III. THE MAIN FINDINGS OF THE 1996 REPORT

The 1996 examines the contribution of two alternative types of highway capital to output growth and productivity of thirty-five U.S. industrial sectors individually and of the economy as a whole. . Two measures of highway capital are used in this study. The first is total highway capital, which includes roads under federal, state, and local government jurisdiction. The second is the stock of upper level roads excluding local government investments in roads and streets, which is commonly referred to as the non-local highway system (NLS). The NLS includes the federal-aid highway system, with the exception of expenditures on secondary rural roads, and represents approximately 70 percent of total highway capital stock. The purpose of incorporating the NLS stock in the analysis was to examine the impact of a highway network consistent with the underlying definition of the National Highway System (NHS). We also wanted to see whether the rate of return on the NLS stock of highway capital was different from that of the total highway capital. Furthermore, we wanted to test the sensitivity of the model estimates to different measures of highway capital stock.

The relevant policy issues addressed in the 1996 report are:

• The effect of highway capital on the private sector's total cost and demand for labor, capital, and intermediate inputs;

• The marginal benefits to specific industries and the economy as a whole of an increase in highway capital;

• The contribution to productivity growth of highway capital and the overall social rate of return to this type of capital; and

• Any evidence of over- or under-supply of this capital in the post-war period and whether a shortage of highway capital can explain some of the decline in the aggregate productivity growth.

To answer these questions an analytical framework possessing several advantages over existing models reported in the literature was developed and estimated using a comprehensive body of data covering thirty-five industries and sectors of the US economy for the period 1950 to 1989. The basic elements of this analytical framework were:

• The effect of aggregate demand on the productive behavior of individual industries; that is, the effects of changes in aggregate income and population on industry demand which in turn affect the output and productivity growth of the industry;

• The contribution of changes in real factor prices, including wages and capital rental prices, on productivity growth;

• The impact of highway capital, both the total stock and the NLS, on the demand for labor, materials and private sector physical capital;

• The marginal benefits of highway capital to various industries and sectors of the economy and its contribution to the output and productivity growth at the aggregate economy level; and

• The externality effects, the calculation of the social rate of return of highway capital, and the comparison of the contributions of private and highway capital to economic and industry productivity growth.

The main results of the 1996 report can be briefly summarized as follows:

• Total highway capital and NLS capital contribute significantly to economic growth and productivity at the industry and national economy levels. Their contributions vary across industries and over time. The magnitude of the elasticity of output with respect to total highway capital at the aggregate level is about 0.05, which is much smaller than comparable estimates reported in previous literature which are about 0.39.⁶

• The contribution of highway capital to TFP growth is positive in almost all industries, except in some non-manufacturing industries. The magnitudes of the contribution vary across industries, although the most significant contribution is to the productivity of manufacturing industries. At the aggregate level, highway capital contribution to TFP growth is about 0.17. One possible explanation for the negative result in some of the non-manufacturing industries could be that the supply of highway capital exceeds what the industries are willing to pay at that price.

• There is evidence of increasing returns to scale both at the industry level and the national level. At both levels, the contribution of private capital to economic output is about four times that of total highway and NLS capital. This result stands in sharp contrast to those reported in earlier literature. The estimates of the parameters of the model did not significantly change whether total highway capital or NLS capital were used as the measure of public capital. Some evidence exists that the elasticities of cost and factors of production are somewhat higher when the NLS is used as the measure of public capital.

• Both total highway capital and NLS capital have significant effects on employment, private capital formation and demand for materials and inputs in all industries. The results suggest that an increase in total highway capital or NLS capital leads to a reduction in demand for all inputs in manufacturing, while in non-manufacturing industries the pattern is mixed. The magnitude of these effects varies across the three inputs in a given industry and among the industries. These results were based on assuming the level output fixed. The effect of output expansion induced by lower costs due to increase in highway capital was not considered in 1996 report.

• The marginal benefits of total highway capital and NLS capital at the industry level are calculated by using the estimated cost elasticities. The marginal benefit of highway capital varies across industries. The marginal benefits are negative for non-manufacturing industries, but their magnitudes are small suggesting that the demand for highway capital services at the price these industries were willing to pay is slightly less than the available supply.

• The results indicate that net social rate of return on total highway capital was high (about 35 percent) in the 1950s and 1960s, then declined considerably up until the 1980s to about 10 percent. The same pattern holds for NLS capital, although the current net social rate of return is higher for NLS, approximately 16 percent. In the 1980s the rates of return on total highway capital and private sector capital seem to have converged considerably.

• The main contributors to productivity both at the industry and aggregate levels are exogenous factors that shift industry demands such as aggregate income and population growth. Relative prices and technical change also contribute to the growth of TFP, but their contributions are generally smaller and vary across industries. Highway capital contributes to long run trend TFP growth.

FHWA Home | HPTS Home | Feedback United States Department of Transportation - Federal Highway Administration