Highway Grants: Roads to Prosperity?

Night Construction II

A new Economic Letter from the Federal Reserve Bank of San Francisco focuses on new research from Sylvain Leduc and Daniel Wilson. From their forthcoming paper, "Roads to Prosperity or Bridges to Nowhere?:Theory and Evidence on the Impact of Public Infrastructure Investment", Leduc and Wilson study the macroeconomic effects of infrastructure investment. 

This research focuses on investment in roads and highways in part because it is the largest component of public infrastructure in the United States. Moreover, the procedures by which federal highway grants are distributed to states help us identify more precisely how transportation spending affects economic activity.

We find that unanticipated increases in highway spending have positive but temporary effects on GSP, both in the short and medium run. The short-run effect is consistent with a traditional Keynesian channel in which output increases because of a rise in aggregate demand, combined with slow-to-adjust prices. In contrast, the positive response of GSP over the medium run is in line with a supply-side effect due to an increase in the economy’s productive capacity.

This research is timley given the prognosis that the Highway Trust Fund will go brankrupt by 2014 all while hoping infrastrcture investment can spur the economy through job creation, as outlined in MAP-21.