Big Bang Theory for Highway Grants

| November 27, 2012

Give a state a fish… no wait.  Teach a state to fish. Consider this: for every dollar in federal highway grants received by a state, that state’s GSP (gross state product) rises by at least two dollars. That’s in good times. In bad times the multiplier is bigger.

A new report from the Federal Reserve Bank of San Francisco  says that,

“Federal highway grants to states appear to boost economic activity in the short and medium term. The short-term effects appear to be due largely to increases in aggregate demand. Medium-term effects apparently reflect the increased productive capacity brought by improved roads. Overall, each dollar of federal highway grants received by a state raises that state’s annual economic output by at least two dollars, a relatively large multiplier.”

So the money quickly goes into wages and taxes, then the work done generates income from more product reaching markets more efficiently. But perhaps more importantly this effect is more pronounced when we are in the (gasp) economic doldrums – according to the report the effects of “stimulus” dollars spent on infrastructure were four times greater than the same amount of dollars spent in a normal year.

The FRBSF built its report in part, apparently, to address a common problem: “The fact is, though, that surprisingly little empirical information is available about the effect of public infrastructure investment on economic activity over the short and medium term.”

The short and long terms effects of the this boost in GSP are addressed in the FRBSF report, but the report’s conclusion is simple: “Infrastructure investment gets a good bang for the buck in the sense that fiscal multipliers—the dollar of increased output for each dollar of spending—are large.”

This is the sort of report that  could add depth, data and argument to any case that presses politicians to support increased highway funding. We have been arguing this case to Washington for a long while, sure of its argument, but this report adds the sort of supporting evidence that may have been crucially lacking.

If you were a grad student you’d cite this report all day long.

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