Each dollar of federal highway grants received by a state raises that state’s annual economic output by at least two dollars, according to research by the Federal Reserve Bank of San Francisco.
Federal highway grants to states appear to boost economic activity in both the short and medium term. 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.
One criticism of federal public-infrastructure programs is that they take a long time to put in place and therefore are unlikely to be effective quickly enough to alleviate economic downturns. 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.
An edition of the San Francisco Fed's Economic Letter examines forthcoming research on the dynamic effects of public investment in roads and highways on gross state product, the total economic output of a state.