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How Big Should the Public Capital Stock Be? The Relationship Between Public Capital and Economic Growth

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  • David Alan Aschauer

Abstract

Investment in infrastructure is necessary for a strong, flexible, and growing economy. However, the relationship between public capital and economic growth is not linear. At a certain level, the tax burden associated with financing and maintaining public capital reduces the returns to private industry, which, in turn, reduces growth; also, different types of spending have different effects on growth. The short- and long-term growth-maximizing effects of public investment increase as the ratio of public to private capital stock rises to an optimal level (found to be about 61 percent); above that level the growth effects decrease. The public to private ratio is below the optimal level throughout much of the country and government spending is not always directed toward the types of investment that have the most positive effects on growth. Good economic policy requires both increasing the public capital stock and reorienting government spending from consumption to investment in physical capital stock.

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  • David Alan Aschauer, "undated". "How Big Should the Public Capital Stock Be? The Relationship Between Public Capital and Economic Growth," Economics Public Policy Brief Archive ppb_43, Levy Economics Institute.
    • Handle: RePEc:lev:levppb:ppb_43
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    1. EU-13 should spend more
      by Bruno Duarte in EUnomics on 2018-09-18 20:25:53

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    Cited by:

    1. Fosu, Augustin Kwasi & Getachew, Yoseph Yilma & Ziesemer, Thomas H.W., 2016. "Optimal Public Investment, Growth, And Consumption: Evidence From African Countries," Macroeconomic Dynamics, Cambridge University Press, vol. 20(8), pages 1957-1986, December.
    2. Glomm Gerhard & Jung Juergen & Lee Changmin & Tran Chung, 2010. "Public Sector Pension Policies and Capital Accumulation in an Emerging Economy: The Case of Brazil," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-40, June.
    3. Pantelis Kalaitzidakis & Vangelis Tzouvelekas, 2011. "On the growth and welfare maximizing allocation of public investment," Journal of Economics, Springer, vol. 104(2), pages 127-137, October.
    4. Gerhard Glomm & Juergen Jung & Changmin Lee & Chung Tran, 2009. "Public Sector Pension Policies and Capital Accumulation in Emerging Economies," Discussion Papers 2009-10, School of Economics, The University of New South Wales.
    5. Lifeng Zhang, 2015. "A Multi-sector Model of Public Expenditure and Growth," Journal of Economics, Springer, vol. 115(1), pages 73-93, May.
    6. Stone, Joe & Bania, Neil & Gray, Jo Anna, 2010. "Public Infrastructure, Education, and Economic Growth: Region-Specific Complementarity in a Half-Century Panel of States," MPRA Paper 21745, University Library of Munich, Germany.
    7. Augustin Kwasi Fosu & Yoseph Getachew & Thomas H.W. Ziesemer, 2014. "Optimal Public Investment, Growth, and Consumption: Fresh Evidence from African Countries," Working Papers 201464, University of Pretoria, Department of Economics.
    8. Gelsomina Catalano & Davide Sartori, 2013. "Infrastructure investment long term contribution: Economic development and wellbeing," Working Papers 201301, CSIL Centre for Industrial Studies.

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