"Linking Public Capital to Economic Performance, Public Capital: The Missing Link Between Investment and Economic Growth "

Following up on findings by J. Bradford DeLong and Lawrence Summers that a robust statistical relationship exists between productivity and private sector investment in plant and equipment, Erenburg explores whether there is also a connection between economic growth and public spending. She argues that public investment in infrastructure stimulates private sector investment in plant and equipment. By providing empirical proof that public and private investment are complements in production, Erenburg supplies the missing link that explicitly ties public infrastructure to economic growth.

"The Relationship Between Public and Private Investment"

The relationship between government spending and aggregates such as output, employment, and prices has been the subject of many theoretical and empirical studies. Recently, however, interest has shifted to government spending on the provision of public capital (measured as fixed, nonresidential government capital) and various indicators of economic performance. Hence, government spending is now recognized to extend beyond the traditional view of strictly purchasing goods and services: The provision of public infrastructure has become an integral component. Erenburg finds that empirical estimates from the short-run, first-difference model indicate that each additional one percentage point increase in public infrastructure and government investment spending is associated with an approximate three-fifths of a percentage point increase in private of a percentage point increase in private sector equipment were obtained by using the Stock-Watson method for testing for long-run relationships when variables are integrated of higher order, including different orders. These estimates indicate an increase of approximately two-fifths of a percentage point in private equipment investment per year. Projections reveal that if the rate of growth of public capital stock had continued from 1966 through 1987 at the 1947-1965 average annual growth rate (instead of decreasing), the growth rate of private sector equipment investment would have been between 4 to 6 percentage points above the actual rate of growth. In addition to the impact on economic growth, Aschauer (1989) and Erenburg (1993) find a positive correlation between the public provision of infrastructure and private investment. As private investment activity enhances future growth of real income, these statistical results confirm that public policy has permanent effects on real output. The empirical results confirm that public policy has permanent effects on real output. The empirical results indicate that private sector equipment investment is inversely related to government investment spending and directly related to the existing public capital stock. Also, private equipment investment is much more sensitive to public provision of capital than either structures investment. These findings suggest that public infrastructure has an overall stimulative effect on private investment activity in the United States: In essence, these results verify Aschauer's, while addressing concerns of spurious correlation.

Productivity, private and public capital, and real wage in the United States: 1948 - 1990

This paper examines the relationship between real wages in the United States and productivity. The measure of productivity includes the impact of public capital as well as private capital. Both neo-classical and Keynesian theories predict that real wages increase with increases in the capital stock and technical progress, and move inversely over business cycles. However, the question of whether real wages are cyclical or countercyclical has not been confirmed by empirical studies. These studies, however, ignore the impact of public capital on productivity. Using Cobb-Douglas production function estimates, this paper incorporates the impact of public capital on productivity and real wage. The results indicate that when the capital stock is controlled for, real wage is countercyclical, and validate diminishing returns to labor, positive returns to public capital and a procyclical effect of capacity utilization on real wage. Addressing stationarity concerns, estimates from the productivity equation establish a long-run relationship between productivity, measured as output per unit of capital, and employment to capital ratio, and the public capital to private capital ratio. Estimates from the real wage equation indicate that a long-run relationship exists between real wage and labor productivity and the public to private capital ratio. Using the statistical estimates herein, if the public capital stock had remained at the historical 1948-1965 ratio, rather than declining, productivity would have been between 2.4 and 2.9 percentage points higher and real wages would have been between 2 to 2.8 percentage points higher, ceteris paribus. These projections translate into a potential increase in gnp per capita and a higher, rather than stagnating, standard of living

Linking public capital to economic performance - Public capital: The missing link between investment and economic growth

Following up on findings by J. Bradford DeLong and Lawrence Summers that a robust statistical relationship exists between productivity and private sector investment in plant and equipment, the author explores whether there is also a connection between economic growth and public spending. She argues that public investment in infrastructure stimulates private sector investment in plant and equipment. By providing empirical proof that public and private investment are complements in production, Erenburg supplies the missing link that explicitly ties public infrastructure to economic growth

The Relationship Between Public and Private Investment

The relationship between government spending and aggregates such as output, employment, and prices has been the subject of many theoretical and empirical studies. Recently, however, interest has shifted to government spending on the provision of public capital (measured as fixed, nonresidential government capital) and various indicators of economic performance. Hence, government spending is now recognized to extend beyond the traditional view of strictly purchasing goods and services: The provision of public infrastructure has become an integral component. Erenburg finds that empirical estimates from the short-run, first-difference model indicate that each additional one percentage point increase in public infrastructure and government investment spending is associated with an approximate three-fifths of a percentage point increase in private of a percentage point increase in private sector equipment were obtained by using the Stock-Watson method for testing for long-run relationships when variables are integrated of higher order, including different orders. These estimates indicate an increase of approximately two-fifths of a percentage point in private equipment investment per year. Projections reveal that if the rate of growth of public capital stock had continued from 1966 through 1987 at the 1947-1965 average annual growth rate (instead of decreasing), the growth rate of private sector equipment investment would have been between 4 to 6 percentage points above the actual rate of growth. In addition to the impact on economic growth, Aschauer (1989) and Erenburg (1993) find a positive correlation between the public provision of infrastructure and private investment. As private investment activity enhances future growth of real income, these statistical results confirm that public policy has permanent effects on real output. The empirical results confirm that public policy has permanent effects on real output. The empirical results indicate that private sector equipment investment is inversely related to government investment spending and directly related to the existing public capital stock. Also, private equipment investment is much more sensitive to public provision of capital than either structures investment. These findings suggest that public infrastructure has an overall stimulative effect on private investment activity in the United States: In essence, these results verify Aschauer's, while addressing concerns of spurious correlation

The real effects of public investment on private investment

One of the main policy questions that emanated from the macro rational expectations literature, and the focus of many empirical studies, is whether expected government policy has an effect on real output (and/or whether unanticipated government policy has a permanent effect on real output). Many of the empirical studies have examined this question directly by testing whether a statistically significant relationship exists between real output or employment and some form of an aggregate demand policy variable. The conflicting results of these studies fail to either validate of refute the neutrality proposition. A shortcoming of these empirical studies arises because government spending is viewed merely as an additive component of aggregate demand and is, therefore, modelled on the demand side only. If, however, the productivity of private investment is correlated with aggregate demand policy, there will exist supply side effects, also. Another approach to determine any effects of public capital on private capital is to specify investment as two separate components - private and public - to determine whether private sector investment is affected (enhanced or diminished) by the public provision of infrastructure. This study uses a two-equation system that was estimated using a full-information maximum-likelihood statistical technique with non-linear parameter restrictions to determine separate effects of past government investment spending and past government deficit spending on private investment spending. The empirical results indicate that there is a positive, statistically significant relationship between private and public capital should be explicityly taken into account when examining aggregate effects of fiscal policy. In addition, combined federal, state and local deficit spending reveals no statistically significant effect on private capital investment spending

On the real effects of short- and long-run inflation and relative sector price variability: Some empirical evidence using the Kalman filter

This paper evaluates empirically the effects of sector relative-price variability, and short-run and long-run inflation on the growth rate of real output in the United States since 1947. Also, permanent and transitory estimates are constructed to evaluate the effects of unanticipated movements in sector relative price on the growth rate of real output. The results show a statistically significant inverse relationship beween the growth rate of real output and transitory sector relative-price variability and anticipated long-run inflation, and a direct relationship between the growth rate of real output and unanticipated short-run inflation

Public and private investment: Are there causal linkages?

This paper examines the causal linkage between private investment and government provision of public capital and government investment spending. The influence of the provision of public infrastructure on private investment activity is examined by including public sector investment spending and public capital stock along with the variables specified in the major theoretical private investment models. The multivariate Granger-Causality testing procedure combined with the Akaike\u27s Final Prediction Error (FPE) criterion is employed on annual data over the period 1954–1989. The results indicate that profits, the rate of return to capital and the tax-adjusted measre of Tobin\u27s q “Granger cause” private equipment investment. Tobin\u27s q also exhibits a significant positive effect on public investment. The results indicate the existence of feedback effects between public and private investment

Interactions Between Public and Private Investment: Evidence from Developing Countries

This study examines the linkages between public investments and private investments by using Granger-causality and cointegration tests and probit analysis in a sample of 25 developing countries. The results from the cointegration and Granger-causality tests are further analysed in a probit framework by assigning the dependent variable the value '1' for the 'crowding-out' cases and '0' otherwise, and the explanatory variables are various components of Gwartney and Lawson's (2004) economic freedom of the world index. Using this approach, we find that the higher the share of government involvement in an economy, the lower the trade openness; the more restrictions there are on the use of foreign currencies, and the more stable and developed the macro and monetary environment is, the higher the likelihood that public investments may crowd out private investments. The model correctly predicts 10 out of 11 cases of crowding-out and 13 out of 14 cases of no-crowding-out. Copyright 2005 Blackwell Publishing Ltd..