Public Capital and Private Sector Performance

Abstract

The public capital hypothesis is that the stock of public capital raises private sector output both directly and indirectly. Advocates of the public capital hypothesis argue that a slowdown in public capital formation caused a productivity slump beginning in the early 1970s. An increasing number of people are advocating increased government capital spending to raise private sector output, productivity, and private capital formation. Evidence suggests that a rise in public capital spending to raise private capital formation would have statistically no significant effect on these measures. Appropriately estimated, the hypothesis that public capital has a positive marginal private sector product cannot be supported.