The Effect of Public Capital on U. S. Manufacturing Activity: 1970 to 1978

The decade of the 1970s has been characterized by a significant deterioration of the nation's public capital stock. From 1970 to 1978 the real value of the total stock of public capital at the regional level (SMSA) has declined, on average, by 41 percent. Likewise, the real value of the stock of sewers and sanitation facilities, highways and roads, and water supply and treatment facilities has declined by 39, 45 and 48 percent.' The size of this decay has caused concern among regional policy makers since such deterioration may have an adverse effect on regional growth. Regional economists have long considered public capital to play an important role in regional economic development. Although public investment does not guarantee that regional growth will occur economists view it as being able to create the necessary foundation for regional economic and social activity. As suggested by Nijkamp, public investment can have both a short and long term effect on regional growth [22]. The short term effect results from the direct effect of public capital on the production activities of private industry. Meade suggests that public capital can be viewed as an input in the production process of private industry that contributes independently to firms' output [21]. However, it is a unique input since firms do not purchase public capital on a per unit basis as they do private capital and labor. Rather, local governments supply public capital to firms in return for a lump sum property tax payment. The political process, in which private industry is assumed not to play a significant role, determines the amount of public capital supplied to private industry. Hence, if firms have no direct control over how much public capital local governments supply to them, then public capital enters the production process as an unpaid, fixed input. As such, public capital has a direct effect on firms' variable costs and profits.2 The favorable effect of public investment on variable costs and profits may induce exiting