Policy Watch: Infrastructure Investment and Economic Growth

TLDR

The debate began with Aschauer’s 1989 study linking the 1970s decline in U.S. productivity to falling public capital investment, a claim later challenged for methodological flaws and unclear causation. The paper seeks to clarify what is known and unknown about the relationship between public infrastructure and productivity and to assess its policy implications. It confirms Aschauer’s findings, fuels advocacy for greater public investment, yet also encounters strong skepticism from many economists.

Abstract

In the late 1980s, David Aschauer (1989) triggered a long overdue dialogue among economists and political leaders when he published a study arguing that much of the decline in U.S. productivity that occurred in the 1970s was precipitated by declining rates of public capital investment. My own work confirmed these results (Munnell, 1990a). Spending advocates seized on these findings as support for increased public investment. The enthusiasm among policymakers for the early Aschauer results was matched, if not surpassed, by skepticism on the part of many economists. Critics of these studies charged that the methodology was flawed, that the direction of causation between public investment and output growth is unclear and that, even if the historical empirical relationships were estimated correctly, they provide no clear indications for current policy. Who's right? What do we know and not know about the link between public infrastructure and productivity? And what are the implications of these results for policy?