America’s stock of physical and human capital, private and public, can be thought of as the most tangible representation of the nation’s wealth. It is majorly what allows the U.S. workforce to produce more per hour worked than most of the remaining world. It is the most valuable economic legacy we pass on to our future generations.
The nation’s capital stock is built by public investment by federal, state, and local governments allocating resources to the basic physical infrastructure, green investments, innovative activity, and education that leads to higher productivity and/or higher living standards. Private actors invest to a much smaller degree, partially because the gains from public investment accrue not just to those undertaking the investment, but to a wide range of people and businesses.
Recently, based on research showing that infrastructure investment is about the most efficient fiscal support one can provide to a depressed economy, some debate has been going around increasing the public investment to provide a near-term boost to the job market. However, there is also an enormous amount of economic evidence demonstrating that public investment is a significantly powers productivity growth in the long-run —and hence the growth in average living standards. This lesson was lost in recent decades as —in a break from historical trends—productivity acceleration in the late 1990s was driven largely by private-sector investments in information and communications technology (ICT) equipment, and not by increased public funds.
But, now it is time to re-learn this lesson. A new round of research in the last decade confirmed the large impact of public investment on productivity growth. Simultaneously, the contribution of private ICT investment to productivity growth seems to be decreasing. The surest route to returning to the productivity growth which we enjoyed in the post-World War II era and again in the late 1990s requires a substantial increase in public investments.