U.S. Army Corps of Engineers - A28 082

Water Resources Support Center ADlimE 082 Institute for Water Resources 111l1llH l IIIl IIIIII M I11 il III

Infrastructure in the 21st Century

Economy: A Review of the Issues

and Outline of a Study of the

Impacts of Federal Infrastructure

Investments , . T *r

Appicr'rd f puJw r- a

94-20363

DTIC QUALITY 1 ,;i D 3

Federal Infrastructure Strategy Program

July 1993 IWR Report 93-FIS
Federal Infrastructure

Strategy Reports

This is the fourth in a series of interim reports prepared to support the Federal Infrastructure Strategy

Initiative, a 3-year program to explore the development of an integrated multi-agency Federal infrastructure strategy.

The Federal Infrastructure Strategy Initiative is a dynamic program involving many Government

departments and agencies. The series of reports which chronicle the strategy's development refloa.t the desire to

publish interim documentation as results become available. These documents will be used to facilitate the dialogue

within the Federal and non-Federal infrastructure communities as policy deliberations continue.

The program will culminate with a final report to be published at the end of 1993. The interim

documentation contained herein is not intended to foreclose or preclude the program's final conclusions and

recommendations. Within this context, comments are welcome on any of these reports.

This report documents the results of an in-depth study and workshop which developed methods which could

be applied to overcome barriers to innovation and the use of innovative technology within the nation's public works

infrastructure.

The first three reports published as part of the Federal Infrastructure Strategy Program were:

The Federal Infrastructure Strategy Program: Framing the Dialogue - Strategies, Issues and

Opportunities (IWR Report 93-FIS-1)

Challenges and Opportunities for Innovation in the Public Works Infrastructure, Volumes I and

II, (IWR Reports 93-FIS-2 and 93-FIS-3); and

The next report planned for publication as part of the program is:

Federal Public Works Infrastructure R&D: A New Perspective (IWR Report 93-FIS-5).

For further information on the Federal Infrastructure Strategy Program, please contact Robert A.

Pietrowsky, Program Manager at :

Institute for Water Resources

Casey Building

7701 Telegraph Road

Fort Belvoir, VA 22060-5586

Telephone: (703) 355-3073

The Federal Infrastructure Strategy tea includes Cameron E. Gordon, Economics Studies Manager and

James F. Thompson, Jr., Engineering Studies Manager. The program is overseen by Dr. Eugene Z. Stakhiv, Chief

of the Policy and Special Studies Division, and Kyle Schilling, Director of the Institute.

Reports may be ordered by writing (above address) or calling Arlene Nurthen, IWR Publications, at

703/355-3042.
DFPARý`MENT OF THE ARMY

CORPS OF ENGINEERS. WATER RESOURCES SUPPORT CENTER

INSTITUTE FOR WATER RESOURCES

7701 TELEGRAPH ROAD

ALEXANDRIA, VA 2231 1-30"

REPLY TO June 24, 1994

CEWRC-IWR

MEMORANDUM FOR COMMANDER, Defense Technical Information Center,

Cameron Station, Alexandria, VA 22314

SUBJECT: Transmittal of IWR Report 93-FIS-4

1. Reference AR 70-31.

2. Two copies of IWR Report 93-FIS-4, "Infratructure in the

21st Century Economy: A Review of the Issues and Outline of a

Study of the Impacts of Federal Infrastructure Investments", has

hereby been submitted

3. Initial distribution of this report has been made to

appropriate Corps of Engineers agencies. It is recommended that

copies of this report be forwarded to the National Technical

Information Center.

4. Request for the DTIC Form 50 (Incl 2) be completed and

returned to WRSC-IWR.

FOR THE DIRECTOR:

Enclosure Kyle E. Schilling

Director
The Federal Infrastructure

Strategy Program

INFRASTRUCTURE IN THE 21ST CENTURY ECONOMY:

A REVIEW OF THE ISSUES AND OUTLINE OF

STUDY OF THE IMPACTS OF FEDERAL

INFRASTRUCTURE INVESTMENTS

by

CAMERON GORDON

Water Resources Support Center

Institute for Water Resources

Casey Building

Fort Belvoir, VA 22060-5586

JULY 1993 IWR REPORT 93-FIS-4

9.47
Century Economy

ACKNOWLEDGEMENTS'

This study is a cross-cutting effort which examines infrastructure programs within the

Corps of Engineers, and in other Federal agencies, and whose development has been aided by

and continues to be participated in by representatives from many Federal and non-Federal

organizations. As such, there are many people to acknowledge who provided contributions of

time and insight which led to the development of this effort, reviewed the many draft scopes of

work which preceded this effort, reviewed this report itself and who are continuing to participate

in the ongoing work. A list of these participants can be found in Appendix B. Without their

past and continued efforts, this study would not have to come to pass in the form it did.

The study has been coordinated, and this report was principally authored by Mr.

Cameron Gordon (Economics Study Manager). Mr. Robert Pietrowsky (Federal Infrastructure

Strategy Program Manager) and Dr. Eugene Stakhiv (Chief of the Policy and Special Studies

Division of the Institute for Water Resources), have overseen the effort and provided much

counsel and guidance on the overall direction of the work. Dr. Robert Stearns (Deputy Assistant

Secretary of the Army for Project Management [Civil Works]) chaired the first two workshops

and Mr. Kyle Schilling, Director of the Institute for Water Resources, chaired the final meeting;

both provided much useful additional guidance.

As usual, many others provided invaluable comments and review. Once again, readers

are referred to Appendix B for a full list of the people who were sent review copies of this

report. Special mention must be made of Mr. Dennis Robinson and Dr. L. George Antle,

Senior Economist and Chief respectively, with the Navigation Division of the Institute for Water

Resources, and Mr. Michael Krouse and Dr. David Moser, Senior Economist and Chief

respectively, with the Research Division of the Institute for Water Resources. Ms. Jan Peterson

spent many hours editing and formatting the various drafts to make them polished enough for

the final version.

,P

Finally, this report does not reflect the official views or policies of the Department of the

Army or the Corps of Engineers.

@ ACKNOWLEDGEMENTS iii

7-A
Infrastructure in the 21st

Century Economy

TABLE OF CONTENTS

Page

ACKNOW LEDGEMENTS ......................................

TABLE OF CONTENTS v......................

EXECUTIVE SUM M ARY ...................................... vii

INTRODUCTION I......................

CONTEXT 5......................

Authority and Scope of the Federal Infrastructure Strategy Program .......... 5

The Relationship of Infrastructure Investment to the Economy and the Quality of

Life: the Current State of Research versus Federal Policy Needs ....... 6

Untangling Cause and Effect in Public Works and Economic Growth and

P roductivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

How Public Works Affect Private Economic Activity .................. 6

Is America Currently Underinvesting in Infrastructure? Two Contrasting

V iew s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

General Conclusions of Existing Research: Infrastructure Matters ............ 9

Caveats to This General Conclusion .................................. 9

Guidance for Federal Policymakers Based on the Current State of Knowledge . . . 11

® TABLE OF CONTENTS v
Why is There Relatively So Little Agreed Upon Regarding Infrastructure and

What Can Be Done About It'? ................................ 11

Significant Challenges ........................................... 13

PROCESS....................................................... 15

Developing a Scope of Work ....................................... 15

Participation .................................................. 15

Preliminary Findings Regarding Study Means and Ends ................... 16

General Issues of Debate ......................................... 17

The Current Effort ............................................. 19

PRODUCT...................................................... 21

Overview of the Workplan ........................................ 21

Aspirations Versus Outcomes ...................................... 22

ORGANIZATION .................................................... 23

Execution of the Effort .......................................... 23

CONCLUSION ..................................................... 25

Next Steps .................................................... 25

Endnotes ..................................................... 26

APPENDIX A: SCOPE OF WORK ....................................... 29

APPENDIX B: INTERPRETATIVE SUMMARIES

OF THE W ORKSHOPS ................................... 43

APPENDIX C: BIBLIOGRAPHY ORGANIZED BY TOPIC ................... 83

APPENDIX D: BIBLIOGRAPHY ORGANIZED BY AUTHOR ................ 107

vi TABLE OF CONTENTS
Infrastructure in the 21st

Century Economy

EXECUTIVE SUMMARY

The U.S. Army Corps of Engineers, through it's Institute for Water Resources, has

commenced an ongoing interagency study to assess the relationship of Federal infrastructure - specifically investments in water, waste management, and transportation - to the Nation's

productivity, economic health, and quality of life.

This report describes this effort and the process by which the study's workplan was

derived. This report covers three main topics:

1. A discussion of what previous research does, and does not, tell Federal policymakers

about the economic impacts of infrastructure investments;

2. A description of the findings of a series of interagency workshops with invited

academic experts regarding the objectives of and methodological approaches for the

current foundation of an economic policy study of infrastructure investments; and

3. An outline of the goals and activities associated with this study.

The Current State of Research

There is currently much debate over the cause and effect relationships between

infrastructure and the economy. The services which infrastructure provide, such as the

improvement in mobility provided by a new bridge, can change economic output either by

affecting suppliers of goods and services or by affecting total demand for those goods and

services (infrastructure demand being one component of that overall demand). Four main

channels of causation have been identified:

Causal Effect #1: The services provided by public capital can be a direct input into

private production.

Causal Effect #2: The services provided by public capital can affect private output

by increasing the productivity of other privately provided inputs.

@ EXECUTIVE SUMMARY vii
Causal Effect #3: The services and amenities provided by infrastructure can create

an environment which draws inputs from other areas.

Causal Effect #4: The building and maintenance of facilities can create temporary

new demands for goods and services and thus raise the level of economic activity.

In general, there is agreement that the services provided by infrastructure. broadly

defined to include all types of public works, have a positive effect on measured output.

Empirical results generally show that infrastructure's positive impact on production is greatest

at the national level. As the level of analysis gets more specific (e.g. from nation to region to

state to city), the positive effects of infrastructure on output appear to become smaller, perhaps

because the impacts become increasingly difficult to detect.

While research thus far generally confirms that infrastructure has a positive effect on

economic output, it may not always have a positive effect. The following points should be kept

in mind when examining the economic impacts of public works:

1. While most estimates confirm infrastructure's positive effect on economic activitV,

a few estimates do not.

2. There is no consensus on the extent to which infrastructure is a cause or an effect

of economic growth, since statistical analysis often cannot identify the direction of

the cause-effect relationship.

3. Infrastructure affects quality of life as well as the economy, but these effects are

difficult to quantify.

4. Services provided by facilities, rather than the facilities themselves, are most

important to long-run economic growth.

5. Users of infrastructure should be commensurately charged for the services they

receive.

6. It is possible to invest too much, as well as too little, in infrastructure.

7. It is cost-effective to properly maintain infrastructure.

8. A positive impact of an infrastructure investment in gross terms can become

neutral or negative after the costs of the investment are subtracted out.

All of the statements above apply "on average" - that is to say. while the sum of all

public works investments has a positive national impact. particular public works projects are

viii EXECUTIVE SUMMA RY @
inherently local and their effects are closely tied to the local circumstances in which they

operate.

General statements about infrastructure's relationship to the economy are difficult to make

in part because of the limitations which have faced researchers in this field. The policy

implications which can be drawn from the existing literature, particularly for the Federal

government, are also often limited. Some of the reasons for the tentative or broad nature of

many of the present conclusions about infrastructure's relationship to economic growth and

appropriate policies to undertake, include the following:

1. The complexity of the problem.

2. The fact that different researchers have used different models, sometimes asked

different questions, and used different data.

3. Incomplete and limited data.

4. Problems with model estimation and econometric analysis.

5. Focus on separate public works categories rather than infrastructure as a system.

6. A lack of policy focus in most studies.

The Findings of the Three Interagency Workshops

To examine the infrastructure debate more fully, three one-day workshops were held on

July 16, September 17, and November 6, 1992 and were attended by staff from the following

Federal agencies:

U.S. Department of the Army, including the Corps of Engineers

U.S. Department of Agriculture

U.S. Department of Commerce: Bureau of Economic Analysis

U.S. Department of Energy

U.S. Environmental Protection Agency

U.S. Department of the Interior: Bureau of Reclamation

U.S. Department of Transportation:

Federal Aviation Administration,

Federal Highway Administration,

Federal Railroad Administration, and

Federal Transit Administration

U.S. Office of Management and Budget

@ EXECUTIVE SUMMARY ix
Representatives from the Congressional Budget Office. Congressional Research Service.

Federal Reserve Banks of Boston and Cleveland and various academic institutions also attended.

A list of the attendees who were not from the Corps of Engineers in included in 'Fable ES-I at

the end of this executive summary.

Participants generally agreed that publication of further literature surveys was not needed

and that economic theory alone had been pushed as far as it would go. What was needed was

more original. comprehensive, and policy-relevant empirical work and analysis.

Questions of spillover, external economies, and network effects of public capital, the

effect of infrastructure on economic structure and guidelines for allocating Federal resources

across investments were seen as key questions for study. While short-term economic impacts

are clearly important, participants opted for focusing on the medium and long-run impacts of

Federal investments planned for the next five years.

Most thought that the scope of Federally provided and leveraged infrastructure could

include a variety of investments but that for the sake of manageability, the Fragile Foundations

categories of water resources, (such as flood control, ports, and inland waterways) water supply

and wastewatcr treatment, transportation (mass, air and highways), and waste management (solid

and hazardous) would be acceptable. Participants also felt, however, that these categories should

be examined in alternative ways, such as splitting the traditional modes of transportation

catecorics into outputs such as intercity passenger transportation and intercity freight. to name

one example.

It was also recognized that non-economic impacts of public works were very important

and should be described and quantified where possible even if non-systematically. Participants

agreed that there was a need for more original and better data and that while one needs to

understand the past to understand the future, the study should systematically attempt to make

some predictions about future impacts. Finally, a controlled comparison, run on comparable

data, of the production function and a generalized cost-benefit analysis at the program level was

seen as a useful way of discerning the effects of methodologies on inferences.

The Current Effort

Conceptually, the work consists of four broad tasks, each of which is designed to deal

with some of the challenges faced in prior research which has kept guidance to Federal

policymakers fairly limited. These tasks, which will be fleshed out and expanded later with case

studies and other analytic techniques, are:

I. Organization of an Analytic Framework: To meet the challenge of conducting a

comprehensive analysis of tile economic and non-economic impacts of the Federal infrastructure

x EXECUiT'VE SUMMARY @
system, the study is developing an overall framework to account for all costs and benefits,

broadly defined, of Federal infrastructure investment.

2. Data Collection: One must have high quality data regarding appropriate and relevant

phenomena. Given the interagency nature of this effort, it is hoped that a fully catalogued list

of Federal data will identify consistencies and inconsistencies and data gaps that, if closed, might

shed light on the nature, quality and quantity of services offered by the existing Federal capital

stock.

3. Comparison: Much of the uncertainty surrounding the size of the economic impact

of public works expenditures may be due to differences in methodologies. To untangle some

of these issues, the core of the effort is a controlled comparison, on comparable data, between

broad benefit-cost analyses of investments in infrastructure modes and production or cost

function analyses of the same investments. (Benefit-cost analysis is here defined as the

quantification and classification of some investment impacts as costs to society and others as

benefits, using specified criteria such as willingness-to-pay, and then netting out the difference

between the two to determine whether the investment impacts represent a net gain or loss to

society). Analysis of economic irn, cts will start at the national level. additional analysis at the

regional, state, and local levels, anu oy more detailed expenditure category, is desired, but may

not be accomplished depending on limitations of time, resources and data.

4. Simulations: This study aims to be relevant to policymakers, particularly those at the

Federal level. One way of ensuring this relevance is to focus on Federal programs. Another

way is to simulate the economic impacts of planned Federal infrastructure investments in the

future, and comparing this simulation with an explicit and predefined baseline. Future projects

will be evaluated using prospective simulations of both benefit-cost and production function

analysis.

Of course, to understand the future, one must understand the past. Retrospective analysis

is a key part of the study, and the impacts of past investments on past economic performance

will be assessed to better understand economic dynamics, potential causal relationships, and the

workings of different analytic models. However, the main output of this study will be a

simulation of future economic impacts of curient and future Federal infrastructure investments.

Next Steps

The study will continue to be guided by interagency management and review committees

and non-Federal experts will be called in to lead the broad conceptualization of the cost-benefit

and production function analyses.

@ EXECUTIVE SUMMARY xi
Interim products will include:

A report describing current and planned Federal infrastructure programs, which will

take the data collected from Federal agencies, and describe and quantify current Feueral public

works investment plans.

A report describing work in progress serving as a status report on the effort, revealing

what has been uncovered, what remains to be examined, and how.

A report on the simulation of economic effects of Federal infrastructure, which will

describe the way in which simulations have been undertaken and preliminary results of these

simulations.

Reports on various extensions of the analysis, case studies and a synthesis report.

xii EXECUR7VE SUMMARY '
Table ES-I: Non-Corps of EngineersWorkshop Participants

David Aschauer - BATES COLLEGE

Michael Bell - JOHNS HOPKINS UNIVERSITY

Carolyn Cannon - U.S. DEPARTMENT OF ENERGY

Michael Dean - U.S. ENVIRONMENTAL PROTECTION AGENCY (EPA): OFFICE

WATER

Michael Deich - U.S. CONGRESSIONAL BUDGET OFFICE (currently with the

NATIONAL ECONOMIC COUNCIL)

Alan Dickerson - U.S. DEPARTMENT OF THE INTERIOR: BUREAU OF

RECLAMATION

Randall Eberts - FEDERAL RESERVE BANK OF CLEVELAND

Frank Emerson - U.S. DEPARTMENT OF TRANSPORTATION: FEDERAL

AVIATION AUTHORITY

William Gelston - U.S DEPARTMENT OF TRANSPORTATION: FEDERAL

RAILROAD ADMINISTRATION

Ann Grambsch - EPA: OFFICE OF POLICY, PLANNING, AND EVALUATION

Thomas Hady - U.S. DEPARTMENT OF AGRICULTURE: ECONOMIC

RESEARCH SERVICE

Arthur Jacoby - U.S. DEPARTMENT OF TRANSPORTATION: FEDERAL

HIGHWAY ADMINISTRATION

Kurt Karl - WEFA GROUP, INC.

John Kort - U.S. DEPARTMENT OF COMMERCE: BUREAU OF

ECONOMIC ANALYSIS

John Love APOGEE RESEARCH, INC.

Randolph Lyon - U.S. OFFICE OF MANAGEMENT AND BUDGET

Al McGartland - EPA: OFFICE OF POLICY, PLANNING AND EVALUATION

Ronald Moomaw - UNIVERSITY OF OKLAHOMA

Alicia Munnell - FEDERAL RESERVE BANK OF BOSTON (currently Deputy As ý:stant

Secretary of the Treasury for Economic Policy)

Ishaq Nadiri - NEW YORK UNIVERSITY

Gene Pontillo - EPA: OFFICE OF THE COMPTROLLER

Adam Rose - PENNSYLVANIA STATE UNIVERSITY

Kenneth Rubin - APOGEE RESEARCH, INC.

Norman Starler - U.S. OFFICE OF MANAGEMENT AND BUDGET

Robert Stearns - U.S. DEPARTMENT OF THE ARMY, Office of Assistant

Secretary of the Army (Civil Works)

Robert Wescott - WEFA GROUP, INC.

Fred Williams - U.S. DEPARTMENT OF TRANSPORTATION: FEDERAL

TRANSIT ADMINISTRATION

@ EXECUTIVE SUMMARY xiii
Infrastructure in the 21st

Century Economy

INTRODUCTION

In the late 1970's and early 1980's, when state and local infrastructure budgets were

stretched thin and some major cities were in, or in danger of, default, aging infrastructure and

the lack of resources to refurbish that infrastructure entered into the national policy debate. A

1984 report by Pat Choate and Susan Walters entitled America in Ruins: The Decaying

Infrastructure, argued that "America's public facilities are wearing out faster than they are being

replaced" and that the resultant bottlenecks and deteriorated services from this public

disinvestment would hinder the functioning of the American economy.

Another report on the same topic was issued around the same time by the Congressional

Budget Office (CBO) and was titled Public Works Infrastructure: Policy Considerations for the

1980's. CBO analyzed specific investment needs in highways, public transit, wastewater

treatment, water resources, air traffic control, airports, and municipal water supply. While the

study authors found some unmet needs, they also claimed that many modes were functioning

adequately at present funding levels, that traditional needs studies often overstated requirements

for new resources, that some current spending priorities should be reordered rather than

increased, and that certain problems with deteriorating services were, in fact, due to overuse

caused by inadequate pricing.

Much has been written on the topic of infrastructure sincc then, but in many ways the

debate continues along the same lines as suggested by the juxtaposition of the CBO and America

in Ruins reports. Congress established the National Council on Public Works Improvement

(NCPWI) to study the infrastructure issue from a national perspective. CBO conducted its own

set of analyses. The result of these activities were the NCPWI report Fragile Foundations,

issued in 1988, and the CBO report How Federal Spending for Infrastructure and Other Public

Investments Affects the Economy, issued in 1991.

A comparison of these two reports reveals that many of the fundamental issues surrounding

Federal infrastructure investment are still open. Fragile Foundations concluded that the Nation's

infrastructure was "barely adequate to fulfill current requirements and insufficient to meet the

demands of future economic growth and development." While maintaining that better

management, accounting, financing, and technology practices were called for, the study

nonetheless called for a doubling of infrastructure investment by all levels of goverment by the

year 2000.

@ INTRODUCTION I
The CBO study was far more reserved in its statements regarding Federal infrastructure

investments. The report stated that:

carefidlly chosen Federal investments in physical infrastructure such as highway and

aviation projects would yield economic rates of return higher than the average rate

of return on private capital. As a rule, the highest economic benefits would result

from maintaining existing infrastructure assets and from expanding capacity in highly

congested facilities. Substantial economic benefits also can be achieved by using

existing assets more efficiently. In many cases, price mechanisnms can significantly

increase the efficiency with which infrastructure is used ... Although further, carefully

selected investments in public infrastructure may well be productive, there is little

evidence that substantial, across-the-board increases in current programs would be

more productive on average than private investment.

Academic research into the topic has not been much more conclusive and the fault lines

in that debate have been similar. David Aschauer's work has noted the decline in public

investment, measured as a percentage of gross national product over the last two decades, and

has identified that decline as an important source of the concomitant fall in American

productivity over the same period.2 Other economists have challenged these results as

empirically unsound and have argued that the existing stock of public capital is more or less

adequate, although in need of better pricing and maintenance.'

Meanwhile, the Federal government invests over $50 billion annually in non-military

capital in the form of grants or direct expenditures. 4 At present, however, there is little

consensus on whether that amount of investment is too much, too little, or just about right; how

those investments affect or are affected by economic growth, development, and structure; or

what the rates of return are to different broad categories of investment. Without some reliable

and generally accepted answers to these questions, it is difficult to develop a long-range,

coherent Federal infrastructure investment strategy. A study designed to arrive at some of these

answers and to mitigate or avoid some of the pitfalls into which prior work has fallen is in

order.

Purpose and Scope of This Report

The purpose of this report is to describe an ongoing interagency study, commenced by the

U.S. Army Corps of Engineers, through the Institute for Water Resources, to assess the

relationship of Federal infrastructure - specifically investments in waste management, water, and

transportation - to the Nation's productivity, economic health, and quality of life.

After briefly noting the history of the Corps' involvement in infrastructure studies

generally, this report will describe the current state of knowledge about infrastructure's role in

economic growth and development. It will be argued that, beyond broad principles, not much

firm policy guidance is forthcoming from existing knowledge, and that some of these

2 INTRODUCTION
uncertainties arise from limitations in the data, methodology, and research focus of the work

done to date.

A description of the findings of a series of workshops follows, held by the Corps, in which

individuals from Federal agencies, Congressional organizations and academic institutions were

invited to examine issues surrounding formulation of a scope of work to address Federal policy

needs and mitigate some of the problems encountered in previous research.

Having discussed the limitations of current knowledge and having described the proceedings

of workshop sessions devoted to fleshing out strategies for overcoming those limitations, this

report will conclude by describing the objectives of this effort, the means settled upon to achieve

those goals, and the plan of work.

As part of this discussion, a number of appendices are included as background. These

appendices include:

Appendix A: Scope of work for this study of infrastructure's economic impacts

Appendix B: Selected paraphrase proceedings of workshops and list of workshop attendees

Appendix C: Infrastructure bibliography arranged alphabetically by topic

Appendix D: Infrastructure bibliography arranged alphabetically by author

@ INTRODUCTION 3
Infrastructure in the 21st

Century Economy

CONTEXT

Authority and Scope of the Federal Infrastructure Strategy Program

The effort to examine the economic impacts of Federal infrastructure investments is part

of a larger Federal Infrastructure Strategy (FIS) program of studies and research developed by

the Corps in accordance with an Administration budget initiative. House Report 101-536,

accompanying the Energy and Water Development Appropriations Act of 1991, gave the U.S.

Army Corps of Engineers responsibility for coordinating this initiative and emphasized that the

effort pursue "opportunities for providing local infrastructure facilities" through a partnership

between Federal agencies, state and local governments, and the private sector. Consideration

was to be given to planning, designing, financing, constructing, operating, and maintaining the

Nation's infrastructure with special mention made of identifying public/private financing

opportunities.

From this charge, the Army Corps of Engineers, through the Institute for Water Resources

(Policy and Special Studies Division) has developed a wide-ranging program to examine the

Federal role in infrastructure provision. One of these efforts, the subject of this report, is a

study to better understand the ways in which Federally provided and leveraged infrastructure

investment affect the economy and society at large. The FIS program, and this study, generally

focus on infrastructure spending in transportation, in this case consisting of mass transit, aviation

and highways; waste management, consisting of hazardous and solid waste disposal; and water.

consisting of wastewater treatment, water resources, and water supply.

The aggregate Fragile Foundations categories include analysis of a multiplicity of

investments. For example, among the investments analyzed under the rubric of the broader

classifications are:

WATER RESOURCES: flood control, deep draft and inland navigation, locks and dams,

WATER SUPPLY: small versus large systems, urban versus rural systems;

WASTEWATER: water and wastewater treatment facilities;

HIGHWAYS: highways, local roads, streets;

AIR: general aviation facilities, commercial passenger facilities, passenger facilities,

@ CONTEXT' 5
MASS TRANSIT: buses, fixed rail;

HAZARDOUS WASTE: treatment, storage disposal;

SOLID WASTE: landfills, waste-to-energy plants.

Like Fragile Foundations, this study will analyze these and the many other different

investments which fall under the aggregate categories.

The Relationship of Infrastructure Investment to the Economy and the Quality of Life:

Current State of Research versus Federal Policy Needs

The literature on public works and the economy is burgeoning, so much so in fact, that

there are a number of literature surveys of the field available. There have also been a number

of national studies of public works, some of which have already been mentioned above. Thus,

an extensive literature survey will not be conducted here. (References are provided alphabetically

by author in Appendix C and by topic in Appendix D; citations of literature surveys may be

found in the topical bibliography unde, "Literature Survey").

Instead. this section will report on the applicability of the current state of research to

Federal policy needs and, in particular, the extent to which the known and unknown about

infrastructure can help determine how much and where to invest Federal resources. As it

happens, not much beyond general inferences are widely shared at this point.

Untangling Cause and Effect in Public Works and Economic Growth and Productivity

It is indisputable l'lat public works investment by state, local and Federal governments,

measured as a percentagc ol Gross Domestic Product (GDP), has declined since the 1960's. But

there is disagreement abo 't which factors have caused this historic decline, or how this decline

affects economic variables such as income and productivity.

There is currently much debart over the cause and effect of infrastructure and the economy.

The services which infrastructure '-ovide. such as the improvement in mobility provided by a

new bridge, can cause changes in tl. tput either by affecting suppliers of goods and services or

by affecting total demand for thosc goods and services (infrastructure demand being one

component of that overall demand). ,:our main channels of causation have been identified.

How Public Works Affect Privatt, Economic Activity

Causal Effect #1: The servicts provided by public capital can be a direct input into

private production. The most direct way in which public capital affects private economic

activity is by providing services to private pioducers which are directly used in the production

of goods. A water supply facility, for example, may provide water directly to a steel plant.

6 CONTEXT @
Causal Effect #2: The services provided by public capital can affect private output

by increasing the productivity of other privately provided inputs. Public capital may also

increase output by creating an environment which indirectly enhances the productivity of other

private inputs. In this case, rather than being used directly as an input by a firm, an

infrastructure facility may provide services which makes other labor and capital used by the firm

more productive and/or less costly. An example is a road which facilitates the commute of firm

employees, lessens their commuting time, and makes the workers more productive at work or

allows the firm to choose from a wider pool of skilled labor.

Causal Effect #3: The services and amenities provided by infrastructure can cr,'ate

an environment which draws inputs from other areas. Infrastructure also affects economic

growth by cieating an environment attractive to labor and capital from other areas. This

attraction of goods and services from other areas generally implies a redistribution of national

income from one locale to another, rather than an increase in national income (though if inputs

are being attracted from other countries, this may not be the case). Workers and firms may be

attracted to a particular region by infrastructure for a number of reasons, ranging from the fact

that public facilities may lower the costs of operating in a given area relative to surrounding

areas, to the possibility that facilities may increase the amenities and quality of life in a locale

relative to others (for example, a refurbished and revitalized canal may create desirable canalfront neighborhoods in which workers and entrepreneurs from other cities want to live).

Causal Effect #4: The buildipg and maintenance of facilities can create temporary

new demands for goods and services, and thus raise the level of economic activity. The

actual construction of a facility results in direct and indirect purchases of goods and services

which provide a temporary stimulus to an area. Thus to build a wastewater treatment facility,

one needs to buy the services of construction workers, engineers, steel and cement, to name but

a few needed inputs, and these purchases provide income and employment directly to suppliers

and workers. These workers and suppliers then spend that income on other goods and services

not directly related to the construction of the facility itself and these indirect purchases cause

further stimulus to economic activity.

The area thus stimulated may only be local if the main effect of a public construction

project is to draw resources away from another public or private project. On the other hand,

if there are unemployed or underemployed resources in the economy, and it is this set of

resources which is actually used to build the project, there may be a temporary stimulus to the

national economy.

Supply and Demand Effects: The effects described above are classified by economists

either as supply or demand effects. Thus infrastructure services can cause changes in output

either by affecting suppliers of private goods and services or by affecting total demand for those

goods and services (infrastructure demand being one component of that overall demand). The

@ CONTEXT 7
first three effects described above are supply effects; the last is a demand effect and is the type

of stimulus that much of the infrastructure debate often focuses on namely, the increase in jobs

caused by the purchases of labor and capital to build a new facility.'

The Distinction Between Infrastructure's Effects on the Location of Economic Activity and

Increasing Overall Economic Activity: It must be noted that infrastructure services can affect

both overall output at the national level and the location of that activity within the Nation. In

practice, the distinction between these effects is often difficult to make since the locations of

economic activity usually shift along with any changes in national output. Nonetheless, it must

be kept in mind that many of the causal relationships described have both locational and national

dimensions to them.

Is America Currently Underinvesting in Infrastructure? Two Contrasting Views

Public infrastructure investment can lead as well as follow economic development. The

causal factors described above are instances where infrastructure "causes" or leads to a change

in economic activity.

However, causality can run the other way. In other words, growth in income or output

in a given area might occur first and then lead to an increase in demand for public works

investments either because such projects are desired to address problems and needs caused by

economic growth or because, as per capita income rises, more consumption of "public goods"

such as a new monorail to replace an aging bus line, is desired. Economists generally agree that

infrastructure is both a cause and effect of economic activity, but disagree about how much and

in what circumstances it is one, the other, or both.6

Some economists and policy analysts believe that infrastructure, at present levels of

investment, are a positive impetus to economic growth and productivity, and that more public

investment is needed to increase that growth and productivity to prior levels. Thus the decline

in public infrastructure investment is viewed as a cause of the historic decline in national

productivity. 7

On the other side are analysts who maintain that infrastructure spending is basically

demand-driven, that during the 1950's and 1960's, demographic and income changes led to a

demand for more infrastructure, relative to national output, and that the waning of those changes

has led to the current relative decline in public infrastructure investment.' Added in to this mix

are voices, on both sides of the debate, that emphasize the need to carefully choose infrastructure

investments based on the consistent application of economic efficiency criteria, and point out

existing inefficiencies in managing and pricing the current public capital stock.

8 CONTEXT @
General Conclusions of Existing Research: Infrastructure Matters

How much truth do each of these stories contain'? In general, there is agreement that the

services provided by infrastructure, broadly defined to include all types of public works, do have

a positive effect on measured output. Thus, whatever representation of output is being studied -

national output, gross state product, manufacturing output, personal income, manufacturing

value-added, total factor productivity (TFP) - most studies have found that more public capital

is associated with higher levels of that output. Empirical results also generally show that

infrastructure's positive impact on production is greatest at the national level. As the level of

analysis gets more specific (e.g. from Nation to region to state to city), the positive effects of

infrastructure on output appear to become smaller, perhaps because the impacts become

increasingly difficult to detect, possibly because of leakages of impact from the smaller area

under study to a larger area.

Caveats to This General Conclusion

While research thus far generally confirms that infrastructure has a positive effect on

economic output, it may not always have a positive effect. The following points should be kept

in mind when examining the economic impacts of public works:

1. While most estimates confirm infrastructure's positive effect on economic activity,

a few estimates do not. Not all estimates of infrastructure's impact on productivity and other

economic variables are positive. However, a large majority of these estimates are positive and

this preponderance has proved the case to most economists' satisfaction that public works are

positively related to economic growth.9

2. There is no consensus on the extent to which infrasiructure is a cause or an effect

of economic growth since statistical analysis often cannot identify the direction of the causeeffect relationship. While economists accept the notion that, on average, where there is more

infrastructure, there is generally more economic activity, there is not yet a consensus on what

circumstances lead to infrastructure investment being a cause rather than an effect of economic

activity, or whether public works generally leads or follows economic growth."

3. Infrastructure affects quality of life as well as the economy, but these effects are

difficult to quantify. Much of the literature has focused on infrastructure's impacts on

measurable economic variables. Analysts recognize that public works also have significant

effects on quality-of-life measures, such as environmental quality, which are not included in

national income accounts. Some even say that these "intangible" benefits (from the point of

view of income accountants) are infrastructure's main contribution to society."

@ CONTEXT 9
4. Services provided by facilities, rather than the facilities themselves, are what is

important to long-run economic growth. Economists agree that infrastructure facilities by

themselves do not generally facilitate economic growth; instead, the services that these facilities

offer are key. Thus the mere existence of a bridge does not by itself improve economic

performance over the long-run, but the fact that the bridge facilitates travel from one point to

another may lead to such an improvement. 2

5. Users of infrastructure should be commensurately charged for the services they

receive. The prices of services offered by infrastructure are very important. Theory and

empirical studies suggest that many infrastructure services provided by the Federal and other

levels of government are underpriced and hence overused. This overuse often ends up resulting

in higher maintenance costs for facilities and shorter service lives.13

Of course, identifying users and charging them for services rendered may, in some cases,

be difficult or costly. In such cases, the costs of collecting user fees must be weighed against

the revenues those user fees would yield.

6. It is possible to invest too much, as well as too little, in public works. Clearly, there

can be too much infrastructure investment. Common sense, theory, and a smattering of

empirical studies have shown that overinvestment in public works can and does occur and that

in such cases, disinvestment - in effect the abandonment or lowered use of a facility - may be

recommended. In general, the literature finds that there are diminishing returns to scale in

public works, i.e. that the more public capital there is in place, the lower the rate of return will

be on an increment to that capital."4

7. It is cost-effective to properly maintain infrastructure. It is well established that

proper maintenance of public works is essential to minimizing life-time costs and that deferral

of such maintenance dramatically increases the costs of infrastructure. It is also clear that many

glovernments are currently underfunding maintenance of their public capital stock."5

8. A positive impact of an infrastructure investment in gross terms can become neutral

or negative after the costs of the investment are subtracted out. Many public works projects

will increase output in some way. However, this investment is costly and the resources to fund

the investment must be drawn from some other alternative use which may increase output by the

same or a greater amount. Thus, although the gross economic impact of an infrastructure

project may be positive, one must not assume that the net effect, after accounting for real costs,

is similarly positive."

All inferences are based on the average case and may not apply in particular

circumstances. All of the statements above apply "on average" - that is to say, while the sum

of all public works investments may have a positive national impact, particular public works

10 COTExTI @
projects are inherently local and their effects are closely tied to the local circumstances in which

they operate. Thus a bridge may have positive effects where there is traffic congestion, while

the exact same bridge. placed in the middle of an unpopulated. undeveloped area. may be a

highly inefficient investment. Statements about average effects are very useful in formulating

broad strategies and narrowing down lists of alternatives but in the end these statements do not

obviate the need to consider projects individually on a case-by-case basis.

Guidance for Federal Policymakers Based on the Current State of Knowledge

Thus far, the literature reads more like a list of do's and don't's for Federal policyrnakers

rather than a set of suggestions for drawing up a strategic investment plan. The list reads

something like this:

1. Don't automatically assume that your budgets are inadequate'

2. Do better manage the available resources,

3. Do focus on services offered, not facilities4. Do consider charging more for services being offered;

5. Do conduct individual economic analyses of projects when the time comes for

determining means of meeting specific policy goals.

Why is There Relatively So Little Agreed Upon Regarding Infrastructure and What Can

Be Done About It?

General statements about infrastructure's relationship to the economy are so hard to make

in part because of the limitations which have faced researchers in this field. The policy

implications which can be drawn from the existing literature, particularly for the Federal

government, are also often limited. Some of the reasons for the tentative and broad nature of

many of the present conclusions about infrastructure's relationship to economic growth, and the

accompanying amorphousness of policy guidance which can be inferred, include the following:

1. The complexity of the problem: The problem of determining how infrastructure affects

the economy, and the larger society as well, is inherently complex. General statements are

difficult to make because of the multiplicity of influences on the economy and the complexity

of the workings of the economy itself.

Moreover, general statements about public works often cannot be directly applied in

specific situations, since every situation in which a public investment might be placed is different

from every other situation, at least in subtle respects. Local characteristics which are recognized

as being important in determining the efficacy of public works as an economic development tool

include the existing supply and quality of local capital and labor (e.g. the extent to which there

O CONTEXT I1
is an educated labor force in place); the supply, age, and quality of other local infrastructure

(e.g. the extent to which basic sewer, water, and transport systems are already in place and

functioning): local development and traffic patterns (e.g. whether roads are congested or

development dispersed); the state of the social fabric (e.g. the relative safety of the community,

public health and so on); the type of infrastructure being put in place (the literature thus far

indicates "core" capital. such as transportation, has the biggest impact, water and sewers less,

and others none, but there is not enough evidence yet for a consensus on this point); and the list

goes on).7

2. Study Inconsistencies: Although the literature has focused on infrastructure's effect on

output, the studies themselves have focused on different aspects of the problem. For example,

studies have examined the Nation, the states, regions, and cities and have used different time

periods. Also, the actual output variables which have been tested have differed substantially

across studies: measures which have been used include manufacturing value-added, personal

income, gross state product and total factor productivity. Some of these measures, particularly

net rather than gross output measures such as value-added, pose certain theoretical problems and

problems of interpretation. The fact that infrastructure's impact on output has generally been

found to be positive across this wide range of measures of different types of output across time

and space has increased confidence that public capital matters, but it has also made it nearly

impossible to make firm inferences about the effects which public capital may have on specific

policy variables of interest."

3. Data Limitations: The data used in many studies are often problematic. Classifications

of investments in public physical capital, maintained by government statistical agencies, are

sometimes too limited, contain expenditures which are extraneous to the purpose at hand, and

are usually restricted to publicly provided infrastructure, even if identical infrastructure is being

offered by the private sector. These data are also primarily national estimates of capital stock

at the local level have first generally been converted into national stocks from flow information

at the national level and then disaggregated using imputations based on national ratios or rulesof-thumb. Of course most of this information is in terms of dollar values of physical assets.

Relatively little data is available on types, quality, and conditions of the assets themselves nor

on the types, quality, and nature of the services these assets make possible.`

4. Differing Models, Different Data, and the Difficulty of Comparing Results: A wide

variety of models has been used and little in the way of controlled comparison has been done.

The wide variety of data has been set upon by an equally wide variety of models, including

production functions, cost functions, and profit functions, each of which produce different

estimates with different interpretatioms. The miodels themselves are sometimes ad hoc, or

contain problematic simplifying assumptions, or assume a particular type or direction of causality

with respect to infrastructure and economic growth. even though causal questions are one of the

questions the studies are attempting to answer. Hfere, as with the data, it can be difficult to

12 CONTEXT @
know how much different results produced by different studies can be attributed partly to

differences in methodology. 2

5. Econometric Problems: There can be substantial difficulties in actually estimating these

models. The econometric difficulties have been greatest in measuring, testing, and interpreting

statistical relationships accurately. To give but one example, the strength of the measured

relationship between output and infrastructure has been affected greatly by whether one uses

levels of infrastructure in a given year or net changes from a level in one year to a level in the

next. Which figures are appropriate is a matter of one of the many debates in this area.21

6. A Lack of Focus on Policy Questions: With a few exceptions, much of the literature

which has been getting the attention has been written by academic economists for economic

audiences. Usually the data used are public-use and there tends to be little reliance on, or even

awareness of Federal work. Moreover, while the work has policy ramifications, it does not

often explicitly (or implicitly) ask policy questions such as "How will this set of specific public

capital programs affect this set of economic variables in that local area'?"

7. A Lack of Focus on System-Wide Performance: Almost paradoxically, while much

of the analysis done thus far is highly aggregated, it lacks a systematic view of the infrastructure

network. Widely different modal investments are often added up like so many apples and

oranges. Even where investment types are broken out, they are analyzed as purely separate

components as if none of the other programs existed. A few of the national studies, such as

Fragzile Foundations, have attempted to take a systematic view, but have usually stopped at

generalities. Much work remains to be done.

Significant Challenges

All of this is not to impugn the work which has been done thus far. Any work on this

topic, including this study, faces these same challenges. Much has been learned over the years.

indeed, as general as many of the statements above seem, most were not agreed upon ten or

fifteen years ago. Moreover, the complexity of the problem argues for a multiplicity of

approaches. But at the same time, there are changes in study design and objectives which are

suggested by the debate thus far and which this study is committed to implement. flow much

these changes will result in improved understanding is, of course, something that the study's

outcome will reveal.

The current state of knowledge and the limitations of that knowledge which have been

reviewed above can be summed up in the following table:

@ (ONT,'AT 13
TABLE 1: INFRASTRUCTURE'S IMPACT ON ECONOMIC ACTIVITY

General Conclusion:

Infrastructure Matters

How Infrastructure Matters:

*As an input into production;

*by enhancing productivity of other inputs;

*by attracting inputs from elsewhere;

*by providing demand for construction and other services;

*by responding to demographic and sxructural changes.

Caveats to These Insights: *Services, not structures, are important;

*services should be appropriately priced;

*there can be too much as well as too little investment;

*facilities must be properly maintained;

*new investments must be carefully analyzed, case by case.

Reasons That Not More is Known:

*Complexity cf the problem;

*inconsistencies in what current studies measure;

*lack of comparability across methods and data;

*limnitations in data themselves;

*econometric anu estimation problems;

*lack of policy focus in current studies;

*lack of focus on system-wide performance.

14 CONTEXT @
Infrastructure in the 21st

Century Economy

PROCESS

Developing a Scope of Work

To develop a scope of work which avoided or mitigated at least some of the difficulties

cited above and to encourage an interagency effort, the Corps determined that it was first

necessary to convene several workshops to frame issues and get agencies sharing their

knowledge and perspectives.

Participation

To examine the infrastructure debate more fully, three one-day workshops were held on

July 16, September 17, and November 6, 1992 and were attended by staff from the following

Federal agencies:

U.S. Department of the Army, including the Corps of Engineers

U.S. Department of Agriculture

U.S. Department of Commerce: Bureau of Economic Analysis

U.S. Department of Energy

U.S. Environmental Protection Agency

U.S. Department of the Interior: Bureau of Reclamation

U.S. Department of Transportation:

Federal Aviation Administration,

Federal Highway Administration,

Federal Railroad Administration, and

Federal Transit Administration

U.S. Office of Management and Budget

Representatives from the Congressional Budget Office, Congressional Research Service,

Federal Reserve Banks of Boston and Cleveland and various acar,,nic institutions also attended.

(An attendee list and a condensed paraphrase proceedings of the three workshops is contained

in Appendix B).

® PROCESS 15
Preliminary Findings Regarding Study Means and Ends

General Problems and Needs Defined: Workshop participants struggled with a number

of issues regarding appropriate study design, focus and so forth. However, at the end of the

three workshops, some general propositions about research needs and limitations became clear.

1. There is no need for further publication of literature surveys. The growing literature

on public capital has spawned a growing number of surveys of that literature. These surveys

are useful, but there is no need for another one. Rather these surveys should be built upon with

new information and original research.

2. Economic theory alone cannot provide answers to the questions of how and how

much public capital matters. Economists have been guided by their theories to investigate

particular aspects of the infrastructure problem more intensively. Theory suggests, for example,

that users are not charged enough for much of the public capital they use and that better pricing

will have high payoffs. Theory also suggests that proper levels of maintenance will have high

rates of return. Some evidence has been gathered showing these rather common-sense

propositions to be true.

H-owever, while existing public capital stock can be better managed, theory provides less

guidance about what parts of that stock should be added to, what parts should be abandoned, and

in what ways these increments and decrements should be undertaken. Where theory does

provide some guidance, the limited evidence often raises questions rather than confirmations.

For example, Alicia Munnell has pointed out that public capital should not have greater impacts

on measured output than private capital does and yet some studies show precisely this result.2

Is theory incomplete, the empirical studies misleading, or is there something else being missed?

Available evidence has reached its limits in providing answers. New evidence, and analysis of

that evidence, is needed.

3. The Federal government could use some directed research to address the question

of where best to invest pablic capital. The Federal government spends substantial sums on

non-military public capital every year. Existing literature provides almost no guidance on how

to allocate this money. Federal agencies have conducted some original research on their own,

but little comprehensive, systematic, or inter-program work has been done. The need for such

work is clear.

These conclusions led to the decision to think broadly and aim high, realizing that while

all the goals might not be fully reached, this effort will serve as important new work.

16 PROCESS @
o Be Original: Collect new data, or bring previously unused or internally used

information, into the public domain;

Be Comprehensive: Within limits, of course, look at Federal infrastructure

programs comprehensively. Consider infrastructure as a network, cutting across

programs, as well as looking at the components of that network.

• Be Policy-Oriented: Ask questions specifically about Federal monies which the

Federal government can later use to make investment decisions - hence the focus of

this study on Federal expenditures and how these expenditures affect, and are affected

by, economic structure.

General Issues of Debate

Stating goals such as those above is far easier than developing specific means for achieving

them. Not surprisingly, the same sorts of divisions existing among academic economists existed

among government economists. Perhaps more surprisingly, some common ground on goals and

methods for attaining those goals was reached, resulting in a final workplan (contained in

Appendix 2). The debates focused on a number of issues, including:

1. questions the study should ask (including the definition of infrastructure and the

impacts to be studied);

2. methods and models which the study should employ;

3. data which the study should use.

Study Questions: When first discussing what questions the study should ask, a wide range of

questions were suggested. In fact, one of the first requests of workshop participants was that

an inventory of such questions be drawn up and that rankings be made of that inventory. In the

end, participants identified three main questions which the study should focus on:

How should public capital investment strategies change as the structure of the

economy shifts, and how is that structure and infrastructure related?

•. What are the spillover, external economy, and network effects of public capital

(containing subsidiary questions such as how public capital affects different industries

and regions and what environmental and social impacts occur because of public

capital)?

@ PROCESS 17
How should Federal resources be allocated among competing needs - in other words

where should the Federal government invest its resources'?

Definition of Infrastructure: As for the definition of infrastructure, the Corps of

Engineers originally started with the categories used in the NCPWI study Fragile Foundations

which included:

Water: water resources, water supply, wastewater;

Transportation: highways, air, mass transit, intermodal;

Waste Management: hazardous, solid.

A spirited discussion ensued about whether this definition was too narrow. The general

consensus was that the answer was "yes". However, it was also felt that, for the sake of

keeping the study manageable, these categories, while not perfect, would serve as a reasonable

starting point.

Alternative Ways of Defining Infrastructure Modes: There was also much discussion

of alternative ways of analyzing the Fragile Foundations modes, for example, by dividing

transportation along service types such as intercity and intracity travel rather than sub-modes.

The general agreement was that experimentation with alternative classifications would be useful

in developing the study and their use in the final study products would be developed as the study

progressed.

Time Period for Analysis: There was also discussion of the time period which the study

should cover. Most involved agreed that the suggested focus on Federal investments over the

next five years was acceptable, but that the impacts to be analyzed were medium- and long-term,

with the long-term lasting at least as long as the lives of the assets being analyzed.

Non-Economic Impacts: It was recognized that infrastructure has a wide range of impacts

on the qualify of life beyond economic growth and productivity effects. By their nature, these

impacts, such as air or water quality, aesthetic value of facilities, ability to reach recreational,

pristine or exotic areas in less time, reduced commuting times, and so on, are difficult or

impossible to quantify. While there is a vast and burgeoning literature on environmental benefits

in particular, these intangibles have interestingly been left out of much of the current debate

about infrastructure. Although the focus of this project, like this debate, is primarily economic,

it was agreed that there should be an attempt to integrate these effects into the analysis up-front

and to conduct some research to better understand how these effects operate.

Need For a Controlled Comparison: Methods and models were another area of sharp

debate. Most everyone agreed that models were means to an end and that different tasks often

required different approaches, often more than one. At the same time, there was a recognition

18 PROCESS @
that much of the current debate had gotten mired in the difficulty of interpreting and comparing

results of differing models run on differing data sets.

Thus, a controlled comparison between models run on a comparable data set was felt to

be a useful exercise. To keep the matter simple, this comparison would be restricted to two

models - a production function approach and a generalized benefit-cost analysis, both done at

a fairly aggregated level, such as program investments (e.g. inland waterways)

Retrospective versus Prospective Analysis: Another debate arose over whether most of

the effort should be devoted to analyzing and estimating past relationships and impacts of

infrastructure or instead whether it should confine itself largely to simulating and predicting

future impacts. In the end, it was agreed that much of the work, by its nature, would be

devoted to analyzing the past since that is the only empirical way of understanding and verifying

causal relationships but that the most systematic analysis and the core of the project would be

devoted to using this knowledge of the past to predict future impacts.

Need for Better and More Original Data: Finally, there was universal dissatisfaction

with the state of Federal infrastructure data. Indeed, some participants felt that the most value

to be gained from the study was to amass a more detailed and comprehensive data set on

currently planned Federal infrastructure investments and on the state of the current Federal

capital stock. It was recognized that data collection was the first and most important order of

business and also that it would take the most time. The advantages of an interagency effort in

rounding up data were apparent.

The Current Effort

The result of the workshops was to forge a workplan which was perceived to be credible,

doable, relevant to Federal policymaking needs and, perhaps most important, likely to result in

some advance from the current state of knowledge.

The goal of the study is a comprehensive treatment of Federal infrastructure within certain

predefined boundaries. Promising leads uncovered by this initial treatment will be pursued using

additional data analysis and case studies. It was agreed that enough literature reviews had been

done and that the relationships identified using economic theory alone had already been wellcovered. A comprehensive treatment, and uncovering of original data, had not been done yet

to any great degree and held the promise of more rewards in terms of new knowledge.

@ PROCESS 19
Infrastructure in the 21st

Century Economy

PRODUCT

Overview of the Workplan

The detailed scope of work developed as result of the three workshops is contained in

Appendix B. Conceptually, the work can be said to consist of four sets of tasks, each of which

are designed to deal with some of the challenges faced in prior research which has kept guidance

to Federal policymakers fairly limited. These four sets of tasks, each of which will be expanded

and fleshed out later using case studies and additional analysis, are:

1. Organization of an analytic framework

2. Data collection

3. Comparison

4. Simulation

1. Organization of an Analytic Framework: To meet the challenge of conducting a

comprehensive analysis of the economic and non-economic impacts of the Federal infrastructure

system, the study will begin by developing an overall framework to account for all costs and

benefits, broadly defined, of Federal infrastructure investment. This framework will serve as

a shell, to be filled in as the study progresses, which integrates economic and non-economic

impacts of public works into a single conceptual view of the world.

2. Data Collection: The study seeks to improve understanding of the potential rates of

return to potential future infrastructure investments. To even begin to reach this goal, one must

have high quality data regarding appropriate and relevant phenomena. Given the interagency

nature of this effort, it is hoped that there will be uncovered either new or previously

unpublished data regarding current and planned investments in Federal infrastructure programs

and the nature, quantity, and quality of services offered by existing Federal capital stock.

3. Comparison: An oversimplification of the infrastructure debate thus far might pit costbenefit approaches on one side, favoring no new large-scale increases in public capital

investment, and production function approaches on the other side, favoring such large increases.

© PRODUCT 21
This characterization is, of course, unfair, but it is true that much of the uncertainty surrounding

the size of the economic impact of public works expenditures may be due to methodologies.

To untangle some of these issues, the core of the effort is a controlled comparison, on

comparable data, between broad benefit-cost analyses of investments in infrastructure modes and

production or cost function analyses of the same investments. (Benefit-cost analysis is here

defined as the quantification and classification of some investment impacts as costs to society and

others as benefits, using specified criteria such as willingness-to-pay, and then netting out the

difference between the two to determine whether the investment impacts represent a net gain or

loss to society). Analysis of economic impacts will start at the national level, and additional

analysis at regional, state and local levels, and by more detailed expenditure category is desired,

but may not be accomplished depending on time and resources and data constraints.

4. Simulations: Already mentioned is that fact that this study aims to be relevant to

policymakers, particularly at the Federal level. One of way ensuring this relevance is to focus

on Federal programs. Another way is to simulate the economic impacts of planned Federal

infrastructure investments in the future, doing a with/without analysis. Future projects will be

evaluated using prospective simulations of both benefit-cost and production function analysis.

Of course, to understand the future, one must understand the past. Retrospective analysis

is a key part of the study, and the impacts of past investments on past economic performance

will be assessed to better understand economic dynamics, potential causal relationships, and the

workings of different analytic models. However, the main output of this study will be a

simulation of future economic impacts of current and future Federal infrastructure investments.

Aspirations Versus Outcomes

As written, this effort is ambitious. Given the difficulty of data collection and methods

improvement, it is expected that most of the study effort will be consumed with the means rather

than the end, but participants agreed that even if the goal was not reached, it is worth the

attempt, and that whatever work was done would serve as a foundation which new efforts led

by other entities could build off of.

22 PRODUCT @
Infrastructure in the 21st

"Century Economy

ORGANIZATION

Execution of the Effort

To make sure the work gets done in a timely fashion and that it is consistently of high

quality and policy-relevance, a structure has been set up to guide the effort. This structure

consists of a set of review committees and a contracting structure incorporating the use of

unbiased and skilled expertise.

Oversight Committees: A number of oversight committees have been established for

quality control and transmission of a vision from participating agencies. There are three such

committees:

1. Management Committee - composed of individuals from participating agencies, this

committee will make decisions, on the agencies' behalf, regarding the direction of the

study, its scope, its focus, and the deployment of resources committed to it. This

committee will designate a project manager from one of the agencies with full-time

responsibility for managing the effort and acting as the main point-of-contact between

the committee and contractors.

2. Technical Committee - composed of individuals from participating agencies and

others with expertise in the modes and infrastructure programs being studied, and

technical details of the data, models and theory underlying the project, the main task

of this committee will be to ensure that the technical work being done meets the

objectives at hand. At least some members of the committee have had direct

experience working with the models being used by the contractors and have had

direct experience working with the relevant data.

3. Convening Group - composed of individuals who attended the first three workshops

and aided in designing the original scope of work, this group will remain in place to

meet periodically to review the work in progress and the final reports, bringing to

bear on the work a continuity and overarching perspective.

© ORGANIZATION 23
Experts: Apogee Research, Inc., has been chosen as the lead contractor in this effort.

(Apogee was hired to conduct many of the technical studies which the National Council on

Public Works Improvement used to produce Fragile Foundations, and Apogee also wrote

sections of that final report.) Several subcontractors will be doing much of conceptual work in

terms of choosing and evaluating models and posing questions for analysis. There will be two

classes of subcontractors. The process calls for core production function analysis and core

benefit-cost analysis. These two efforts will each be led by neutral, experienced, well-respected

people in their fields with relevant expertise, who will be doing most of the conceptualization

of the problems and will select specific economic models to operationalize the approaches.

As these coordinating experts guide the work and issue orders, people who have developed

models, such as David Aschauer and others, will be consulted and provide input to the process

and others, such as Apogee staff, will do much of the technical work, using the guidance of

these outside experts.

24 ORGANIZATION @
Infrastructure in the 21st

Century Economy

CONCLUSION

Next Steps

The workshops have ended and the real work of the effort is beginning. This report serves

both as a description and an announcement of this study. It is anticipated that this work will

take place over the next two years and will consist of the following products:

A report describing current and planned Federal infrastructure programs, which will take

the data collected from Federal agencies and describe and quantify current Federal public

works investment plans. To be issued 1993.

A report describing work in progress serving as a status report on the effort, revealing

what has been uncovered, what remains to be examined, and how. To be issued 1993.

A report on the simulation of economic effects of Federal infrastructure, which will

describe the way in which simulations have been undertaken and preliminary results of

these simulations. To be issued 1993/1994.

Reports on the various extensions of the analysis, case studies, and a synthesis report; all

issued over the course of 1994.

Federal managers always face infrastructure investment decisions and of necessity cannot

wait for the results of any study, least of all from a modest effort such as this, before making

those decisions. But because there is always a need to decide on, as President Clinton's A

Vision of Change for America puts it, "the difficult and often unglamorous steps necessary to

ensure prosperity over the long run," it is hoped that the products of this study, as they are

completed, will be relevant and useful, and a contribution to an ever-widening body of

knowledge about infrastructure.

@ CONCLUSION 25
Endnotes

1. pp. xv-xvi, in CBO, 1991.

2. See Aschauer, 1989a, 1989b.

3. For example, see Aaron, 1990; Holtz-Eakin, 1988a, 1991; Hulten & Peterson, 1984; and

Jorgenson, 1988.

4. Budget of the U.S. Government, FY93.

5. This discussion of causal factors, and much of what follows below, is inspired by Eberts,

1991.

6. Theoretical discussions can be found in Bergstrom and Goodman, 1973; Borcherding and

Deacon, 1972; and Pestieau, 1976.

7. Aschauer (1990a, 1990b, 1990c, 1989a, 1989b, 1988b) has been a leading proponent for this

view.

8. This is the story told, for example, by Hulten and Peterson, 1984.

9. See McGuire and Nienhaus, 1992, for a discussion.

10. For a survey of the literature, see Eberts, 1991 and 1990. For other discussions, see Bell

and Feitelson, 1990; Garcia-Mila, 1987; Hansen, 1965; Hirschman, 1958; Holtz-Eakin, 1988a;

Hulten and Schwab, 1984b; Looney and Frederiksen, 1981; Sahni and Singh, 1984; and Singh

and Sahni, 1984.

11. Some discussion of these issues can be found in McL)owell and Bell, 1991; National

Council on Public Works Improvement, 1988; and U.S. House of Representatives, 1991a.

12. This is a key finding of the National Council on Public Works Improvement, 1988.

13. Most noteworthy in this field are studies by the Congressional Budget Office, 1992b;

Small, Winston and Evans, 1989; and Winston, 1991.

14. For example, Aberg, 1981; Antle, 1983; and Carlino, 1979.

15. National Council on Public Works Improvement, 1988; Office of Technology Assessment,

1990.

16. See, for example, CBO, 1991.

17. Fox, 1990 and Fox and Smith, 1990, discuss many of these issues.

26 CONCLUSION @
18. The literature survey by Mcguire and Nienhaus, 1992, contains a more detailed discussion

of these issues.

19. See McGuire and Nienhaus, 1992.

20. See McGuire and Nienhaus, 1992.

21. There are many attacks in particular on the production function methodology specifically,

and the observed correlation between productivity and infrastructure spending more generally.

See Aaron, 1990; Congressional Budget Office, 1991; and Jorgenson, 1988, for examples.

22. Munnell, 1992.

@ CONCLUSION 27
APPENDIX A: SCOPE OF WORK

@ APPENDIX A 29
APPENDIX A

SCOPE OF WORK

Background

During tLe 1980's, a number of reports came out detailing the problems with America's

infrastr.icture. The broad consensus of these reports was that there was underinvestment in the

Nation's public works. There was far less agreement about the magnitude of that

underinvestment or about where funds should be allocated.

Late in the same decade, a debate began to rage in the academic community about the role

of infrastructure investments in the performance of the United States economy. Some

economists found that new public works generally have high rates of return, using a

methodology of estimating an aggregate production function for the national economy; other

economists, relying more heavily on traditional benefit-cost analysis, found much lower rates

of return for public capital investments.

In absolute terms, Federal infrastructure investments are sizeable; direct Federal

expenditures for physical capital in non-defense programs equalled over $20 billion in 1992;

Federal grants for capital spending in non-defense programs equalled over $27 billion in the

same year.1 A more definitive assessment of the impact of that spending on the American

economy is in order.

Purpose

The purpose of this study is to assess the total rate of return on planned Federally provided

and leveraged capital spending and capital stock in selected categories of infrastructure;

understand the effects that these investments may have on economic activity; and examine and

compare a number of methodologies for assessing this impact.

Definitions and Study Scope

For purposes of this study total refers to effects which go beyond those which are private

and beneficiary-specific to include phenomena such as network and linkage effects; more broadly

speaking, total includes both economic and noneconomic returns. Rate of return refers to the

'. These figures are estimates obtained from Table 9.1 of the Budget of the United States

Government: Fiscal Year 1992.

@ APPENDIX A 31
net effects of infrastructure investments of different types, focusing on long-run effects (with the

long-run being defined by the economic and operational life of capital stock being analyzed) but

not excluding short-run effects. The impacts which will be analyzed include:

"* Factor impacts (e.g. labor [or capital] incomes, productivity, etc.);

"* Sectoral/Industry impacts (e.g. industry x's income, productivity, etc.);

"* National income;

"* Non-economic impacts (e.g. environmental effects).

Planned Federally provided or leveraged refers to programs likely to exist at the Federal

level over the next five to seven years where there is a significant Federal interest and

involvement in terms of providing direct infrastructure facilities and services, grant money,

loans, guarantees or other sources of liquidity.

To keep the study manageable, some arbitrary lines have to be drawn. Thus where the

Federal government's role is primarily regulatory and its direct and indirect funding

responsibilities are negligible, the program will not be studied.

However, the services (as opposed to the programs) which will be examined are not

necessarily or always primarily Federal. In many cases, Federal investments fit into a larger

infrastructure system which is primarily non-Federally owned or operated. In such cases, the

Federal program could not be studied meaningfully without considering its place in the larger

network. An example would be the role of Federal highways in the national system of state,

local, and private roads.

Selected categories of infrastructure refers to the eight categories identified in Fragile

Foundations. These eight categories are:2

2 The aggregate Fragile Foundations categories include analysis of a multiplicity of

investments. For example, the investments analyzed under the rubric of the broader

classifications include, but are not limited to: WATER RESOURCES: flood control,

navigation, dams, locks and dams: WATER SUPPLY: small versus large systems, urban

versus rural systems; WASTEWATER: sewage treatment facilities, nonpoint controls,

groundwater contamination; ItlGHlWAYS: interstate highways, local roads, streets; AIR:

general aviation facilities, commercial passenger facilities, passenger facilities; MASS

TRANSIT: buses, fixed rail; HAZARDOUS WASTE: treatment, storage, disposal: SOLID

WASTE: landfills, waste-to-energy plants.

32 APPENDIX A @
WATER water resources

water supply

wastewater

TRANSPORTATION highways

air

mass transit

intermodal

WASTE MANAGEMENT hazardous

solid

Note that while these 8 categories are the subject of study, they will not necessarily be the

focus of analysis or the categories used to organize the outputs of the study. For example,

analysis of the data on transportation could be organized along the lines which the U.S.

Department of Transportation used to develop the National Transportation Policy (NTP). In this

case, the relevant transportation categories would be:

TRANSPORTATION intercity freight

intercity passenger

urban/suburban mobility

international mobility

manpower & technology

The research reports produced could be organized along similar lines or, conceivably there

could be two sets of analysis or reports, with one organized along the Fragile Foundations

categories and another organized along NTP categories. Different lines of analysis could also

be devised for waste and water as well.

Outline of Work to Be Done

The work will proceed as follows:

1. A thorough and complete time-series of Federal infrastructure capital flows and stocks will

be collected.

Like Fragile Foundations, this study will analyze the many different investments which fall

under the aggregate categories.

@ APPENDIX A 33
2. Initial assumptions, methods, and specifications for the analysis to follow will be developed

and made explicit (e.g. the framework for categorizing investment impacts as costs and

benefits, simplifying assumptions used to make the analysis manageable, specification and

development of the two different methodologies to be used, namely a generalized benefitcost and production function analysis, and modifications necessary to make the results of

the two analyses comparable).

3. The production function and benefit-cost models will be run on the same or similar data,

using the analytic framework developed under item 2.

4. Once the models have been run, the results will be compared; differences and convergences

in effects predicted will be identified and analyzed.

5. Then the results of these two analyses will be extended, using other complementary models

such as input-output analysis and macro-econometric modelling, to develop estimates of

sectoral impacts. Non-economic impacts and causal relationships will be explored in

greater detail through case studies.

Tasks

I. DATA

Task L Categorize Information to be Collected

Identify all relevant public and private programs and investments which fall into the

categories (and subcategories therein) of transportation, waste, and water. Distinguish between

those investments which are Federal, Federally leveraged or key to studying Federal program

impacts, and those investments, public and private, which are non-Federal. Then determine

program conditions such as investment and O&M cost sharing between Federal, state, local and

nongovernmental entities.

Task 2: Collect and Develop Data

Develop and/or collect relevant program data including, but not limited to:

"* Overall expenditures;

"* Capital items purchased each year;

"* Characteristics of items purchased (e.g. quality, useful lives, service lives,

function);

"* Amount spent on O&M versus new capital;

"* Characteristics of O&M expenditures;

14 AIPPENDIX A @
"* Characteristics of infrastructure users/clientele;

"* Characteristics of facility performance;

"* Prices (explicit and implicit); and

"* Characteristics and quality of services offered.

These data will be disaggregated in various ways including by level of government

(Federal and nonfederal) and geographic location (national, regional, State). Where relevant

data do not exist, or are too time-consuming or difficult to collect, reasonable imputations may

be made. These imputations must be fully explained, defended, and documented.

Task 3: Relate Capital Stocks and Flows

Develop and/or collect relevant capital stock information and relate the capital flow data

to the capital stock data. Where data are plentiful, this task may be as straightforward as

checking an outstanding inventory and netting out recorded depreciation. More likely, some

imputations and estimates will have to be made.

Task 4: Organize Data Collected

Classify and categorize the information collected by the Fragile Foundation categories

listed in the "Definitions" section and also describe how the programs are related to each other

in terms of a network. Also classify and categorize information collected according to other

relevant categories such as those used in formulating the National Transportation Policy (NTP).

Provide cross-references in the data between the Fragile Foundations categories and the other

categories selected.

II. MODELLING

IL.a. Preparations for Analysis

Task 5: Classify Investments to be Analyzed

Develop and prepare methods for aggregating projects into modal investments, to be

analyzed as a large project (or set of large projects). For example, the National Highway

System, or the Missouri River lock and dam system, could be considered a project for study

purposes

Task 6: Conduct a Literature Survey on Potential Benefits and Costs

Conduct a literature survey identifying types and ranges of dollar values for various costs

and benefits, and discount rates, and develop (and defend) a set of "consensus" values.

@ APPENDIX A 35
Task 7: Develop a Framework for Analysis

Specify the likely categories of economic and non-economic impacts and organize an

accounting framework for tabulating, comparing, and analyzing these impacts as costs and

benefits (and for calculating social rates of return) as these estimates are produced.

Task 8: Specify the Baseline and Counter-Factual

Specify fully the comparison to be done. In particular, clearly specify the baseline case

(that is, the situation which would exist with a given set of policies in place) and the counterfactual (the situation which would exist with a change in that set of policies). In detailing the

counter-factual, some assumptions must be made that Federal funding for infrastructure diverts

resources from elsewhere in the economy (either from the private economy through higher taxes

or debt or from other Federal spending). In detailing the baseline, some assumptions must be

made regarding provision of infrastructure in the absence of Federal funding (for example, some

private toll roads or state funding would be offered if Federal roads were not built). Obviously

these are problematic issues and, in many cases, the need for simplicity may override a desire

for realism in assumptions. Whatever assumptions are made, there must be a full discussion of

the relevant issues.

M. b. Simulations

Task 9: Simulate effects of potential public works investments; select production/cost

function and benefit-cost models.

Having specified the baseline and simplifying assumptions, a with-without comparison will

be made for Federal programs from 1992 to 1997. Thus a forecast will be made using two

scenarios: a forecast of economic conditions with a given set of Federal infrastructure

investments in place and a forecast of those conditions without those investments. Note that

while the comparison would be made only between the presence and absence of Federal

programs for the next five years, the economic effects of this simulation would extend as far into

the future as necessary. The time frame for analysis may vary depending upon the project in

question.

The first step in conducting simulations will be to select and/or modify specific benefit-cost

and production and/or cost function models. To assess which models are best suited to the task

at hand and to make modifications which improve the performance of the models, it will be

necessary to conduct some limited simulations of selected public investments for past time

periods, compare the results with actual historic performance, and then make any necessary

changes to the methodologies based on interpretations of the differences between the predicted

values and actual values. While these historic simulations will be limited and uncomprehensive,

36 APPENDIX A
they are a necessary prelude to the prospective simulations described above and will be fully

documented and described as part of the final study reports.

Then, two separate prospective iimulations will be done. A generalized benefit-cost

analysis, using the accounting framework done as part of Task 7, will be used to produce

one simulation and a production function methodology (or its dual, the cost function) will

be used to produce another simulation. As much as possible, the outputs of this production

function analysis will be put into the same impact accounting framework.

These first simulations will be conducted so as to be as comparable as possible. Each

model will be run on a core set of identical data (recognizing that one method may also require

some additional information which the other method does not), identical simplifying assumptions,

and identical units of analysis, (i.e. projects [as defined under Task 51 at the national, or perhaps

a set of subnational levels [which taken together constitute the geographic confines of the

Nation]).

Task 10: Conduct Sensitivity Analyses

The simulations above will first be run using "reasonable" parameter values, then conducted

again varying important values such as benefits, costs, discount rates, and details of the

counterfactual and baseline cases. ("Reasonable" values will be chosen based on the results of

the literature survey conducted in task 6 and using expert judgement). There may also be some

additional sensitivity analyses run on one method but not the other; for example, the functional

form of the production function may be varied.

H. c. Comparison of Simulations

Task 11: Convert Model Outputs to a Comparable Metric

The basic outputs of a benefit-cost model are figures for net benefits and rate of return.

The basic output of a production function model is an output elasticity. Instances where the

results of the simulations based on the two different models are not directly comparable must

be identified and then modified so they can be compared. For example, the production function

elasticities described above must be converted into rates of return. Also, as mentioned under

Task 9 above, the outputs of the 2 models will be put into a common impact accounting

framework.

Task 12: Identify Convergences and Similarities Between the Production Function and

Benefit-Cost Results

Results of each of the simulations done above will be tallied and compared; where no

comparison is possible (for example, one model generates an output that the other does not) this

@ APPENDIX A 37
fact will be noted. Divergences and convergences will be noted and quantified. As much as

possible, there will be an attempt to make statements such as "the rate of return on waterways

capital predicted by B/C differs by X% from the rate of return predicted by the production

function.

Task 13: Analyze Convergences and Similarities Between the Production Function and

Benefit-Cost Results

The differences and agreements found between the two models will be analyzed in greater

detail with an eye towards assessing why they occurred and what they may mean. This analysis

will be guided by an extensive literature search on infrastructure's role in the economy,

statistical tests of causality, and other analytic methods and expert judgments.

NOTE: In each of the exercises outlined above, there will be an attempt to make the models

run on a consistent data set, analyze comparable questions (for example, identical counterfactuals and similar sensitivity analyses) and generate roughly comparable results. The purpose

of this exercise is not to set up some sort of contest between models and declare a "winner"

(such a declaration would be without real foundation). Rather this sort of controlled comparison

will hopefully lead to new insights about the effects of implicit assumptions on research results

and indicate instances where there might be synergies, network effects, or other sorts of

phenomena which were not anticipated when prior research was done. Indeed, this is just the

sort of insight which has been gained as a result of the initial clash of benefit-cost study results

and production function results.

III. EXTENSION OF ANALYSIS

To better understand the implications of the simulations conducted above, explain the realworld dynamics of infrastructure investments, and to add detail to both the benefit-cost and

production function approaches, some additional models and case studies will be used.

III.a. Disaggregation of Models

Task 14: Extend Benefit-Cost Analysis with Input-Output Analysis

The estimates of economic impact from the benefit-cost analysis (e.g. changes in input and

output supplies) will be used in an input/output model, to be determined later, which will be

used to produce a detailed static picture of sectoral and industry impacts. A macro-econometric

model, may then be used to extend the static sectoral impact picture into the future. Both the

I/O model and the macro-econometric models chosen must be nationally recognized and accepted

by the economics profession, have been used in published academic research, and have been

cited in the academic literature.

38 APPENDIX A
Task 15: Extend production function Analysis with Cost Function Analysis

The results of the production function analysis will be extended using the dual of the

production funtaion, the cost function, to generate sectoral impact estimates; the same macroeconometric model may also be used for extending the benefit-cost analysis will also be used for

projecting sectoral impacts into the future.

III. b. Causality

Task 16: Describe and Test Causal Relationships

As in Task 13, statistical methods such as Granger tests will be employed to test for and

quantify causal relationships. In addition, at least one case study, perhaps of an industry, will

be conducted to flesh out possible causes and effects between modal investments and economic

activity.

III. c. Regional and Local Impacts

Task 17: Describe and Test Regional and Local Infrastructure Impacts

To some extent, the initial simulations may have already quantified subnational impacts,

depending on the level of aggregation chosen for analysis. To analyze these impacts more

qualitatively and in greater detail, at least one case study of infrastructure investments in a local

area will be conducted. A possible candidate for study is a high-technology corridor such as

Silicon Valley. If possible, a set of case studies will be randomly selected. In the event that

such a random selection is not made, and/or if the number of cases examined is too small to

make statistically significant inferences, this fact will be noted and the reader will be advised that

the results are purely illustrative of possible causal impacts.

III.d. Non-Economic Impacts

Task 18: Describe and Analyze Environmental and Social Impacts

All tasks described above are undertaken with the understanding that important impacts of

infrastructure on the quality of life and environment must be identified, quantified where

possible, and discussed qualitatively otherwise. To emphasize the importance of these impacts,

and to better understand their dynamics, at least one case study of the environmental and social

impacts of an infrastructure investment will be examined. If possible, a set of case studies will

be randomly selected. In the event that such a random selection is not made, and/or if the

number of cases examined is too small to make statistically significant inferences, this fact will

be noted and the reader will be advised that the results are purely illustrative of possible causal

impacts.

@ APPENDIX A 39
1ll. e. Larger Impacts

Task 19: Describe and Analyze the Impacts Beyond the Modes Under Study and Beyond

National Borders

The study as written explicitly focuses on eight modes as defined as Fragile Foundations,

and on impacts of investments in those modes in the United States. Clearly economic effects

do not stop at modal or national borders. The shift from the eight modes mentioned above to

NTP categories is an implicit acknov ledgement of this fact.

Perhaps using the NTP and other classifications as a starting point, a qualitative and

quantitative analysis of international and intermodal impacts will be conducted. An input-output

analysis could be used to consider the effects of water, waste management, and transportation

investments on industries and modes other than these three (e.g. telecommunications); a macroeconometric model or other analytic model could be used to get a preliminary estimate of

international impacts; and a qinlitative analysis, literature review, and perhaps a case study

(perhaps of a port) could be conducted for a cross-cutting assessment.

IV. STUDY PRODUCTS

As the study progresses, the following reports will be issued:

1. Kick-Off Report

A report announcing the effort, reviewing the literature, describing the findings of the

process which led to formulation of the scope of work, detailing the goals of the study and

indicating how these goals will be accomplished, to be completed 1993;

2. Data Report

A data report to be issued after completion of Tasks 1 through 4. The report will describe

the data and methods used for collecting and modifying the data, including, but not limited to:

- sources of data

- data elements selected

- criteria used for data selection

- explanation and justification of criteria

- methodology used for adjusting data

- problems existing in the data, both modified and original

- publication of every data record in an appendix

40 APPENDIX A @
This report will also describe the data systematically, emphasizing the implicit Federal

investment strategy inherent in the numbers, the uses to which these numbers will be put in the

upcoming study, and the objectives which are hoped to be met at the conclusion of the effort;

to be completed 1993;

3. Interim Status Report

A report, for general release, describing the work done thus far, the tasks remaining, and

an anticipated outline and structure of the final report; to be completed 1993.

4. Simulation Report

A report describing overall results (perhaps preliminary) of the simulations as outlined in

Tasks 5 though 14 above. This report will describe the methods used, conceptual and theoretical

framework behind the work, difficulties encountered while doing the work and ways in which

those difficulties were resolved and results of the simulations with some preliminary analysis of

those results. This report will also detail plans for expanding on the work done thus far; to be

completed 1993/1994.

5. Con-luding Reports

A series of reports describing the final results of the simulations, their extensions and

capabilities; to be completed 1994.

V. OVERSIGHT

Several mechanisms for study quality control and management have been instituted to ensure

that all participating agencies have a say and that relevant experts can provide input.

1. Oversight Committees

a. Management Committee composed of individuals from participating agencies who

have been given authority to make decisions, on their agency's behalf, regarding the direction

of the study, its scope, its focus, and the deployment of resources committed to it. This

committee will designate a Project Manager from one of the agencies with full-time

responsibility for managing the effort and acting as the main point-of-contact between the

committee and contractors.

b. Technical Committee composed of individuals from participating agencies and others

with expertise in the modes and infrastructure programs being studied and technical details of

the data, models and theory underlying the project. The main task of this committee will be to

@ APPENDIX A 41
ensure both a consistent and high level of technical work and to ensure that the right tasks are

being done by the right people to meet the objectives at hand. At least some members of the

committee must have had direct experience working with the models being used by the

contractors and some must have had direct experience working with the relevant data.

This committee may break up into subcommittees (e.g. modal subcommittees or

methodological subcommittees) if necessary to concentrate effort and expertise on particular

tasks.

c. Convening Group composed of individuals who attended the first three workshops.

Since the convening group designed the original scope of work, it will remain in place to meet

periodically to review the work in progress and the final reports, bringing to bear on the work

a continuity and overarching perspective.

2. Contracting Structure

The lead contractor will act as an overall manager and coordinator of its own work and that

of subcontractors. In addition, this lead contractor will communicate findings and progress to

the committees; coordinate inputs, assumptions and outputs of individual research tasks; and

assume responsibility for product quality control, and preparation of deliverables. All activities

by the contractors and subcontractors will be subject to review by the management and technical

committees and final approval by the Corps of Engineers.

42 APPENDIX A @
APPENDIX B: INTERPRETATIVE SUMMARIES

OF THE WORKSHOPS

@ APPENDIX B 43
APPENDIX B

AN INTERPRETATIVE SUMMARY

OF A DIALOGUE ON INFRASTRUCTURE

ECONOMIC GROWTH, PRODUCTIVITY AND

QUALITY OF LIFE

AND APPROPRIATE AND USEFUL RESEARCH QUESTIONS

HIGHLIGHTS OF INTERAGENCY WORKSHOPS

HELD ON: JULY 16, 1992

SEPTEMBER 17, 1992

NOVEMBER 6, 1992

Foreword:

To explore issues surrounding the Federal infrastructure investments and economic growth,

productivity, and quality of life and to develop a scope of work which addressed questions of

relevance to Federal policymakers in a credible and useful way, the U.S. Army Corps of

Engineers convened three workshops attended by personnel from Federal agencies,

Congressional research organizations, and academic institutions. These workshops were held

on July 16, September 17, and November 6, 1992 respectively, each time attended by

approximately 30 people.

Panels addressed the first two workshops to stimulate thinking, while the last workshop was

purely a working session. In all cases, participants were given a draft scope of work and asked

to provide suggestions for revising it. The result of these proceedings was a final plan of work

which is currently being executed.

The proceedings contained herein are loose paraphrase and focus on selected exchanges

which took place during the workshops. The full proceedings have been taped but have not been

transcribed.

Participants included the following people (in alphabetical order):

L. George ANTLE, U.S. Army Corps of Engineers

David ASCHAUER, Bates College

Michael BELL, Johns Hopkins University

Carolyn CANNON, Department of Energy

M. William CLARK, U.S. Army Corps of Engineers

Michael DEAN, Office of Water, U.S. Environmental Protection Agency (EPA)

Michael DEICH, Congressional Budget Office (currently with the National Economic Council)

@ APPENDIX B 45
Alan DICKERSON, Bureau of Reclamation

Randall EBERTS, Federal Reserve Bank of Cleveland

Frank EMERSON, Federal Aviation Authority

William GELSTON, Federal Rail Administration

Cameron GORDON, U.S. Army Corps of Engineers

Ann GRAMBSCH, Office of Policy, Planning and Evaluation, EPA

Thomas HADY, Economic Research Service, Department of Agriculture

Arthur JACOBY, Federal Highway Administration

Kurt KARL, The WEFA Group, Inc.

John KORT, Bureau of Economic Analysis

John LOVE, Apogee Research, Inc.

Randolph LYON, Office of Management and Budget

Al McGARTLAND, Office of Policy, Planning and Evaluation, EPA

Ronald MOOMAW, University of Oklahoma

Alicia MUNNELL, Federal Reserve Bank of Boston (current Deputy Assistant Secretary of the

Treasury for Economic Policy)

Ishaq NADIRI, New York University

Robert PIETROWSKY, U.S. Army Corps of Engineers

Gene PONTILLO, Office of the Comptroller, EPA

Dennis ROBINSON, U.S. Army Corps of Engineers

Adam ROSE, Pennsylvania State University

Kenneth RUBIN, Apogee Research, Inc.

Kyle SCHILLING, U.S. Army Corps of Engineers

Norman STARLER, Office of Management and Budget

Robert STEARNS, Office of Assistant Secretary of the Army (Civil Works)

Rob-,;,t WESCOTT, The WEFA Group, Inc.

Fred ,VILLIAMS, Federal Transit Administration

46 APPENDIX B @
HIGHLIGHTS OF THE JULY 16 1992 WORKSHOP TO DESIGN A SCOPE OF WORK

TO STUDY THE ECONOMIC IMPACTS OF FEDERAL PUBLIC WORKS

INVESTMENTS

9:30AM - 10:15AM: Welcome and Introductory Remarks by Dr. Robert Stearns, Deputy

Assistant Secretary of the Army (Civil Works) for Project Management

Stearns: Why has everyone been invited to gather at this particular place on this particular day?

The Administration and the Congress wanted a dialogue on infrastructure strategy and have

given the Corps the task of starting this dialogue. Why was the Corps of Engineers assigned

this task? The Corps has engineering expertise; an interdisciplinary staff; a long history of state

and local relationships; many local offices; and experience with forging interagency

relationships.

The Corps is not seeking a new mission or to sell its methods for doing things. Rather the

Corps is asking open questions. This scope of work is ambitious.

Reading this strawman scope of work, we see the project represents a very broad study on

the effects of infrastructure spending on private growth. The Scope of Work (strawman) lists

areas of infrastructure interest: highways, mass transit, aviation, water resources, water supply,

wastewater, solid waste, and hazardous waste. The project examines econometric models to

analyze infrastructure effects, assess them, and provide answers on what can they tell us.

In accomplishing the task of evaluating the economic value of infrastructure investments,

there are eight (8) luestions which I think need to be asked:

1. Are we able to define the optimal levels of infrastructure investment?

2. Has the work helped us to determine the priorities of investment within a single agency'?

3. Has it helped us to determine how to select among projects in agencies along with the

associated tradeoffs'?

4. Has it helped us decide whether operations and maintenance, major rehabilitation, or

replacement is the best strategy for a given infrastructure, given the facility condition

and budget?

5. Has it helped us to develop a common language among Federal agencies on this issue'?

6. Does it tell us what data we should be collecting to make informed decisions in the

government?

@ APPENDIX 8 47
7. What does it say about the appropriate roles of the Federal government, state and local

governments, and the private sector in an overall infrastructure investment strategy?

8. If increased public works investments are indicated, how are we going to pay for these

investments and who is going to pay? For example, is the beneficiary pays mechanism

to be used?

This is what Federal research should do, as opposed to purely academic research. I choose

to be an optimist and ask everyone to begin with the assumption that this effort is going to work.

10:30AM - 11:30 AM: Panel Discussion

Dr. Stearns then introduced the panel composed of Dr. Alicia Munnell, with the Federal

Reserve Bank of Boston; Dr. N. Ishaq Nadiri, from New York University; and Dr. Michael

Deich, with the Congressional Budget Office.

L Presentation of Dr. Alicia Munnell, Federal Reserve Bank of Boston

Munnell: The stock of public capital is huge - around $2.7 trillion - so it is amazing that the

economics profession missed analyzing this factor for so long in examining productivity. A few

years ago, Dr. David Aschauer initiated the debate on the effect of public infrastructure

investment on private sector output with the publication of his study. His results showed a very

impressive effect on output. Dr. Aschauer's work has caused an intense debate on these issues.

Skeptics claimed that the study's methodology was flawed. Furthermore, the critics argued that

any historical relationship established between public investment and private output does not

predict what the effect of future investments would be.

My own work has estimated that a one percent increase in public capital stock increases

output by 30 percent. This implies that the marginal productivity of public capital stock is 60

percent. Dr. Aschauer has reported that the GNP increases are greater for public investment

than for private investment by a factor between two and five.

Having said this, I do not think that you can tell from what we have whether we need more

infrastructure or not, much less what sort of infrastructure we need. Everybody agrees on the

sign of the effect ot infrastructure on productivity (positive), but there is no general agreement

on the magnitude. The computed multipliers for public capital are very large - two to five times

that of private capital. But it doesn't make any sense that public capital would have more effect

on measured output than private capital, since much public investment is for environmental and

other social needs not captured in private output measures. New studies have claimed an effect

roughly half as large as those found in prior studies.

48 APPENDIX B
The critics have three main lines of attack on these studies:

1. Data problems lead to spurious correlations.

2. The wide range of estimates cast doubt on the estimates themselves.

3. Just because one documents a relationship, that does not mean one can make definitive

statements about the direction of causality.

With regard to the data, the critics have argued that the regressions should be run on first

differences, not levels. Actually, the pertinent question is whether or not the production function

represents a co-integrating relationship between output and public capital. Alan Blinder has

looked at this question and found that the production function did indeed perform in this way.

If this is right, estimation in levels is correct. In any case, you would not expect a rise in public

capital in a given year to raise output in that year.

With regard to the wide range of estimates, this criticism misses the point. The fact is that

all the estimates are generally positive. The newest studies still show positive and significant

relationships, with biggest impacts nationally, state impacts half the national impact, and local

impacts half of that.

As for causality, it clearly runs both ways (i.e. public capital to productivity and productivity

to public capital). My reestimates of state data still show positive effects.

Other critiques are technical, e.g. the lack of input prices in the production function.

Where do we stand? We do know that public capital affects output and growth. However,

the production function doesn't answer the questions we have, given the data that we have. We

need to improve the data. But in general, even with good information, these approaches will

not answer the question of optimal investment levels. Basically you use intuition, look at

promising areas, and do careful cost-benefit analysis.

I. Remarks of Dr. N. Ishaq Nadiri, New York University

Nadiri: At my center at New York University, we have looked at aggregate impacts and at the

effects of public works on firm and industry cost structures. Specifically, we have looked at

cost functions at the 2-digit industry level and estimated a cross-section, time-series panel. The

cost function contains private sector inputs and public sector inputs as well. Within public sector

inputs, infrastructure capital is separated from R & D capital which has been publicly financed.

What have we found'?

@ APPENDIX B 49
1. The output elasticity of public capital is much smaller on average than in other studies,

but it varies substantially by industry.

2. The public capital elasticity is twice as much as R&D capital in some industries. Again,

the effect varies significantly by industry.

3. We are now trying to look at different types of publicly financed capital. There are no

definite results yet, but so far we have found that R&D financed capital is non-neutral

technically; in some industries it saves capital, in others it does not. Thus public capital

reduces costs but does so non-neutrally.

We then calculate the marginal benefits of investment, i.e. how much the private sector

would pay for it. This is less than 0. 1 % in some industries, but again, it varies.

We then calculate spillover effects. We compare the marginal benefits to the marginal costs

of social capital. Figuring out marginal cost is no easy matter. We didn't estimate this

independently but used Jorgenson's estimate of 1.47. Using this estimate, the social rate of

return is around 6% to 8% for public infrastructure, a little higher for publicly financed R&D.

What is the contribution of public capital to total factor productivity'? Twenty-five percent

to thirty percent of the productivity deceleration is due to the decline in public infrastructure

investment and R&D capital declines account for roughly the same amount. If you add the two

effects, you find a major impact but again, one which differs by sector.

Of course the scale of effort - returns to scale - is important. Note also that states are not

necessarily the relevant units for analysis - they ignore network effects and benefits do not end

at the state border.

With this sort of model you can calculate optimal levels of investment; we have not done

this yet. The issue of specific projects is not addressed by this approach; that is a matter better

addressed by cost-benefit analysis. But cost-benefit analysis will not capture spillover and

network effects.

Note one other issue: there are time lags in public capital; it takes time for investments to

come on line and there are thus dynamic time and adjustment effects which must be considered.

III. Remarks of Dr. Michael Deich, Congressional Budget Office

Deich: This panel marks an evolution in the debate about infrastructure. There has been

movement from two camps to a middle ground. It is now clear that public capital matters. It

is also clear that the production function approach does not tell you this.

50 API'ENDIX B @
The consensus seems to be that the production function is useful for answering some specific

questions. However, cost-benefit analysis is still the best way to go for answering at least 7 of

Dr. Stearn's 8 questions.

Alicia Munnell's dismissal of some of the production function critiques are too ready. The

fact is, simple detrending methods make the relationship between public capital and output fall

apart. We still await the results of more sophisticated methods. (I haven't seen Blinder's work.)

As far as leakages and robustness of results, the studies do show a wide range of effects at

the national level. Hulten and Schwab, for one, use regional data and find no significant effects.

Leakages are there, but are not a big effect.

Finally, cost functions are promising, but the results are preliminary and not necessarily

strong endorsements of more public investment.

Cost-benefit analysis answers the questions you need to answer and interestingly, cost-benefit

studies often answer "yes" to the question of "should we invest more". Examples are Clifford

Winston's work and some of the Federal Highway Administration's work.

All of the debate about investments is taking place under tight budget constraints, making

the use of cost-benefit analysis even more critical. Even if public capital has a big effect on

productivity, an aggregate approach can't tell you what investments have the greatest effects.

Finally, the historical evidence is limited. History may overstate future effects since the

building of a network has bigger effect than making additions to a public capital stock already

in place. On the other hand, history may understate future effects since future technologies like

MAGLEV haven't transpired yet.

IV. Panel Question and Answers

Nadiri: Let me make two points. First, this research is all new: don't dismiss it because it is

not developing definitive results yet. Second, the analytic approaches are complements. Don't

move in the direction of one model versus the other. They might serve together to clear up

issues of causality.

Deich: Throwing out the production function approach is throwing out a lot of valuable results.

Bell: All of this underlines the necessity of picking the model to fit the question you're trying

to answer. Some models are oriented towards answering some questions, others are better for

answering different questions. Thus when you look at location, you look at one set of factors

@ APPENDIX B 51
and at productivity, another set. But you don't include these sets a priori; you go by the

evidence and the evidence suggests that public capital is important. Thus we continue to test.

Nadiri: There is a false dichotomy between the cost-function and the production function. They

come from the same source. You have your choice of variables to account for things. For

example, a time trend in many ways serves the same role as a population variable. Take your

choice - these are not fundamental problems.

I reemphasize that all these techniques are complementary approaches. But there are tough

issues, for example, the effects of migration on output, the determinants of migration, etc.

Deich: I have another concern. Regression analysis is backwards looking; what does it tell us

about what the future should be'? Aschauer would say we should invest more, but to me using

these past results would be luck of the draw as far as telling us what we'd get if we build more

of Project X.

Aschauer: I wouldn't say that. I recognize relationships change. What my approach does is

to pick up effects that partial equilibrium analysis ignores (e.g. spillovers). Moreover, it

indicates a possible magnitude. We interpret this number with caution, but it gives us an outside

number perhaps. I agree that the production function and cost-benefit analysis are

complementary. But we must ask, just as the production function can be improved, cost-benefit

analysis can be improved.

Jacoby: For policy purposes, the production function and cost-benefit analysis are both

important, but we must figure out where the biggest bang for the buck is in a crude sense and

must figure out how our policies affect key variables. These studies show us directions our

policies might lead us and that in itself serves a useful purpose.

Nadiri: One should not read a huge amount of insight from finding relationships between public

capital and productivity. This relationship holds true broadly, but different investments have

different effects and assessing these differentials is key.

Also note that the future is always present in historical data - there are always lags. So the

sign that historical data show is important (although the magnitude is not).

Deich: You've suggested that these approaches are complementary, and in an ideal world this

is true, but you have to think how Congress works. If you have two approaches side-by-side,

Congress will pick the more favorable one and ignore the cost-benefit analysis.

Nadiri: I disagree. You'd have to do cost-benefit analysis anyway. The production function

shows the level you need to spend and says nothing about choosing between projects. You

would still need cost-benefit analysis to make project selections.

52 APPENDIX B @
Rubin: What can one say about ambient environmental effects of infrastructure?

Munnell: I was struck by the notion that these effects cannot be captured in cost-benefit

analysis. Why not?

McGartland: They are, in fact, included in EPA analysis.

Aschauer: But wouldn't these things be subject to even greater sensitivity to the assumptions

than the production function approach or other approaches? I would say that cost-benefit

analysts are presumptuous when they say that, even when an analysis is done well, they can

conceptualize and capture all the economic and social relationships properly and completely.

Jacoby: Externalities are tough. But how about the value of public capital itself? The quality

of capital is not captured at all.

Nadiri: The usual way to capture this is to use a proper definition that in principle captures

vintage and other effects that affect quality. But unfortunately, our deflators generally have no

other force than convention. A majority of people use nothing other than GNP.

Jacoby: What about roads - depreciation and the value of the components of roads'? What is

the economic life of these components - rights-of-way, subgrade, and pavement - and how do

we account for these differences?

Nadiri: One of the benefits of an exchange of this type is to refine and exchange knowledge

and this will provide economists with grist for their mill in developing appropriate depreciation

and other measures.

Munnell: Let me add that it's even worse for state data. There are no state data and the range

of crrors is large.

Aschauer: To put this in perspective, the depreciation problem is more severe in the case of

R&D capital than in infrastructure capital. What is the relevant service-life for new knowledge'?

Analysts probably have put too much trust in the estimated elasticity for R&D capital.

1:15PM - 4PM: Afternoon Discussion Sessions

The afternoon session began with a presentation by Cameron Gordon, Study Manager for

this study for the U.S. Army Corps of Engineers, Institute for Water Resources.

V. Presentation of Strawman by Cameron Gordon, U.S. Army Corps of Engineers

@ APPENDIX B 53
Gordon: Let me explain where this strawman scope of work originated and how we hope you

will use it. The scope of work was originally developed as a project to be undertaken by the

Corps of Engineers, Institute for Water Resources as an element of the Federal Infrastructure

Strategy study. However, we soon realized that the project scope was too broad for the Corps

alone and, moreover, that we needed to find out what our audience - namely Federal agencies

and policymakers generally - wanted to achieve. Hence, we are holding these workshops to get

the agencies involved in designing a research plan.

Note that this strawman isn't a request for a proposal; it is a focus of discussion to make use

of the group we have assembled here in building a new plan which bridges the gap between the

academic and policy debates. In focusing, we ask you not to get bogged down in technical

details at this point; it's too early in the process. Rather, consider the following:

1. Scope of Exercise: What modes should be examined'? What is the appropriate time

horizon? Is the focus on planned Federal expenditures appropriate'? Are these the

relevant economic variables'?

2. Data: What data are necessary and appropriate for the study?

3. Models: What approaches are most useful (we'll get to specific examples of functional

forms later on).

4. Standards: How do we define standards of proof and evidence'? What standards would

satisfy most critics'?

5. Objectives: What questions are we trying to answer'? What specific products do we

want from this effort?

There are three workshops planned: this first one and two to be held in the months

following. In these later workshops, we must also discuss issues of participation, e.g.

administration and oversight of the effort.

Munnell: Can we just focus our efforts on perfecting cost benefit analysis'?

Schilling: Yes, if we all end up agreeing that is, in fact, the best way to proceed.

Antle: Efficiency of infrastructure investment is key with today's tight budgets. The question

that should be asked is should money be spent on expansion, maintenance, or shrinkage'?

Schilling: The National Council on Public Works' recommendations are to be used as a guide

for this project. We strive for Federal participation in this effort. If the group would examine

54 APPENDIX B @
Dr. Stearns' eight original questions, maybe we can identify approaches to answer those

questions. Benefit-cost analysis might answer many of them.

Jacoby: Not true; benefit-cost analysis only answers a limited number of those questions.

Munnell: The production function answers only the first one.

Hady: I have no problem with the scope per se, but are we studying enough in terms of the

modes suggested? Are we excluding some important aspects? Should the term infrastructure

be expanded to include areas such as education?

McGartland: The assumption of the proposal is top-down, i.e. determine the optimal level of

investment and then allocate it. But these are all independent decisions. Why not look at them

independently? Perhaps the study should be decentralized. That is, do a bottom-up approach

where one is comparing the net merits of increased spending by area.

Nadiri: I hear a number of things. First, the Federal agencies are doing a lot and analyzing

it in many different ways. So you get an inventory of methods and results as a start.

But by itself this is not enough. How do you link the pieces of the infrastructure network

together? What are the linkage effects? The nature of infrastructure and its institutions have

changed; how do we assess these impacts?

So we have to answer these questions as well. But having answered all of these questions,

we still could do productivity analysis for it will tell us what all of these investments will do to

the national economy.

Jacoby: Stearns' questions are general, while the scope is project specific. We should do a

more general, empirical approach. What we should not do is answer questions like appropriate

locations for projects.

Williams: One issue here is that politicians tell us what they want and we do it. So one starting

point is to ask what the year 2000 or 2010 could be like or should be like. Also there are plenty

of programs likely to happen or definitely going to happen and we should proceed by including

them in our analysis. Again, do a bottoms-up approach: identify the areas of need and then

investigate the optimal spending level of these areas.

Clark: I think Stearns offered questions which were designed to enhance the strawman, not

supplant it. The original intent of the strawman was to help the group establish a focus and

develop an agenda that was their product.

Hady: I agree. I don't think we've kicked around this strawman at all and it deserves a few

good kicks.

@ APPENDIX B 55
Rubin: I think what we're trying to get at is finding tools which we can use to analyze our

decisions; at least that was the original aim of the project as I heard it early on. Now we're

getting into the application of those tools - the uses to which they would be put - and that's

unfortunate.

Lyon: I think there's a disconnect here between the opening remarks and the scope. Stearns'

questions are good, basic ones, but the scope of work seems to address different and perhaps

not especially relevant questions. We have to know what the size of this effort will be, who will

be doing the work. The framework of the analysis must be laid out.

Williams: Our problems are different than they used to be. In the old days, roads used to have

the benefit of moving people. Now we're destroying the country by moving people and we have

to think about what to do differently.

Eberts: I think what we seem to be shooting for is one particular client and one decision rule

they're seeking. But in fact we have many clients and many decision rules. ISTEA (The

Intermodal Surface Transportation Efficiency Act) went from an efficiency project to a jobs

project. So we need information and approaches for each one of these things.

Rubin: loois are where the link is made between the strawman and the questions Stearns

asked. You don't stop at tools, but it is where you begin. For example, does the scope of work

examine the right economic indicators?

Jacoby: I do not think we should emphasize the evaluation of particular projects. I don't think

we should focus on cost-benefit analysis. We should be looking at emphasis, changing patterns,

the way we should be responding to structural chatiges such as the changing relationships

between firms in production, sectoral shifts and so forth. Where do you put your money for the

biggest bang?

Lyon: Your comments are really interesting. My personal position is that the place where the

Corps could make the best contribution would be to look at projects, select a randomly stratified

sample of those projects, and then go back and see if those projects panned out. Did you catch

all of the benefits'? Can you go back and find secondary effects that were not computed'? Was

the analysis wrong in the beginning? That's the comparative advantage of Federal agencies;

have all your agencies do this and compare. The comparative advantage is not with agencies

to do macro-economic, aggregate analysis - that's for academic shops and cottage industries.

Munnell: It would be great if you knew whether investments should go towards Medicare or

infrastructure and then within that MAGLEV or fiber optics, but the econometrics is so loose

on this that we can't really say much.

56 APPENDIX B
I don't know much about cost-benefit analysis, but it would seem better to review the

practices of agencies and compare. There is so much loose talk that we need to get the terms

straight.

Jacoby: The Transportation Research Board has a primer on transportation cost-benefit analysis.

Eberts: The World Bank has also gone back to check on the performance of some of its costbenefit analyses.

Antle: Historical examination of projects have been done and they tend to verify that the

benefits ultimately are often much different than what type of benefits were predicted, This is

not to say that the projects weren't beneficial, just that the effects ultimately realized were

different from those predicted. For this reason such historical case studies are not especially

useful in looking forward and making decisions about the future.

Jacoby: I would like to know what sort of data the number crunchers need to run the models.

Eberts: I reemphasize that point. We can't get data from the agencies. We have to find it

ourselves and make imputations. Also all the agencies have their own data. The problem is in

the data, not the models.

Williams: A reasonable answer to the charge that we don't know what infrastructure does is

to say that we don't have the information we need and require more support in getting that

information.

Blechman: What about the comparability issue?

Hady: Each model needs different data, so it will be difficult to compare them.

Bell: The different approaches yield different results, each of which is useful depending on the

purpose you have. So they're not competing, but complementary. You cannot do cost-benefit

analysis without knowing what the links are between industries.

Nadiri: I was impressed with the fact that people put forward the elements of what you need

to answer the question. We must realize that the data do not exist in a currently usable form.

Also, the approaches discussed today are complementary, so one should not ask the same

questions of each approach.

We shouldn't be short-circuited by the questions proposed. What the organizers should do

is go back and fine-tune the questions and assess which methods best answer different questions.

@ APPENDIX B 57
Lyon: But we need to know where to look. Cost-benefit analysis tells you this. Otherwise,

it's a leap of faith. In addition, cost-benefit analysis does catch spillover effects.

Nadiri: Don't think that cost-benefit analysis tells you that for it's a macro question on some

level. We need to know what the links are.

58 APPENDIX B @
HIGHLIGHTS OF THE SEPTEMBER 17, 1992 WORKSHOP TO DESIGN A SCOPE OF

WORK TO STUDY THE ECONOMIC IMPACTS OF FEDERAL PUBLIC WORKS

INVESTMENTS

9:15AM - 9:45AM: Welcome and Introductory Remarks by Dr. Robert Stearns, Deputy

Assistant Secretary of the Army (Civil Works) for Project Management

Dr. Robert Stearns welcomed the participants who then introduced themselves. His

introduction was followed by a panel consisting of Ann Grambsch and Al McGartland with the

Environmental Protection Agency; Robert Wescott and Kurt Karl from The WEFA Group, Inc.,

a macro-econometric modelling firm; and, Adam Rose, an expert on input-output (I/O) analysis

from the Pennsylvania State University.

Stearns: I would like to add to my remarks made at the opening of the first session. Two

concerns came to mind which led to the original list of eight questions: 1) We didn't want this

study to appear to be a self serving study (that is, we didn't want agency personnel deciding that

we need more infrastructure); and, 2) we couldn't get them from here -- there obviously is not

enough time/resources to answer all the original eight questions - the questions were too

esoteric. Today's focus is the value of infrastructure investments on the U.S. economy; what

can we do in two years to answer this question, and how do we do it.

Keep in mind what we are here for today. This study is only one of a number of projects

the Corps has under way as part of its overall Federal infrastructure strategy program. This

study doesn't need to answer all the questions. Let's focus on the questions raised in the

strawman and come up with approaches to answer some of the original questions. Some

possible avenues to explore include the data needs to be used, the development of a common

language between the agencies, and the optimal level of investment. In summary, let's make

progress today by deciding which approaches should be taken.

Blechman: The session should probably facilitate itself. Remembe- to focus on the big

question: What research can be done in two years to evaluate the impact, particularly the

economic impact, of public infrastructure spending.

This session will be less free-ranging then the first workshop. Our goal today is to move

to specifics: what are the research projects, how would they be constructed, what are their

goals.

The last workshop consisted largely of personal views. Today, we would like to do the

same unless the participants, for the record, indicate that they are speaking for their agency.

Next workshop, we will ask that all remarks be agency-based.

@ APPENDIX 8 59
9:30AM - 10:30AM: Panel Presentations

I. Presentation of Al McGartland and Ann Grambsch, Office of Policy Planning and

Evaluation, U.S. Environmental Protection Agency

McGartland: Ann Grambsch will be doing a presentation on EPA's Section 812 study

regarding the benefits and costs of the Clean Air Act in the United States. EPA, with an annual

budget of almost $7 billion, is largely a regulatory agency. EPA's official position endorses the

use of cost-benefit analysis, although there are various exceptions throughout the agency.

Grambsch: In many ways our Section 812 st..dy has an intent similar to that of the Corps'

study. we wish to look at the macro picture, but to accomplish this task, a micro-level analysis

is needed. What we at EPA are doing, is to examine the situation with and without the Clean

Air Act and then comparing the results. There are two main components to this analysis: an

assessment of costs and economic impacts and a benefits assessment.

The most difficult issue we have had to grapple with in our with/without comparison has

been specifying a baseline. We have had to make a number of simplifying assumptions. For

example, in answering the question of what states would have done in the absence of the Clean

Air Act (CAA), we have assumed that all costs and benefits accrue to passage of the Act. We

also assume no change in firm location patterns.

The assessment of costs consists of examining changes in pollution abatement expenditures

over time and changes in defensive and mitigating expmnditures over time which together lead

to an estimate of net changes in economic activity over time with and without the CAA. We

have a big problem here in specifying the components of these changes. Conceptually, we'd like

to get to this.

It is not sufficient to look just at engineering cost-accounting. We also have to look at

general equilibrium and macro-economic effects, and the economic dynamics these entail. We

have selected the Jorgenson-Wilcoxen (JW) model to do this. The JW model is general

equilibrium and dynamic and focuses on the intermediate and long-runs. The model does not

examine the short-run effects. JW is a full-employment model, a micro-economic general

equilibrium model. Cost and other functions are econometrically estimated so some behavioral

response is captured.

The assessment of benelits starts with the net changes in emissions due to the CAA. From

this estimate, an estimate of net air quality changes is made using various existing models of

physical processes (e.g. acid deposition). From this estimate, we can compute net changes in

health and welfare (using nvdical studies and other literature), then estimate net changes in

economic damages. This la.,t step is complicated and consists of coming up with a dollar value

60 APPENDIX B @
per incident or episode of damage, conducting additional modelling of effects on, say,

agriculture and prices, and so on.

One has to aggregate these things meaningfully. Another significant issue is dealing with

uncertainty.

Robinson: How do you value human health benefits?

Grambsch: We use contingent valuation and panel discussions. Much work has been done on

this issue which we can draw upon.

Nadiri: I have three questions:

1. How do you establish the initial or baseline conditions?

2. How do you account for the issue of not considering aggregate demand at all (because

the long-run model might introduce bias), given demand certainly exists?

3. If the study is looking forward, how do you account for the change in business

conditions and patterns?

Grambsch: Regarding the last question, we expect locational changes to occur. Our

simplifying assumption is that everything will stay as it is. Without firm evidence anything else

we would assume would be arbitrary. In establishing the baseline conditions, we have the "costof-clean" estimates. We have a history, in other words. Then we take those costs out and run

the simulations. On the demand side, we can't look at unemployment since that is a short-run

effect and this is a long-run model, but given the long-run focus this may be an acceptable

simplification.

McGartland: I would like to add that in addition to the Section 812 study, EPA is also doing

cost-benefit analyses of the Superfund and clean water programs.

I. Presentation of Robert Wescott and Kurt Karl, Wharton Econometric Forecasting Associates,

Inc. (WEFA)

Wescott: We at WEFA feel that today's topic will be a key policy issue of the future. The

WEFA model is a 1,000 equation Keynesian model, which also has a supply-side driving output

and a financial equation block to model flow of funds.

There are two effects of public infrastructure: normal effects, which consist of multiplier

effects, i.e. the direct and indirect effects of the first spending round; there are also input and

@ APPENDIX B 61
output effects and productivity gains, some of which are "normal"; there are also special effects,

cost changes which are the dual of the productivity question and the transmission of these

productivity effects. Our model also looks at sectoral effects and international effects.

At this time, I would like to turn over the presentation to my colleague, Kurt Karl, who will

describe the model in greater detail.

Karl: The WEFA model contains exogenous inputs for demographic changes and population

growth. There are a couple of markets in the model, i.e., the goods and the labor markets.

When there are imbalances between these markets, prices adjust and thus affect GDP. There

is also a financial market.

Now consider an infrastructure investment. This investment will lead to financial changes

which will affect demand, which will affect prices, which will affect output. Sectoral effects

will simply replicate the overall demand model for as many sectors as exist. The model is

recursive in that an I/O model, driven by the macro model, creates sectoral effects which then

feed back into the macro model which feeds back to the I/O model until a satisfactory

equilibrium is reached.

A further level of sophistication is represented in our model by having the price vector

affecting the structure of the economy. Thus, given production functions for all of the sectors,

we can have prices feed back into the 1/0 model and change the structure.

Aschauer: How are the macro-economic and the I/O models kept consistent'? That is, if the

macro model effects change costs (I/O coefficients), how do you handle it'?

Karl: We would have to do an external evaluation of the changes in cost structure involved,

possibly using an outside accounting firm to estimate such changes.

Grambsch: Does your model distinguish between government-provided capital stock as opposed

to privately-provided capital'?

Karl: No. Our model only contains private capital, not government capital.

l)eich: How does the macro model distinguish between Federal infrastructure spending and

other forms of government outlays'?

Karl: The only distinction in the macro model is between factor compensation and purchase of

goods. Thus, there is no distinction between infrastructure spending and paper clips. However,

we are aware of this limitation and are currently focusing our efforts on compensating for it.

62 AIPIPENDIX B @
III. Presentation of Adam Rose, Pennsylvania State University

Rose: My talk will differ from the first two presentations, in that it will be a more general talk

on the input-output model and its potential applicatolity to the estimation of the economic impact

of Federal infrastructure spending. I would like to start by contrasting the I/O approach (in its

most basic and limited form) to where I/O has gone in the last fifty years.

There are two types of I/O analysis: a basic version which is a static, linear model of all

purchases and sales between sectors of the economy, based on the technological relations of

production; and an ultimate version which is a dynamic, non-linear model of market and nonmarket interactions between sectors and institutions of economies, based on production

technology and any other variables that can be quantified. The essence of I/O generally is to

model all economic interactions between sectors and/or institutions with an emphasis on

production requirements.

There are numerous advantages of an I/O approach; it is an organizational framework for

data; it is comprehensive and detailed; specific models are readily available; it has computational

ease; it displays economic structure and reveals economic linkages, it can be used to calculate

total (direct, indirect, and induced) impacts; it is readily extended (to consider institutions, and

pollution, for example); and it is compatible with other models and engineering data. There are

also disadvantages: prices play a secondary role, linearities are difficult to overcome, and 1/O

lacks a forecasting ability.

Comparing I/O and other models, I/O can readily be converted to an optimization model

(e.g. a Linear Programming format); it can serve as the database for intermediate inputs and

some overall accounts in CGE models; it can be extended to forecasting (e.g., INFORUM); and

can be conjoined with macroeconometric models (e.g., REMI).

As for the applicability of I/O to infrastructure impacts, construction impacts are a very

straightforward application of I/O; one uses itemized (sectoral) construction costs as a change

in final demand, and modelling of backward linkages. There are limited insights for broader

impacts from the basic version, since it includes direct and indirect market impacts of only some

types of infrastructure (e.g., hydroelectric generation); omits direct impacts of non-market

infrastructure (e.g., non-toll roads, bridges); and omits non-market indirect impacts (external

economies brought about by productivity improvements and external diseconomies due to

pollution).

The applicability of I/O to impacts of infrastructure operation are more limited given the

current state of modelling and data collection. However, a number of refinements are possible,

including the specification of nonmarket infrastructure as I/O sectors, adjustment of other I/O

coefficients to reflect productivity improvements, and so on.

@ APPENDIX B 63
Also refinements are being made to give I/O greater capacities for regional and socioeconomic disaggregation:

1. Most infrastructural impacts are relatively more intense at the regional level. There are

some regional counter-cyclical or economic development objectives for public works

expenditures. There are a number of good non-survey tables or multipliers available and

many I/O databases are also available to estimate location tendencies and competitive

advantage.

2. Most impact analyses are done in terms of aggregate economic indicators (even costbenefit analysis). The distribution of impacts are important as well; for normative

reasons -- equity or fairness, and positive reasons -- public choice/support. Other

distributional categories include racial/ethnic and occupational impacts; I/O models (and

SAAM) have been extended to analyze these concerns.

A research agenda for this project could include development of infrastructure capital and

current account coefficients and infrastructure externality coefficients and coefficient

adjustments. Other possibilities would be to explore the uses of I/O databases, improve

databases at the regional level and explore the use of I/O in conjunction with other models; and

perform tests of accuracy of I/O model predictions.

IV. Morning Discussion and Panel Questions and Answers

McGartland: I have a concern. I believe we are taking a step back from the first workshop,

where we spoke of productivity measures of infrastructure investments. We should not use

infrastructure investment as counter-cyclical policy. None of these models capture noneconomic

benefits (i.e., clean water, clean air). Productivity is important, but it too is exogenous in these

models. Basically, we want to find out, at the margin, how and if these investments improve

society.

Bell: I agree with McGartland's comment. The multiplier effects of infrastructure investment

are important, but not the only issue. For example, how do you pick up distributional impacts?

And while you may be able to quantify impacts, how do you determine whether they are costs

or benefits'?

Grambsch: I think the deeper issue is that much of the current research focuses on the

production/costs side of productivity changes because they can be measured well. What we

cannot measure well are the benefits side. We should focus on this.

Bell: It is difficult, at times, to distinguish costs versus benefits. The catalytic convertor is an

example. Is any technological change interpreted as a cost'?

64 APPENDIX B @
Grambsch: These tools have been developed and we are able to crank through some of this.

For example, JW uses 600 representative consumers.

McGartland: Since we have limited resources, I would like to focus on what we are buying.

We should not put money into macro models, but into developing and quantifying what those

models take as exogenous.

Moomaw: We need to use existing infrastructure more efficiently; O&M and congestion pricing

are examples.

Wescott: There are two questions here: 1) How should we rank projects? and 2) What is the

optimal level of investment? The macro model can get to the optimal level. Macro models are

useful in contemplating how an economy should organize itself; that question contributes to the

policy debate.

Deich: Even using a macro model, you need to rely on other models as support, such as the

production function. Your models take as exogenous types of capital and its effects for example.

Aschauer: The same can be said of the JW model and benefit cost analysis.

Bell: All of the approaches have some contribution to make, depending of what question you're

asking. If there is a relationship, can we quantify it? If we can do this, how do we allocate

resources'? The macro model tells us how much, but not how to spend.

Nadiri: We need to focus on a number of issues. What are the special characteristics of public

infrastructure? Why is infrastructure publicly provided and not privately supplied? What ever

model you use, these issues must be addressed. In deciding over different types of public

infrastructure, policy makers want to see alternatives: what are the priorities -- clean air? Also

technologies change and adapt over time. Finally, one model will not answer all questions, so

we need to think of series of complementary activities.

I have one question on the I/O model; how do you model externalities?

Rose: Some externalities are difficult to model, such as producer-to-producer externalities.

Producer-to-consumer externalities are easier; pollution coefficients have been calculated and

used with the I/O model.

Stearns: Let me ask a rhetorical question. How will we pay for infrastructure investments?

I have two answers: 1) get the money elsewhere by cutting something else (then counter-cyclical

effects are zero) or 2) charge user fees. Can these models distinguish between various

taxing/financing methods? Actually, there is a third method; simply mandate or regulate the

private sector to provide the infrastructure.

@ APPENDIX B 65
Blechman: Let me interrupt as we are getting close to lunch. Cameron Gordon will do a short

presentation a list of four major questions that we would like discussion on this afternoon.

Gordon: There are four issues that this workshop should focus on: 1) should this study

compare models, use different models for different tasks, or both? 2) what approaches should

be used for which tasks'? 3) how long is the long-run for study purposes? and, 4) which impacts

are feasible and useful to study (see list on Page A-3). I might mention that the data questions

are not included here. I realize that this is a crucial question, but let's keep it in the back of our

minds for now. In addition, the panel discussion we heard today was, in effect, a strawman

panel. We want to use the presentation of these models as catalysts for the afternoon discussion.

Keep in mind also that the strawman scope of work limits this study to Federal infrastructure

programs and the sector categories in Fragile Foundations.

1:00PM - 4:45PM Afternoon Discussion Sessions

Blechman: Let's review the areas that need to be discussed this afternoon: 1) allocation of

resources among categories; 2) optimal level of expenditures; 3) public (state and Federal) versus

private provision; 4) optimal financing; and 5) project specific assessment.

Lyon: I think allocation of resources among categories, optimal level of expenditures, and

project specific assessment can be grouped together. If it is possible to determine the rate of

return, then those three questions could be answered. Allocation of the rate of return is key.

Nadiri: I agree that these are all allocation and rate of return questions.

Lyon: Also, we can group the remaining two tasks together into the means of delivery or means

of financing.

Pietrowsky: The means of financing may be outside of this project's scope. The Corps of

Engineers has other studies under way which examine these questions. This particular aspect

should be assumed for this project.

Blechman: Let's start with how long is long-term; the year 2000? That is, as Cameron said,

pretty close.

Lyon: I think you have to look at the return over the investment's lifespan. That is definitely

not short term.

Jacoby: Some capital investments have an extremely long life. The time-span should therefore

be long.

66 APPENDIX B
Gordon: Does this exclude the short-run?

Nadiri: It is not mutually exclusive. After the decision is made (after calculating rate of return)

to invest in infrastructure, the first impact would be on the demand side. The ultimate effect

of increased demand would be to increase the requirements in the capacity of the economy to

produce and the corresponding requirements for inputs. The lag structures and the dynamics

between supply and demand mean that the short-run and long-run are not mutually exclusive.

Emerson: The effects during the investment period are relevant. For example, during a

recession, the real resource costs are less.

Lyon: Is there a Keynesian impact'? At OMB, we assume there is not.

Nadiri: You make a decision on programs and projects based on the long-term rate of return.

But once the investment is in place, these big projects have important short-term effects in terms

of allocation.

Blechman: Our second issue for this afternoon is of how we narrow the scope; what do we

mean by infrastructure'?

Jacoby: We should not just look at central government expenditures. We need to look at all

levels of government.

Bell: Use the Fragile Foundation categories plus energy and telecommunications. The Fragi-e

Foundations categories were limited to those which support economic activity, not ownership.

Ownership is not such a big issue.

Emerson: Telecommunications should be included because it is a direct competitor to

transportation.

Blechman: We seem to be saying the study should include all levels of government and

physical infrastructure, including energy and communications? Is this scope too big'? What

about privately held support facilities?

Jacoby: Maybe to limit the focus to public infrastructure is wrong. Private facilities must be

included, but the line must be drawn somewhere.

Rose: How about distinguishing between public goods and private goods'? Public goods can be

shared irrespective of who pays for it. Thus, our criteria perhaps should be the same as those

used to distinguish public from private goods, i.e. nonrivalness in consumption and

excludability.

@ APPENDIX B 67
Nadiri: I believe the scope is too broad and ambitious given the budget and timing; let's narrow

it to be more successful. The scope could be limited to 2 to 3 major public capital categories,

Federal or not, which have a major impact on the long-run capacity of the economy. We could

then examine where those impacts occur and build in cost-benefit analysis and other approaches.

Blechman: How many categories should be examined? Is 1 or 2 too small? How about all of

the Fragile Foundations categories; is this too many?

Bell: The number of categories is determined by whatever "theme" the categories are judged

by; find a general theme which is important to the development of the economy.

Nadiri: That is correct; ask what 3 or 4 (or whatever) categories will facilitate the development

of economy, or certain strategic sectors of the economy. Then calculate the rates of return for

those categories which will produce a ranking and an estimate of macro effects.

Bell: Accessibility or environmental concerns may be the theme; it depends on your overall

priorities.

Nadiri: Ask what are the potential services that the economy would need that the public sector

can provide.

Blechman: In consideration of the time remaining today, it doesn't appear that we are going

to be able to choose the categories; so let's focus on the process.

Gordon: Let's list the Fragile Foundations categories. Water: resources, supply, and

wastewater. Transportation: highways, air, and mass transit. Waste management: hazardous

and solid. Today's additions are communications, education, public buildings and property, and

energy.

Nadiri: Let's concentrate on those categories which will enhance the productivity of the

economy in the intermediate run. Productivity is the key problem that this country faces.

Schilling: I hear some talk about including education, but I think education is outside our

budget and scope.

Bell: I agree that education is outside this group's expertise. If the categories are guided by

their contribution to enhancing the Nation's overall accessibility, this means focusing on

transportation and telecommunications.

Jacoby: Should we limit it to physical infrastructure'?

68 APPENDIX B
Blechman: Federally-leveraged expenditures, shared public goods, and physical infrastructure

is what I am hearing everyone suggesting the study should focus on.

Nadiri: Let's not worry now about the ownership aspect at this point.

Blechman: Can we name the criteria for including infrastructure in the study? I hear it being

suggested that the study should focus on infrastructure if it is an input good, public good, a

critical factor in interstate commerce, or in enhancing the productivity of the economy. Many

participants seem to like the idea of having both publicly provided facilities (such as

transportation) and privately provided facilities (such as telecommunications). However, given

the time, I think we agree that these decisions are to be delegated to the Corps to decide and

then presented at the third workshop.

Nadiri: Within the outlined criteria, accessibility and sustainability are the two key themes.

Stearns: I have a couple of observations: 1) it doesn't appear that this study can address all

the Fragile Foundations categories. Thus, they must be cut down or modified; and, 2) since the

Institute for Water Resources is the sponsoring agency, water resources must be included as a

category. We don't want to give the impression that the Corps is into analyzing other agencies

infrastructure responsibilities, but not its own.

Blechman: The next issue is what impacts are useful and feasible to study. Participants have

suggested a number of additions to the list of impacts we have thus far, including regional,

distributional, and environmental impacts. Let's take a straw poll on ranking the top five

impacts, based on feasibility and priorities.

This poll had the following results (with participants allowed to vote up to three times):

Factor Impacts: 12 Output Mix by Sector: 9

Output Mix By Region: 6 Employment: 9

Monetary Variables: 8 Trade Balances: 5

Industrial Organization: 4 Public Sector Tax and Fee Revenue: 2

Distributional Impacts: 8 Environmental: 7

Blechman: The next issue that we are to discuss is which models/approaches should be used.

Bell: The technique you use depends on the what the questions are. The approaches are

complementary and should be used together.

Wescott: Exactly. For example, our macro model would be used with an I/O approach.

Rose: We should talk about models which can measure the rate of return on capital.

@ APPENDIX B 69
Nadiri: Impacts and rate of return are part of the same analysis or methodology. The way it

works is that you have a model and a number of inputs to the model, then you run the model

and it calculates the rate of return for each type of capital.

Jacoby: The only methodology that we have discussed which will produce a rate of return on

capital is cost/benefit analysis.

Nadiri: As discussed at the last workshop, the production cost function will calculate the rate

of return and some of the effects discussed earlier. If you are measuring the aggregate,

industrial dispersion of the effects then you need to use a combination of models.

Clark: What rate of return should be used: public, private, or social?

Nadiri: The social rate of return could be used.

Gordon: What I am hearing is that a direct comparative exercise is not worth doing; is this

correct'?

Lyon: No. This whole project is a result of David Aschauer's work and results. How do we

measure the validity of the cost-benefit analyses that are used? David Aschauer calculates rates

of return of 40 percent for transportation and cost-benefit is calculating 10 percent. More work

needs to be done in this area as some spillover effects are apparently being lost.

Blechman: (After asking for a show of hands) Well over half of the group thinks that a direct

comparative exercise is worth doing.

Nadiri: This comes back to the same issue, namely that the model to be chosen is dependent

on which questions you are most interested in.

Deich: Macro-economic modelling approaches should be down on the list. We must validate

or invalidate the production function's earlier results.

Lyon: Cost-benefit analysis can be done at the programmatic level; look at EPA's analysis of

the Clean Air Act. A comparative approach should be taken; cost-benefit may not calculate all

effects - it may be dropping some externalities; if so, the econometric (production cost) models

can be used to tell us where to look. Let's do more work on micro level results, studying at a

programmatic level.

Aschauer: I think that we can make use of the production cost function approach to try to

capture some inter-industry spillover effects of various infrastructure investments.

70 A PPENDIX B@
Blechman: We can narrow the differences between cost-benefit analysis and production function

analysis and make them work together to get the answer.

Rose: I would sum up the approach a little differently. To enhance existing studies and

techniques, we could do the following:

Use cost-functions to analyze individual industry impacts

-- broadened by macro, CGE analysis;

Use aggregate cost/production functions to estimate aggregate impacts

-- disaggregated through CGE, I/O analysis;

Use cost-benefit/partial equilibrium analysis for programmatic analysis

-- enhanced by general equilibrium though CGE

IV. Conclusion and Adjournment

After some further discussion and a straw poll, the facilitator summed up:

Blechman: We seem to have identified three research needs and goals: 1) the need to extend

the reach of micro analysis to include more network and external effects and compare to the

aggregate approach (production cost function); 2) the need for work to be done at the

programmatic, inter-agency level (for the cost-benefit side); and, 3) the need to examine multisector linkages.

@ APPENDIX B 71
HIGHLIGHTS OF THE NOVEMBER 6, 1992 WORKSHOP TO DESIGN A SCOPE OF

WORK TO STUDY THE ECONOMIC IMPACTS OF FEDERAL PUBLIC WORKS

INVESTMENTS

Kyle Schilling, Director of Institute for Water Resources, welcomed 24 participants from

Federal agencies and academic institutions. Unlike the previous two workshops, this meeting

was not addressed by a panel and was set up as a working session to finalize the scope of work.

Schilling: Good morning and welcome. Today, we will focus on getting agreement on the

details of the strawman, set up an administrative structure that allows us to proceed, and explore

the possibility of producing a meaningful document early in the research agenda. Finally, we

would also like to gauge agency participation: funding, data, expertise, time, etc., and consider

the timing of release of research products.

Blechman: We have some basic questions that we have to answer today. What's the plan'?

Who is going to do the work and when will it be done? Is your agency participating? I realize

that some of you may not yet bc in a position to answer these questions, but some of you are

and we need to hear from you. Now let me turn it over to Cameron.

(Cameron Gordon, Study Manager, then reviewed proposals for additions and deletions to the

strawman that he had received thus far; he stressed the need to pare down the scope, saying that

while things may be added, the overall research plan should be cut. Then Gordon raised the

issue of the time-frame for the effort and the products to be delivered.)

Rubin: I see two sets of products: 1) Here is what we will be doing; and 2) the results of what

we end up doing.

Schilling: Can we get something out in March?

Aschauer: It's my perspective that we should get out knowledge about the effort early that

shows that we're doing something relevant.

Grambsch: Analytic tasks take time and you can't rush them. Data collection alone, on the

other hand, can be reported on earlier. We could also produce a literature review and research

plan as well.

Blechman: Does the silence indicate that economic analysis is apolitical?

Jacoby: Yes, in the private sector, there's a bottom line. In the public sector, the existing

methodologies are wanting because there is no comparable and easily identifiable bottom line.

We want to compare methods and see if they can be used together to get at the issues. In this

72 APPENDIX B
sense, we're doing pure research. What we are doing, in relation to the new administration,

should not change. Our purpose is to bring the two methods together, to illuminate where they

support one another, where they differ, why they differ, then use these two methods as a tool,

a package. When we crunch the numbers, then the political devils will come out.

Starler: Can we say anything now about infrastructure investment effects, for example, signs

and magnitudes? Can we say anything in an interim report about general policy initiatives?

Jacoby: Yes, but only generally and roughly. Signs we have some idea about, magnitudes we

don't. Everything can fall under the rubric of infrastructure and we can't really distinguish

between modal effects.

Schilling: A data report, including information on how it was used in past research, could be

useful early on.

Grambsch: One of the dangers is that the results of different analyses are not comparable

because the methodologies are different; rank ordering is misleading. That's why we're

undertaking this effort, at least in part.

Starler: Let me be the devil's advocate. Would you want to say "Hey, administration - we

don't know enough about infrastructure'? do something about health care instead?"

Grambsch: You want to say what you're able to say, no more.

Aschauer: Let me give you an example from a macro perspective. There is some evidence that

the deficit doesn't have real impacts. On that alone you don't say: "Don't do anything about

the deficit". The infrastructure issue is comparable.

Williams: We can't stop people from misusing this study, but we can say that researchers need

to know this. The message we need to send is that more research is needed before reaching firm

conclusions.

Rubin: It would not serve this research agenda to rank order ,nything as far as this project or

that one. Let's stick to the data and say what we can say in the interim.

Aschauer: What about putting out B/C estimates that show some projects should go forward'?

Would that be upsetting to you'?

Rubin: I think that we can say that B/C is a useful screening tool.

Gelston: You can't add those B/C analyses up.

@ APPENDIX B 73
Rubin: No, B/C can't tell you the optimal level of investment.

Jacoby: Is there any evidence that B/C overstates benefits'?

Lyon: Yes, B/C analysis shows benefits that other methods don't.

Aschauer: Yes, if B/C analysis is done well. But can it be done well'?

Lyon: Is it done at all in most instances'? B/C analysis does not under-estimate productivity.

Federal agencies only recently have started using B/C analysis to evaluate programs, mostly in

retrospective analyses.

Schilling: The question of whether B/C analys:s i' done well or often enough is different from

the question of whether it is sufficient.

Geiston: We did this years ago. The Bureau of Economic Analysis used to have a model for

net national benefits and regional effects could be often be double-counted under this

methodology. 'y-s. B/C analysis can overstate benefits.

Aschauer: But I thought the question was whether we could do something reasonable over the

next three months with B/C analysis'? Do we have confidence in existing B/C analysis'?

Grambsch: Yes, there are expenditure numbers to work with, but calculations of benefits and

costs are often nki comparable. GAO differs from CBO for example. Which B/C analysis

should be used'?

Aschauer: I agree that's a research question, but we don't say that we don't know anything.

(,rambsch: Yes. but if you get those numbers into the public domain, even if ca-eated, they

can be misused too easily.

Aschatier: True, all you need is one table.

(;elston: You need to know not only where the biggest bang for the buck is, but how much.

1lady: The new aidministration also wants to •'-ow the timing of that bang.

Jacoby: We wani to stress that the issue we're ultimately addressing is the relationship between

infrastructure i:id productivity.

74 AI'I'EN 'i \
Rubin: I have no disagreement with that, but in the description of our research, we want also

to stress the importance of the Fragile Foundations work - the body of work it represents and

its shortcomings. That's a good foundation for the new administration to work with.

Schilling: Good point. That other work was done outside the Federal framework. This work

is bottoms-up and from within.

Blechman: Let me test this - should we focus on productivity'?

Munnell: My concern in the scope of work is that if you focus on this alone, you lose alot.

I note that the increase in leisure time, mobility, etc. are not in the scope of work.

Blechman: That's a content issue, not an interim report issue; do we agree?

Grambsch: No, we should list all the potential benefits. Building wetlands has no productivity

impact, but important social and environmental impacts.

Bell: This is an outline of an interim report; a review of past work, progress made,

identification of research needs, why this project is important and how it represents progress in

the debate. Before Fragile Foundations, the only effects of infrastructure which were focused

on were counter-cyclical effects. Fragile Foundations noted the intrinsic value of infrastructure.

Now we're asking where we should spend our infrastructure dollars.

Kort: Don't emphasize productivity. We don't measure it well enough. Put it near the bottom

of the list.

Jacoby: There are two considerations at the top of the national agenda: 1) the environment

and, as a sign I once saw said, 2) 'the economy, stupid'. I am better off with transport

amenities - I don't want to sell that short. But I want to emphasize productivity because that

issue is so important right now. You don't want to muddy that message. The central message

of the times is the economy.

Lyon: But a dollar is a dollar, where ever it's spent.

Jacoby: I don't disagree with that; I merely suggest a particular emphasis.

Blechman: I see two sentiments being expressed: 1) There is no disagreement on productivity -

it should be examined, hut as only one of many factors; and 2) The study should be based on

Fragle iFoundations.

Williams: I disagree, Fragile Foundations was hard on transit, which was the tone of the times.

There was a lot of uncertainty surrounding the measurement of transit impacts and it hasn't been

@ AtP'PE'NDIX R 75
resolved yet. I'd like to make a pitch to discard modes altogether in the transportation arena.

Put the modes together along service lines. I've been in this business for 14 years and I'm tired

of statisticians driving the policy decisions - i.e. you don't have the data, we can't do it. Modes

are outdated. Look at intercity transport, etc. for all modes. Use the National Transportation

Policy (NTP) clusters.

Jacoby: I would disagree with that. When I look at these modes, I see expenditures; highways

equals roads, not cars; air equals airports, not planes. These are all physical projects.

Gelston: But you've got to account for privately provided physical goods even so.

Grainbsch: But you want to focus on Federal infrastructure projects. You can't disentangle

public and private, but you also need to focus on projects dominated by Federal expenditures.

Gelston: But you can't double-count and take credit for private investments.

Grambsch: Yes, we're aware that just because the Federal government puts in the last dollar,

the Federal government does not get all the credit. But we still need to focus.

Blechman: Is this is a disagreement about content or semantics'?

Rubin: We can accomodate both positions. Let me distinguish between the implications of the

data and the models themselves. We can't run the models without data.

Jacohy: You're suggesting that we start at the synthesis level, not the informational level.

Williams We have a serious problem here in transit. We collect information system-wide. not

on a functional or service basis. Transit fares particularly badly in competition with highways.

Transit does not look good under Fragile Foundations categories. You've got to be aware of

this in your work.

Jacoby: Are we not centering on the physical assets'?

Blechman: Fred, is there a semantic change that would make you happy'?

Williams: What I've suggested already: intercity, suburban, urban travel mobility, not modes.

Aschauer: But you would characterize investments as physical assets, yes'?

Williams: Yes. but let me give you an example. New systems look very bad because they take

place concomitant with new highway investments. That dissipates the impacts of transit.

76 AlT!-AIX BI @
Blechman: These are technical issues.

Williams: No, ISTEA requires us to think intermodally, and thinking intermodally will lead to

different results.

Bell: But to get there, you need good service quality and performance data, and we just don't

have it.

Rubin: But you get there using case studies. You can't get there systematically.

Jacoby: You can get there by quality-weighting the physical inputs. I hesitate to use the word

"hedonic".

Williams: Look, I work in a policy office. Should we be talking about highways versus mass

transit'? No! We should talk about intercity travel and commutation.

Bell: So we say that these investments work together to improve productivity and we try to

illuminate it.

Williams: But I'd like to make sure that this issue gets looked at. You say you can do a useful

study using useless data. I have tons of Section 15 data and I don't use it. It tells the wrong

story.

Blechman: Cameron, what is the basis for these categories? Can we change them'? Should

we'?

Gordon: We're not beholden to them. Should we change them? I don't know. We were

sticking to precedent and building on past work by using these categories, but if it is useful and

doable to change them, I'm for it.

Blechman: But could you collect data this way and do output another way'?

Gordon: My gut reaction is to say yes.

Williams: Within DOT we don't look at highways, we look at the Congestion Mitigation and

Air Quality Program (CMAQ), the National Highway System (NHS), and so on. They are not

distinct modes, but rather problems to be solved.

Lyon: You're saying that money is fungible. But don't you choose among projects and in so

doing, modes'?

@ APPENDIX B 77
Williams: But that level of disaggregation is arbitrary. Why not go down to the types of metal

for trains versus cars?

Blechman: Is this an issue of proper study outputs?

Williams: Look, some investments are different than others. Congested urban area investments

have a clear productivity basis; rural buses may not. I think we should work backwards from

the dependent variable, - productivity - and not forward from data limitations.

Rubin: What's lost by organizing inputs by the NTP clusters and letting the data workers and

modellers work ahead from this?

Jacoby: What gets lost, and maybe it should be lost, is the program focus. But can it even be

done'?

Munnell: I think Fred makes an excellent point: organize to get what you want and need and

act accordingly. If you can't say anything, don't.

Schilling: Policy studies of what is and what could be can't be constrained by the data, but have

to be informed by it too. It cuts both ways.

Blechman: Are there any comments on modelling?

Munnell: Should we set up the B/C analysis and production functions as competing models'?

They are not competing.

Gordon: The study was set up that way to address a perceived competition between models

which perhaps a controlled comparison could illuminate, not to imply that the methods are not

complementary.

Grambsch: I agree; the models are not competing. But we are fundamentally looking at cost'

and benefits of these investments and which investments produce broadly defined benefits which

exceed broadly defined costs.

Gordon: So we should look at benefits and costs and use whatever methods are appropriate?

Grambsch: Yes, you are trying to enrich B/C analysis.

Gordon: What I hear you proposing is to use B/C as an accounting framework only. Specify

all the possible and potential costs and benefits. Then go down each category (whattver these

end up being) and use whatever methods you have selected to fully determine those costs and

benefits.

78 API'PEN)DIX 8i
Grambsch: Yes.

AFTERNOON SESSION

Blechman: What's your perception of this morning's discussion?

Lyon: I think the comparison of models would be useful.

Aschauer: I agree with Randy. Grandly conceived, B/C analysis can capture the set of values

coming out of the production function; but we need to capture the cost analysis to plug into B/C

analysis.

Schilling: That's closer to what I heard. We're shooting for a conceptual ideal of B/C analysis.

To get there, we need to do a comparison.

Jacoby: Wait a second. If you do some report purporting to show agencies how B/C analysis

should be done, that won't fly.

Gordon: I think discussion of the way Federal agencies do or should do B/C analysis is a

separate issue from our effort here. The Corps has engaged the Advisory Commission on

Intergovernmental Relations (ACIR) to do a separate effort where agencies will compare notes

on their current B/C practices and hopefully reach more consistent and better practices in the

future. Here we are trying to get a handle on how Federal infrastructure investments make us

better off. B/C is a useful accounting framework in this sense. One reason that you do a

comparison to start off with is to suggest connections you hadn't thought of before.

Grambsch: I think we are in agreement that the tasks of the study will not change. We may

have to change what to highlight, namely the challenge versus the integration of results, but the

nature of the project hasn't changed.

Blechman: Let me characterize our consensus as to the ultimate goal: we're trying to integrate

these two analyses.

Aschauer: It's presumptuous to say that we're integrating these methods.

Bell: We don't have to integrate or compete; we're simply trying to understand the benefits of

infrastructure better, using a B/C framework. We're not trying to reconcile any perceived

polarization of methods, but trying to improve how we think about things.

Grambsch: We may not integrate the methods, but examine the insights of different approaches

to reach a fuller understanding of infrastructure's effects.

@ APPENDIX 8 79
Bell: We won't integrate methods or results to get to some higher truth. We will strive to

understand the economic mechanisms better.

Schilling: We're not testing to get some perfect model.

Lyon: I thought we were trying to test, as in growth accounting, to figure out the components

of a 30% rate of return and find the spillovers.

Schilling: That implies choosing something better.

Lyon: Sure, but it's like choosing between linear and nonlinear programming. One is less

accurate but simpler; the other more complicated, but more accurate.

Blechman: Let me see if this is a consensus. Our goals then would be to learn what we get

from infrastructure and compare methods. We are asking the question of how the methods

interact with and complement one another. The final product addresses both.

Grambsch: One leads to the other in part and the goal seems to be to gain insights, not

improve methods.

Blechman: Yes, but there is a real distinct interest in methodology in this group.

Jacoby: Look at the proceedings. Last time we didn't get to the synergy of the models.

Grambsch: I agree; different tools answer different questions. Depending on the aspect you're

looking at, you choose a different method. One insight you may gain is to determine which

tools are best for which tasks.

[At this point, the group broke up into management and technical committees; Robert Pietrowsky

led the discussion in the management committee and Cameron Gordon led the technical

committee. Reports from the committees were subsequently given to the floor.]

Gordon: I promised the technical committee to revise the scope of work and to meet with

Apogee to begin to discuss execution of the work, with one contractor being the lead and others

being subcontractors. I said I anticipated a reasonable requirement of technical committee

members was to meet, in person or by phone, once a month on average and intensively review

and comment on various ouputs prior to those meetings. People accepted this as a commitment

they could make. I also promised to deliver two items to the committee for their review in the

next few weeks: a revised scope of work and workplan for final review, a review summary and

annourzement. Given some out-of-town members, our next meeting would probably be by

conference call.

80 APPENDIX B
Pietrowsky: The management committee generally agreed with the three action items

enumerated by the technical group, but we differed with them on the priorities to be assigned.

Due to the potential for delays associated with interagency coordination, we felt that it was

important to put together the think piece to be used in the study announcements as a top priority.

We agreed that it will be important for all agencies to confirm committee representatives

with a need for continuity of membership and objectiivity. We closed with a brief discussion

of the mechanisms available to formalize agency participation if needed, through the execution

of memoranda of agreement or understanding (MOA's or MOU's).

@ APPENDIX B 81
APPENDIX C: BIBLIOGRAPHY ORGANIZED BY TOPIC

@ APPENDIX C 83
APPENDIX C

INFRASTRUCTURE'S ROLE IN THE ECONOMY: A SELECTED

BIBLIOGRAPHY ORGANIZED BY TOPIC

Note: References below are classified as being principally about economic growth and

development; international comparisons; literature survey; policy; pricing; productivity; regional

performance; sectoral performance; transportation; urban economics; or welfare economics. Of

course some works cited below may have more than one principal focus. Nonetheless, one

principal focus has been assumed for the purpose of organizing works below. Citations are not

repeated in more than one category.

INFRASTRUCTURE: Economic Growth and Development

Bamberger, Rita J. Infrastructure Support for Economic Development,

(Chicago, IL: American Planning Association, 1985)

Barth, James R. and Joseph J. "Substitutability, Complementarity and the Impact of

Cordes Government Spending on Economic Activity",

Journal of Economics and Business, 32(3), Spring

1980.

Bell, Micheal and Eran Feitelson The Impact of Structural Changes in the U.S.

Economy on the Demand for Transportation Services,

(Baltimore, MD: Institute for Policy Studies, Johns

Hopkins University, 1990)

Bennett, James T. "The Impact of the Composition of Government

Spending on Private Consumption and Investment:

Some Empirical Evidence", Journal of Economics and

Business, 35(2), June 1983

Berndt, E.R. and B. Hansson "Measuring the Contribution of Public Infrastructure

Capital in Sweden", Working Paper #3842,

(Cambridge, MA: National Bureau of Economic

Research, 1991)

@ APPENDIX C 85
INFRASTRUCTURE: Economic Growth and Development (Cont'd.)

CONSAD Research Corporation A Study of the Effects of Public Investment, prepared

for the Office of Economic Research, Economic

Development Administration, Washington, D.C.,

1969

Eberts, Randall W. "An Assessment of the Linkage between Public

Infrastructure and Economic Development," Final

Report to the National Council on Public Works

Improvement (Washington, D.C., 1986)

Fox, William F. and Tim R. Smith "Public Infrastructure Policy and Economic

Development", Economic Review, March/April 1990,

49-59

Garcia-Mila, T. Government Purchases and Real Output: an Empirical

Analysis and Equilibrium Model with Public Capital,"

Ph.D. Dissertation, University of Minnesota,

Minneapolis, 1987

Garn, Ht. and L. Ledebur "Infrastructure in Economic Development", Report to

the National Council on Public Works Improvement,

(Washington, D.C., 1986)

Hlirschman, A.O. The Strategy of Economic Development, (New

Haven, CT: Yale University Press, 1958)

Kaizuka, K. "Public Goods and Decentralization of Production",

Review of Economics and Statistics, #47, 1965,

118-120

Office of Economic Affairs "Effects of Structural Change in the U.S. Economy

on the Use of Public Works Services", report to the

National Council on Public Works Improvement,

Washington, D.C. 1987

86 APPENDIX C @
INFRASTRUCTURE: Economic Growth and Development (Cont'd.)

U.S. House of Representatives Hearings on Investments in America's Hometowns:

Community Development, Issues in Urban Areas and

Other Places, Committee on the Budget, Task Force

on Community Development and Natural Resources,

9/26/91

U.S. Congress Job Creation and Infrastructure Repair Policies:

Hearings Before the Subcommittee on Economic

Development of the Subcommittee on Economic

Development of the Committee on Public Works and

Transportation, 98th Congress, 1st session, 5/3/83

U.S. Senate Infrastructure and Jobs: Hearings Before the

Committee on Environment and Public Works, 98th

Congress, 1st session, 1983

@ APPENDIX C 87
INFRASTRUCTURE: International Comparisons

Aberg, Y. "Regional Productivity Differences in Swedish

Manufacturing", Regional Science and Urban

Economics, November 1981, 675-688

Antle, John M. "Infrastructure and Aggregate Agricultural

Productivity: International Evidence", Economic

Development and Cultural Change, #31, 1983,

609-619

Gould, Frank "The Development of Public Expenditures in

Western, Industrialized Countries: A Comparative

Analysis", Public Finance, 38(1), 1983

Landau, Daniel "Government Expenditure and Economic Growth: a

Cross- Country Study", Southern Economic Journal,

January 1983

Looney, Robert, and Peter "The Regional Impact of Infratructure in Mexico",

Regional FredricksonStudies, 15(4), 1981, 285-296

Mera, Koichi "Regional Production Functions and Social Overhead

Capital: An Analysis of the Japanese Case", Regional

and Urban Economics, 3(2), 1973, 157-186

Revis, J. and C. Tarnoff "Public Works, Economic Development, and

International Competitiveness: Illustrative

International Experience", report to the National

Council on Public Works Improvement, Washington,

DC, 1987

Sahni, Balbir S. and Balvir Singh "On the Causal Directions Between National Income

and Government Expenditure in Canada", Public

Finance, 39(3), 1984

Sbragia, Alberta M. The Politics of Public Investment: an Anglo-American

Comparison, (Glasgow, U.K.: Center for the Study

of Public Policy, University of St. Rathclyde, 1985)

88 APPENDIX C @
INFRASTRUCTURE: International Comparisons (Cont'd)

Singh, Balvir and Balbir S. Sahni "Causality Between Public Expenditure and National

Income," Review of Economics and Statistics", 66(4),

November 1984

@ APPENWX C 89
INFRASTRUCTURE: Literature Surveys

Apogee Research, Inc. Current literature on highway investment and

economic development, prepared for the Federal

Highway Administration, 1989

Eberts, Randall W. "Public Infrastructure and Regional Economic

Development", Working Paper, Federal Reserve Bank

of Cleveland, December 6, 1991

Fox, William "The Contribution of Infrastructure Investments to

Growth: a Review of the Literature", University of

Tennessee Working Paper, 10/15/90

McGuire, Therese and Michael "Assessing the Relationship Between Transportation

Nienhaus Infrastructure and Productivity", Searching for

Solutions: a policy discussion series, #4,

(Washington, D.C.: Federal Highway Administration,

Office of Policy Development, August 1992)

U.S. Aimy Corps of Engineers Infrastructure Reports: Summaries (Washington, DC:

U.S. Institute for Water Resources Army Corps of Engineers, Institute for Water

Resources, January, 1992)

90 APPENDIX C
INFRASTRUCTURE: Policy

Aschauer, David Alan "Why is Infrastructure Important?", in Is There a

Shortfall in Public Capital Investment?, Alicia

Munnell, ed., (Federal Reserve Bank of Boston:

1990)

Aschauer, David Alan "Government Spending and the Falling Rate of

Profit", Economic Perspectives, 12, 1988, 11-17

Aschauer, David Alan "Rx for Productivity: Build Infrastructure". in

Chicago Federal Reserve Bank Letter, 1988, 21-50

Choate, Pat and Susan Walter America in Ruins: Beyond the Public Works Pork

Barrel, (Washington, DC: Council of State Planning

Agencies, 1984)

Congressional Budget Office Trends in Public Infrastructure Outlays, (Washington,

DC: U.S. Congress, 1992)

Congressional Budget Office How Federal Spending for Infrastructure and Other

Public Investments Affects the

Economy,(Washington, DC: U.S. Congress, 1991)

Congressional Budget Office New Directions for the Nation's Public Works,

(Washington, DC: U.S. Congress, 1988)

Congressional Budget Office The Federal Budget for Public Works Infrastructure,

(Washington, DC: U.S. Congress, 1985)

Holtz-Eakin, Douglas "Private Output, Government Capital, and the

Infrastructure 'Crisis'", Discussion Paper Series

#394, New York: Columbia University, May 1988

Holtz-Eakin, Douglas "Private Output, Government Capital, and the

Infrastructure Crisis", Columbia University

Discussion Paper, #394, May 1988

Hulten, Charles R. and George E. "The Public Capital Stock: Needs, Trends and

Peterson Performance", American Economic Review, 74(2),

May 1984

@ APPENDIX C 91
INFRASTRUCTURE: Policy (Cont'd)

Israel, Arturo Issues for Infrastructure Management in the 1990's,

(Washington, DC: World Bank, 1992)

Kaplan, Marshall Hard Choices: A Report on the Increasing Gap

Between America's Infrastructure Needs and Our

Ability to Pay for Them: a study, (Washington, DC:

U.S. Congress Joint Economic Committee,

U.S.G.P.O., 1984)

Lewis, D., D. Hara, and J. Revis "Economic Growth and Vitality: the Role of Public

Infrastructure in the 21st Century", presented at the

Conference on Long-range Trends and Requirements

for the Nation's Highway and Public Transit Systems,

Washington, DC, 1988

McDowell, Bruce D. and Bell, "The Value of Infrastructure to America", background

Micheal E. paper, U.S. Army Corps of Engineers, Washington,

DC, 1991

Munnell, Alicia H. "Policy Watch: Infrastructure Investment and

Economic Growth", Journal of Economic

Perspectives, 6(4), Fall 1992, 189-198

National Council on Public Works Fragile Foundations: A Report on America's Public

Improvement Works, (Washington, DC: U.S. Government Printing

Office, 1988)

O'Hare, William P. America in the 21st Century: Infrastructure Needs,

(Washington, DC: Population Reference Bureau,

1990)

Office of Technology Assessment Rebuilding the Foundations: State and Local Public

Works Financing and Management, (Washington,

DC: U.S. Government Printing Office. 1990)

Peterson, George "Is Infrastructure Being Undersupplied'?", in Alicia

Munnell. ed., Is There a Shortfall in Public Capital

Investment'?, (Federal Reserve Bank of Boston, 1990)

92 APPENDIX C
INFRASTRUCTURE: Policy (Cont'd)

Rebuild America Coalition Increasing Infrastructure Investment Making

America's Economy Competitive Again (Washington,

DC, 1982)

U.S. Congress Public Investment in Human and Physical

Infrastructure: hearing before the Joint Economic

Committee, 101st Congress, Ist session, 7/19/89

U.S. House of Representatives Hearings on Our Nation's Transportation and Core

Infrastructure, Committee on Public Works and

Transportation, September, 1991

U.S. House of Representatives Infrastructure Needs Assessments and Financing

Alternatives: Hearing before the Subcommittee on

Policy Research and Insurance of the Committee on

Banking, Finance and Urban Affairs, 101st Congress,

1st session, 5/8/90

U.S. House of Representatives Local Infrastructure Financing: Hearing before the

Subcommittee on Economic Development of the

Committee on Public Works and Transportation,

100th Congress, 2nd session, 8/10/88

U.S. House of Representatives Implications of Current Federal Fiscal Policy on State

and Local Infrastructure Financing: Hearing before

the Subcommittee on Investigations and Oversight of

the Committee on Public Works and Transportation,

100th Congress, 9/17/87

U.S. House of Representatives The National Infrastructure Act: Hearing before the

Committee on Public Works and Transportation, 98th

Congress, 2nd session, 9/27/84

U.S. House of Representatives Issues in National and Local Capital Development:

Hearing Before the Task Force on Capital Resources

and Development, 98th Congress, 1st session, 3/7/83

@ APPENDIX C 93
INFRASTRUCTURE: Pricing

Congressional Budget Office Paying for Highways, Airways, and Waterways: How

Can Users be Charged'?, (Washington, DC: U.S.

Congress, 1992)

Small, Kenneth A., Clifford Road Work: A New Highway Pricing and Investment

Winston and Carol A. Evans Policy, (Washington, DC: The Brookings Institution,

1989)

Winston, Clifford M. "Efficient Transportation Infrastructure Policy",

Journal of Economic Perspectives, 5, Winter 1991,

113-27

94 APPENDIX C
INFRASTRUCTURE: Productivity

Aaron, H.J. Discussion of "Why Is Infrastructure Important?", in

Is There a Shortfall in Public Capital Investment?,

Alicia Munnell, ed., (Federal Reserve Bank of

Boston, 1990), 51-63

Apogee Research, Inc. Case Studies of the Link Between Transportation and

Economic Productivity, (Washington, DC: Apogee

Research, Inc., 1991)

Apogee Research, Inc. A Microeconomic Approach to Highway Investment

and Productivity Gains, (Washington, DC: Apogee

Research, Inc., 1990)

Aschauer, David Alan Public Investment and Private Sector Growth,

(Washington, DC: Economic Policy Institute, 1990)

Aschauer, David Alan "Is Public Expenditure Productive'?", Journal of

Monetary Economics, 23(2), March 1989, 177-200

Aschauer, David Alan "Does Public Capital Crowd Out Private Capital'?",

Journal of Monetary Economics, 24, 1989, 171-188

Baily, Martin Neil "Productivity and the Services of Capital and Labor",

Brookings Papers on Economic Activity, #1, 1-50

Clark, Peter K. "Capital Formation and The Recent Productivity

Slowdown", Journal of Finance, June 1978, 965-975

Deno, Kevin The Short Run Relationship Between Investment in

Public Infrastructure and the Formation of Private

Capital, Ph.D. Dissertation, University of Oregon,

Eugene, OR, 1986

Eberts, Randall W. and "Estimating the Relationship Between Local Public and

M. Fogerty Policy Investment", Working Paper 8703, Federal

Reserve Bank of Cleveland, 1987

@ APPENDIX C 95
INFRASTRUCTURE: Productivityy (Cont'd)

Fraumeni, Barbara M. and Dale "Capital Formation and U.S. Productivity Growth,

W. Jorgenson 1948-1976", in Productivity Analysis: A Range of

Perspectives, Ali Dogramaci, ed. (Norwell, MA:

Kluwer-Nijhoff Publishing)

Holtz-Eakin, Douglas "Public-Sector Capital and the Productivity Puzzle",

Working Paper, 1991

Jorgenson, Dale W. "Fragile Statistical Foundations: The Macroeconomics

of Public Infrastructure Investment", presented at the

Conference on Infrastructure Needs and Policy

Options for the Nineties, American Enterprise

Institute, Washington, DC, 1991

Luker, W.A. Jr. "Public Investment and U.S. Productivity Changes:

An Evaluation of Recent Research", presented at

Transportation Economics Committee Meeting,

Transportation Research Board, Washington, DC,

1992

Lynde, C. and J. Richmond "Public Capital and Total Factor Productivity",

Working Paper, University of Massachusetts, Boston,

1991

McGuire, Therese "Highways and Macroeconomic Productivity: Phase

Two", final report to the Federal Highway

Administration, Washington, DC, 1992

Moomaw, R. and M. Williams "Total Factor Productivity in Manufacturing: Further

Evidence from the States", Journal of Regional

Science, 31, 1991, 17-34

Munnell, Alicia H. "Why Has Productivity Growth Declined?:

Productivity and Public Investment", New England

Economic Review, January/February 1990, 3, 3-22

Nienhaus, Michael "Highways and Macroeconomic Productivity: The

Current State of Research", Volpe National

Transportation Systems Center Final Report, Federal

Highway Administration, Washington, DC, 1991

96 APPENDIX C
INFRASTRUCTURE: Productivity (Cont'd)

Rubin, Laura S. "Productivity and the Public Capital Stock: Another

Look", Working Paper Series, Board of Governors of

the Federal Reserve System, #118, May 1991

Tatom, J.A. "Public Capital and Private Sector Performance", St.

Louis Federal Reserve Bank Review, 73(3), 1991,

3-15

U.S. Senate Hearings on Infrastructure, Productivity, and

Economic Growth, Committee on Environment and

Public Works, Subcommittee on Water Resources,

Transportation, and Infrastructure, 2/5/91

@ APPENDIX C 97
INFRASTRUCTURE: Regional Performance

Deno, K.T. "The Effect of Public Capital on U.S. Manufacturing

Activity: 1970 to 1978", Southern Economic Journal,

55, 1988, 400-411

DeRooy. Jacob "Productivity of Social Overhead Capital: NorthSouth Comparisons", Review of Business and

Economic Research, 14, 1978, 45-59

Duffy-Deno, K.T. and R.W. Eberts "Public Infrastructure and Regional Economic

Development: a Simultaneous Equations Approach",

Journal of Urban Economics, 30, 1991, 329-43

Eberts, Randall W. "Public Infrastructure and Regional Economic

Development", Economic Review (Federal Reserve

Bank of Cleveland), 26, 1990, 15-27

Eberts. Randall W. "The Role of Public Investment in Regional

Economic Development", presented at the Association

for Public Policy Analysis and Management,

Washington. DC, October 15, 1985

Eisner, Robert "Infrastructure and Regional Economic Performance:

Comment", New England Economic Review, (Federal

Reserve Bank of Boston). 1991, 47-58

Friedlaender, A.F. Discussion of "How Does Public Infrastructure Affect

regional Economic Performance?", in Is There A

Shortfall In Public Capital Investment, Alicia

Munnell. ed., (Federal Reserve Bank of Boston,

1991)

Garcia-Mila, T. and McGuire, T.J. "The Contribution of Publicly Providc., Inputs to

States' Economies", Regional Science and Urban

Economics, in press

Garcia-Mila. Teresa and McGuire. The Contribution of Publicly Provided Inputs to States'

Therese J. Economies, (Stony Brook, NY: State University of

New York, 1987)

98 APPENDIX C
INFRASTRUCTURE: Regional Performance (Cont'd.)

Hansen, Niles "Unbalanced Growth and Regional Development",

Western Economics Journal, #4, 1965, 3-14

Helms, L. Jay "The Effect of State and Local Taxes on Economic

Growth: A Time-Series-Cross Section Approach".

The Review of Economics and Statistics, 67(4),

November 1985

Holtz-Eakin, Douglas "The Spillover Effects of State-Local Capital",

Columbia University Discussion Paper, #435, July

1989

Hulten, Charles R. and Robert M. "Public Capitnl Formation and the Growth of Regional

Schwab Manufacturing Industries, Part I", National Tax

Journal, 44, 1991, 121-34

Hulten, Charles, and Robert M. "Regional Productivity in U.S. Manufacturing",

Schwab American Economic Review, 74(1), March 1984,

152-162

Johnson, Thomas G., Brady J. Local Infrastructure Investment in Rural America,

Deaton, and Eduardo Segarra, eds. (Boulder, CO: Westview Press, 1988)

Martin, Randolph "Federal Regional Development Programs and U.S.

Problem Areas", Journal of Regional Science, 19(2),

1979, 157-170

Moomaw, Ronald "Productive Efficiency and the Region", Southern

Economic Journal, #48, October 1981, 344-357

Morrison, Catherine J. and Amy "State Infrastructure and Productive Performance",

E. Schwartz Working Paper #3981, National Bureau of Economic

Research, (Cambridge, MA, 1992)

Munnell, Alicia H., with the "How Does Public Infrastructure Affect Regional

assistance of Leah Cook Economic Performance?", in Alicia Munnell, ed., Is

There a Shortfall in Public Capital Investment?

(Federal Reserve Bank of Boston, 1990)

Reid, J. Norman, T. F. Stinson, "Availability of Selected Public Facilities in Rural

@ APPENDIX C 99
INFRASTRUCTURE: Regional Performance (Cont'd.)

Patrick J. Sullivan, Leaon B. Communities: Preliminary Estimates, ERS Staff

Perkinson, MonaCheri P. Clarke, Report #AGES840113, (Washington, DC: U.S.

and Eleanor Whitehead Department of Agriculture, Economic Research

Service, Economic Development Division, March

1984)

Silva Costa, J. da, R.W. ElIson, "Public Capit'l, Regional Output and Development:

and R.C. Martin Some Empirical Evidence", Journal of Regional

Science, 27, 1987, 419-37

Wayslenko, Michael and Therese "Jobs and Taxes: The Effect of Business Climate on

McGuire States' Employment Growth Rates", National Tax

Journal, 38(40), December 1985

Urena Frances, Jose M. de Infrastructure Investments and Spatial Structure of

Accumulation, (Berkeley, CA: Institute of Urban and

Regional Development, University of California,

1983)

I00 A PI'ENDIX C
INFRASTRUCTURE: Sectoral Performance

Dalenberg, Douglas R. and "Estimates of the Manufacturing Sector's Desired Level

Randall W. Eberts of Public Capital: A Cost Function Approach",

presented at the Annual Meeting of the Western

Economic Association, San Francisco, CA, July

10-13, 1992

Nadiri, M.I. amd T.P. Mamuneas "The Effects of Public Infrastructure and R&D

Capital on the Cost Structure and Performance of

U.S. Manufacturing Industries", Working Paper

#3887, National Bureau of Economic Research,

Cambridge, MA, 1991

Negishi, Takashi "The Excess of Public Expenditures On Industries",

Journal of Public Economics, #2, 1973, 231-240

@ APPENDIX C 101
INFRASTRUCTURE: Transportation

Alder, H. "Economic Evaluation of Transportation Projects", in

Transport Investment and Economic Development, G.

Fromm, ed., (Wasington, DC: Brookings Institution,

1965)

Apogee Research, Inc. Enhancing U.S. Competitiveness Through Highway

Investment: A Strategy For Economic Growth,

(Washington, DC: Apogee Research. Inc., 1990)

Aschauer, David Alan "Highway Capacity and Economic Growth",

Economic Perspectives, 14, September/October 1990,

14-24

Friedlander, Ann F. and Subodh "Price Distortions, Financing Constraints and SecondC. Mathur Best Investment Rules in the Transportation

Industries", Journal of Public Economics, 18, July

1982, 195-215

Gordon, R.J. "Productivity in the Transportation Sector", Working

Paper #3815, National Bureau of Economic Research,

(Cambridge, MA, 1991)

Keeler, T.E. and J. Ying "Measuring the Benefits of a Large Public

Investment: The Case Of The U.S. Federal-Aid

Highway System", Journal of Public Economics,

36(1), 1988, 64-86

Keeler, Theodore E. "Public Policy and Productivity in the Trucking

Industry: Some Evidence on the Effects of Highway

Investments, Deregulation, and the 55 MPH Speed

Limit", American Economic Review, 76(2), May

1986

Quarmby. D.A. "Developments in the Retail Market and Their Effect

on Freight Distribution", Journal of Transport

Economics and Policy, January 1989, 75-87

U.S. House of Representatives The Status of ihe Nation's Highways and Bridges:

Conditions and Performance, (Washington, DC:

U.S. Government Printing Office, September 1991)

102 API'ENDIX C
INFRASTRUCTURE: Transportation (Cont'd)

Volpe National Transportation "Highways and thc Economy", report Systems Center

to the Federal Highway Administration (Washington,

DC, 1981-83)

@ APPENDIX C 103
INFRASTRUCTURE: Urban Economics

Carlino, Gcrald A. "Increasing Returns to Scale in Metropolitan

Manufacturing", Journal of Regional Science, #19,

1979, 363-374

Dalenberg, D. Estimates of Elasticities of Substitution Between

Public and Private Inputs in the Manufacturing Sector

of Metropolitan Areas, Ph.D. Dissertation, University

of Oregon, Eugene, 1989

Eberts, Randall W. "Urban Public Infrastructure and Regional Growth",

Working Paper, Federal Reserve Bank of Cleveland,

November 1986

Segal, D. "Are There Returns To Scale In City Size'?", The

Review of Economics and Statistics, August 1979,

339-350

Shefer, D. "Localization Economies in SMSAs: A Production

Function Analysis", Journal of Regional Science,

#13, 1973, 55-64

Sveikauskas, L. "The Productivity Of Cities", Quarterly Journal of

Economics, #89, August 1975

Tolley, G. and B. Smith "Scale Economies, Externalities, and City Size", in

Urban Growth in a Market Economy, Tolley, Graves

and Gardner, eds., (New York, NY: Academic Press,

1979), 37-49

U.S. House of Representatives Urban Infrastructure and Economic Development in

American Cities: Hearing Before the Task Force on

Community and Natural Resources of the Committee

on the Budget, House of Representatives, 99th

Congress, 1/22/86

104 APPENDIX C
INFRASTRUCTURE: Welfare Economics

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@ APPENDIX C 105
APPENDIX D: BIBLIOGRAPHY ORGANIZED BY AUTHOR

©• APPENDIX D 107
APPENDIX D

BIBLIOGRAPHY - ALPHABETICAL

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®APPENDIX D Ill
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112 APPENDIXD @
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114 APPENDIX D
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@ APPENDIX D 117
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S18 A PIPENDIX D@
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@ APPENDIX D 119
U.S. Congress 1989 Public Investment in Human and Physical Infrastructure:

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U.S. House of 1990 Infrastructure Needs Assessments and Financing

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120 APPENDIX D @
U.S. House of 1986 Urban Infrastructure and Economic Development in

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@ APPENDIX D 121
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Infrastructure in the 21st Century Economy: A Review of

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