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Wednesday, August 23, 2006

Foundations of Productivity

I had to have my water heater replaced today, so I might be overly sympathetic to this message. My house is at that age where the roof, water heater, furnace, etc., that came with it when it was new begin to fail and it takes fairly big investments to replace them.

This article argues that the US is at a similar position in the life of its capital, i.e. that the roads, bridges, power plants, dams, ports, airports, electricity networks, sewage systems, and so on, most of which were built 50-75 years ago, are all showing signs of wear or inadequate capacity and are in need of replacement, expansion, or substantial maintenance. The question is how to summon the political will to address these needs with all the other pressing budget issues:

Things Fall Apart: Fixing America’s Crumbling Infrastructure, by Nicholas Kulish, Commentary, NY Times: Whether it’s the roads we drive on, the pipes carrying our water, or the power lines humming with the electricity..., America’s physical networks are falling apart.

That’s ... a substantial drag on our economy and on our businesses. And it will be a competitive challenge for this country in the years to come. ... Unfortunately, what ails Uncle Sam’s body is much more than nicks and bruises and there are no short-term remedies.... It takes years to lay a comprehensive network of fiber-optic cable or dig a tunnel through bedrock. By the time we notice how bad things have gotten, the cost of doing business in this country may have grown prohibitively high...

Yet if we do it right, America will continue to stand at the forefront of both productivity and innovative applications for new technologies. We need to approach these fundamental underpinnings not as chores, like mowing the lawn or painting the house on a national scale, but as the capital investments for a dynamic America, Inc.

I. On the Verge ... Every four years the American Society of Civil Engineers grades the nation’s infrastructure. The group looks at 15 categories, from aviation to bridges, from waste water to public parks. Last year they handed out a D, down from the D+ in 2001. The report noted different problems in every sector, but a few kept popping up almost across the board: A growing population, and growing demand that is overtaxing aging, inadequate systems.

II. Everything Old... In some ways, America’s low-grade infrastructure is to be expected. Much of the physical stock we rely on today was built either under the public works programs of the Great Depression or in the boom following World War II. ...

Fixing up the roads and highways we have is not enough. Back in 1982 there were 232 million people in the country. Now we’re about to pass 300 million. There’s also increased international trade and movement of goods within the country. That means more and more commercial trucks prowling the interstates at all hours. Whether you’re talking about seaports, airports, railroads, canals, or highways, our transport systems need to expand to keep up with our economic activity.

But we haven’t been keeping up. The Office of Management and Budget estimates that this year the government will spend the equivalent of 0.7% of the nation’s gross domestic product ... on non-defense physical capital investments. That’s abysmal by historic standards. Between 1960 and 1981, that annual spending dipped below 1% of G.D.P. only once.

III. ...Is New Again Of course, our goal should be more than just keeping up. If America were a company, and it refused to invest the necessary money on new technology and an improved physical plant, it would become less competitive...

That means not just fixing the roads we have, but investing in better ones. ... [But] [u]pgrading the national infrastructure is about much more than roads. The most important highway right now is the information superhighway, and America ... is rapidly falling behind. ... [T]he United States is now ranked 12th among nations when it comes to the rate of broadband Internet use. ...

IV. Bridges to Nowhere One of the biggest factors in America’s infrastructure decline is politics. Because there is no national vision of how money should be spent to upgrade America’s physical plant, the money that is allocated for it is being spent piecemeal... Money gets doled out in earmarks that are stuck into budget bills by congressmen looking to win favor back home. ... Capital projects are among our most important priorities, but they are also tailor-made for ribbon-cutting ceremonies and other photo opportunities. ...

But average citizens are far from blameless. The reason congressmen love to bring home pork to their districts, in the form of dubious government projects, is that their constituents love them. Voters need to make clear to elected officials that genuine infrastructure improvement is a priority. ...

If we don’t learn how to prioritize the modernization of our country’s physical plant it will slowly squeeze productivity....

V. Do the Right Thing To get things moving in the right direction, national leadership is needed. ... When America does begin pulling out of Iraq, we should take some of the catch phrases we have been using there — “rebuilding,” “capacity building,” and “improving civil society” — and apply them here at home. ...

If you are interested in an academic paper on this topic, it's not my direct area, but "Is Public Expenditure Productive" by David Aschauer which appeared in the Journal of Monetary Economics in 1989 is one classic paper in this area. The paper shows that non-military public investment spending is important for private sector productivity and that it might explain variations in productivity in the 1970s and 1980s.

The paper generated a lot of subsequent research, some of which questioned the link (e.g. Gramlich 1994, Holtz-Eakin 1994), but I don't know the current state of the econometric evidence - whether it's seen as generally supporting the idea the public infrastructure spending explains variations in private sector productivity to a significant degree not. From a productivity standpoint, there's a difference between adding one more road, power line, water pipe, etc. to a functioning system which is the marginal effect many of these papers examine, and replacing an essential  system in danger of failing to perform as needed.

    Posted by on Wednesday, August 23, 2006 at 08:27 PM in Economics, Miscellaneous | Permalink  TrackBack (1)  Comments (23)


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