Effects of Public Capital Investments on the Productivity of the United States, 1992-2022

Introduction

What are the empirical effects of public capital on private output or productivity? Policymakers in the United States is greatly interested in measuring productivity in the public sector across states, as many states are confronted with budget deficits. Consequently, policymakers want to know if the state governments are using their limited resources efficiently and cost-effectively to the taxpayers. In general, there have been opposite positions on the subject: those who believe that government investments in general are not efficient, and those who believe that they are efficient which contributes positively to economic growth. While strong arguments exist on both sides of the issue, the empirical results have been mixed. This chapter analyzed the efficiency of the public sector involving all fifty states throughout the United States, focusing on productivity, i.e., technical efficiency. Technical efficiency is commonly defined as the production of maximum output with the most efficient usage of inputs and is frequently used as a necessary condition for measuring efficiency. More specifically, this chapter examined the current state of efficiency of the public sector in the United States in terms of resource use and its impact on the economy, as measured by public capital from 1992 through 2022.

The first contribution of this chapter is the annual expenditure data from the National Association of Budget Officers (NASBO) to measure public capital, not the Census of Government by the Bureau of the Census. Prior studies would often use the Census of Government as a measure of inputs (different expenditure programs) and/or output (aggregate expenditure) to measure the impact of the public sector on economic growth or productivity. More importantly, the data from NASBO differs from the Census of Government as the NASBO provides more granular data for expenditures by each state. In contrast, the Census of Government provides their data at an aggregated level. The second contribution of this chapter is another approach to measuring the effects of public capital and labor on total factor productivity (TFP) using the Malmquist productivity index. The primary problem in measuring public capital is that measures of public capital do not exist. To derive measures of public capital, prior researchers would determine the value of the public capital stock by adding gross investment flows and subtracting the depreciation of public capital stock based on the life spans for each of the public capital estimated. The latter approach is called the perpetual inventory method (PIM).¹

This chapter is divided into four sections: the first section provides a literature of review highlighting the hypotheses presented over the years; the second section provides a discussion of the data and the methodology; the third section summarizes the empirical results; and the final section concludes the chapter.