Public Infrastructure and Productivity
A well-timed release from StatsCan today that speaks for itself in terms of relevance to the current Budget debate:
“Between 1962Â andÂ 2006, roughly one-half of the total growth in multifactor productivity in the private sector was the result of growth in public infrastructure.
Public capital (the nation’s roads, bridges, sewer systems and water treatment systems) constitutes a vital input for private sector production. It enables concentrations of economic resources and provides wider and deeper markets for output and employment.
The contribution of public infrastructure to productivity growth has not been constant over time. The largest contributions to productivity growth occurred during theÂ 1960s and earlyÂ 1970s, when it contributed up toÂ 0.4Â percentage points to average annual productivity growth.
During the 1980s andÂ 1990s, its contribution to productivity averaged onlyÂ 0.1Â percentage points a year. The slower growth in the stock of public capital afterÂ 1980Â occurred as decades of cross-country highway expansion came to an end.
Analysts studying productivity growth have long been faced with the problem of explaining why growth was much higher beforeÂ 1980Â than afterwards. A substantial portion of the difference came from the much higher growth in public infrastructure in the period precedingÂ 1980.
In its analysis, the paper used earlier research that estimated the rate of return to public infrastructure as the impact on private sector costs. It found that the rate centred onÂ 17%. The paper also examined how robust the results were to alternate estimates of the rate of return. To do so, it used a range of estimates of the impact of public capital on private sector costs. All produced results indicating that public capital made a significant contribution to productivity growth.”
Although I agree that the study speaks for itself, I will say a couple of things about it.
Obviously, it confirms what many economists are now saying: infrastructure spending would not only provide short-term economic stimulus, but also contribute substantially to long-term productivity growth.
But even some commentators who acknowledge this point suggest that there is a shortage of genuinely productive projects to undertake. At a recent press conference, bank economists stated, â€œwe donâ€™t want to have a program of digging holes and filling them in again.â€
Todayâ€™s finding that limited infrastructure spending has contributed 0.1% to productivity since 1980, but that much more infrastructure spending contributed 0.4% before 1980, demonstrates that Canada can invest substantially more in infrastructure without resorting to â€œdigging holes and filling them in again.â€
As I pointed out regarding a previous iteration of this study, the estimated 17% rate of return public infrastructure investment far exceeds the low cost of public borrowing.
Interesting how the timing works as well. It’s as good an explanation for the productivity slowdown as any I’ve heard.
Another thing to remember is that the 80’s and 90’s were the time when governments were trying to bail their way out of deficits, and infrastructure projects were one the first things to be pitched overboard.
An unfortunate situation arises in that some levels of government are mandated to insure that all ‘shovel ready’ infrastructure projects, that will be used as Keynesian fiscal policy because of the impending recession, will have to be P3’s.