastructure programs including the Interstate 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%.Griggs, F. E. (2003). Perspectives in Civil Engineering. 1852-2002: 150 Years in Civil Engineering in the United States. American Society of Civil Engineers. Edited by Jeffrey S. Russell. Pp. 111-122. Also, the Environmental 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.” Considered by the National Academy of Engineering to be the greatest engineering achievement of the 20th century, the Electric grid carries electricity over on high-voltage transmission lines across the U.S. Though currently facing aging facilities and equipment, this public capital investment has ubiquitously reached millions of homes and businesses.Stuller, J. (2009). Reinventing Edison. Conference Board Review, 46(1), 42-49. Retrieved from EBSCOhost.U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy. (2009). Power to the Plug: An Introduction to Energy, Electricity, Consumption, and Efficiency. Pp. 1-4.
Recently, the American 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 include smart grid technology, retrofitting of homes and federal buildings, automated aviation traffic control, advancing freight and passenger rail services, and upgrading water and waste facilities.
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