Why do we invest in transportation infrastructure and when does it work?

Appalachian Development Highway System

By Taylor Jaworski, Queen’s University

Calls for renewed infrastructure investment have been prominent issues in recent election cycles in the United States and Canada. Bernie Sanders called for $1 trillion in spending compared with $48 billion in President Obama’s first term and a proposed $73 billion to end his second term. Here in Canada, Prime Minister Justin Trudeau promised an additional $60 billion in new infrastructure spending. These proposals have received the endorsement of many economists, including Larry Summers in a recent Washington Post op-ed and Paul Krugman in the New York Times earlier this year.

Crucially, policymakers need to clarify the objectives of infrastructure spending. On the one hand, is the goal to provide short- or medium-run stimulus to ailing economies? If so, then knowing the magnitude of the fiscal multiplier is essential. A survey and more recent work on the fiscal multiplier by Valerie Ramey of UC-San Diego is available here, here, and here. On the other hand, is the goal to take advantage of historically low interest rates and use improvements in transportation infrastructure to promote long-run economic growth? In this case, economic history together with recent advances in empirical economics can provide a window into the long-run benefits of investment in new highways, bridges, and rail infrastructure.

In the United States, the highest rates of total factor productivity growth occurred during the twenty years or so between end of World War I and the start of World War II. Both the boom of the 1920s and the downturn of the 1930s were associated with a modernization of the country’s technological inputs from improvements in electricity and highway infrastructure to the reorganization of factories and greater availability of skilled labor. The economic historian Alex Field has estimated the direct contribution of the transportation sector was roughly 10 percent over this period plus the additional effect of spillovers to manufacturing, wholesale and retail trade, and other sectors.

To understand the mechanisms driving these changes, recent work in economics aims to quantify the economic costs associated with geography and the cost-reducing contributions of transportation infrastructure. For example, in the context of the United States Treb Allen and Costas Arkolakis demonstrate that up to 20 percent of the variation in income in 2000 can be explained by geographic location and that removing the Interstate Highway System would reduce welfare up to 1.4 percent. In other work, Dave Donaldson and Richard Hornbeck show that removing the railroad network in the United States in 1890—and forcing producers and consumers to rely instead on existing waterways and wagon roads—would have reduced the value of agricultural land by 60 percent.

In ongoing research with Carl Kitchens, I turn attention to the impact of transportation infrastructure on growth in one of the poorest regions of the United States. The Appalachian Regional Commission was created in 1965 to address the region’s systematic poverty and underdevelopment. Among the many problems facing the region, policymakers at the time pointed specifically to the lack of infrastructure integrating the region with itself and the rest of country. The Appalachian Development Highway System, which is shown in the photo above, was proposed and built to address this problem.

We show that removing this regional highway system—but allowing access to existing state, US, and interstate highways—would have reduced gross domestic product up to $39 billion in 2010. This implies a return on investment up to 6.7 percent. Taking into account population movements we show that income per capita in the targeted region increased by $585 (or 1.5 percent). The results suggest that the benefits associated with the Appalachian Development Highway System were positive and that the infrastructure paid for itself. Nevertheless, when looking at extent of convergence of Appalachia with the rest of the country, the figure below suggests that highways alone cannot address the region’s problems.


The evidence suggests some justification for the optimism surrounding the impact of renewed investment in transportation infrastructure. Still, there is room for caution. Transportation infrastructure is not a panacea for a country’s or a region’s problems and what worked in the past may not be appropriate for the future.