The next surface transportation authorization bill will have far-reaching effects. All Americans have a massive, shared interest in the total economic benefits of the transportation system: it increases the productivity of each industrial sector, it boosts our competitiveness in the global economy, it increases the market for goods and services, and it widens the market for labor and for the other factors of production. Too often in the authorization process, these shared objectives are left unstated, and the discussion immediately turns to the distributive implications of the subject: which programs go up and which go down; which states get more and which less; which modes and regions will grow; which states will be net donors, and the like. These are important issues that are closely watched by transportation interests, but the overriding goal should be to select an investment strategy that gives the greatest boost to the nation's economy and which targets that investment on the most effective programs.
Clearly transportation investments influence the location of economic activity. From the time of the nation's first transportation plan the Gallatin Report at the beginning of the nineteenth century political leaders responsible for transportation investment have been keenly attentive to the substantial regional impacts of such investments. Even earlier, as different ports competed to be the supplier of the original colonies, then as different routes competed to be the gateway to the west, as the first national system of post roads was designed, and later as the Interstate Highway System was designed, states and regions have vied for access. Transportation facilities are major magnets for growth. Many kinds of economic growth will be attracted to one of these magnets or another, at the expense of points in between. States and regions do not want to be left in those gaps. These local economic consequences are obvious and important, but they are not the key to developing an effective national investment strategy.
Developing countries place high priority in investments in rail, port, highway, transit, and other transportation facilities, recognizing the strong ties between transportation infrastructure and overall economic performance. Many historians and developmental economists believe that the Industrial Revolution was a direct consequence of the transportation development that preceded it. One study found that the reason there was an Industrial Revolution in England during the eighteenth century but not in France can be traced partly to their different transportation policies. Specifically, England had a flexible system for investing in turnpikes and canals as opportunities emerged, while France clung to a system of regulations and central plans that could not keep up with changing economic opportunities. (1.)
The economic history of the United States can be traced from its transportation investment history from the initial dominance of eastern port cities like New York and Boston, to the growth of railheads like Chicago and Omaha, to the boom in the Sunbelt which is possible because of ubiquitous air and road access. The linkage between the overall economy and investment in power supply, water supply, and transportation has been of particular interest to developmental economists. All industrial revolutions have been accompanied by development and expansion of such infrastructure. While there has always been a vigorous debate about how to trace the linkage between public investment and economic return, the British economist A. J. Youngston sums the matter up by noting that the vital significance of improved transportation to economic development is "one of the few general truths which it is possible to derive from economic history." (2.) Surprisingly, this "general truth" often gets ignored in the economic analysis of national budget issues.
A recent study by the World Bank found that the importance of transportation does not diminish as countries industrialize. (3.) The growth of Japan, Korea, Taiwan, Malaysia, and Thailand has been spurred by globally integrated production and assembly chains that depend critically on high quality domestic, regional, and international transportation. The World Bank report observes that cross-country studies have confirmed that investment in transport raises growth by increasing the social return to private investment without "crowding out" other productive investment. The Bank's transport investments at completion have shown a rate of return of about 22 percent, comparing favorably with a rate of about 15 percent for all World Bank investments.
Investments in transportation infrastructure in the United States have also stimulated sizable economic returns. Several years ago, Bates College economist David Aschauer performed a simple analysis in which he separated the economic investment in infrastructure from other government, and he found a high rate of return on such public investments. (4.) This study flew in the face of the prevailing economic assumptions used in budgetary analysis, which was, in effect, that the return on investments in infrastructure are no different from any other government spending, and could be lumped in with other government spending when economic impacts are being estimated. This analysis stirred up considerable controversy, both about the methods used and the significance of the findings. Although the methodology can be refined in various ways, this work nonetheless helped to focus renewed attention on the returns from public investments in infrastructure.
It also pointed out that this topic has not received adequate attention. In most cases, economists do not separate public investments in transportation from other federal spending, implicitly assuming that such investments cannot yield rates of return higher than those produced by private investments. But historical experience casts doubt on this assumption, as do other recent economic analyses. They show that the return on transportation capital has in fact been higher than that of other government spending, and also higher than what private capital has earned. To ignore these differences is to sell the nation short. New Findings
This past year, M. Ishaq Nadiri, an economist at New York University, developed a cost-function model to estimate the relationship between the capital stock of highways and the net social rate of return. (5.) He found that during the 1950s and the 1960s, the net social rate of return of the nation's highway network was extremely high around 35 percent, which is far above the rate of return that could be expected from private investments. This means that public funds invested in transportation in the 1950s were paid back, through growth realized by private industry, in only three to four years. Around 1970 this changed. In the past two decades, the net rate of return fell to levels that were comparable to those earned by private capital. (Figure 1)
These patterns are important for two reasons. First, they show that transportation investments can have a profound effect on the economy, if they are targeted on the right projects and programs. Second, they show that the targets change over time.
What are right targets for government investment in transportation today? Will future investments in the highway system yield returns above 30 percent, as in the 1950-1970 period, or 10 percent, as in the last decade? Was it the building of the Interstate Highway System that caused the high rates of return, and are there similar public investments facing us today? Do the National Highway System or the widespread introduction of Intelligent Transportation Systems have similar potential? Do investments in airports, transit, ports, intermodal facilities, and other forms of transportation promise similar economic benefits? This past July the Eno Transportation Foundation, with sponsorship from the Federal Highway Administration, the American Association of State Highway and Transportation Officials, and the National Cooperative Highway Research Program, held a forum to examine the implications of this work in the current context. We brought together a group of economists, industrial representatives, and government officials to explore what led to the very high net social rates of return that resulted from highway investment in the 1950s and 1960s, and whether public investments could be targeted to produce such high returns in the future.
This forum concluded that the social rates of return on infrastructure have been significant and positive. It also concluded that the high returns found in earlier decades trace from what are called network and dynamic effects things that create growing room in the economy; investments that fit the economic conditions of the time. They pointed out that the objective of public investment in infrastructure is not simply to solve a locality's immediate transportation problem, be it potholes or congestion. Rather, it is to enhance the prosperity of the region and the nation as a whole. They also recognized that this does not really answer the question of which programs best serve this goal, and that additional analysis is needed to pinpoint the specific conditions needed to maximize the value of investment projects.
The Interstate Highway System and Network Effects
As we search for possible causes of the pattern of returns shown in Figure 1, by far the most obvious change during the period was the building of the Interstate Highway System, a huge program of unprecedented proportions. Some 45,000 miles of multilane, limited access freeways linking coast to coast and north to south. We all know that this system has profoundly reshaped our economy and our lives. Trips and shipments that formerly were long and unreliable have become routine. Although the new system added barely more than one percent to the nation's total road mileage, today nearly one mile in four of all our highway travel takes place on this system. It made high speed travel possible in many areas where it had not been possible before. The biggest changes in door-to-door speeds probably came from eliminating urban bottlenecks. You can now ship goods from Richmond to Hartford without wondering if you would ever get through Washington, Baltimore, Wilmington, New York, and New Haven. One quarter of our personal travel and our truck freight now occurs on these roads that were not here 40 years ago. The Interstate has not only changed where we live, work, and shop: it has also allowed industry to reduce inventories, achieve economies of scale, access broader markets, and operate plant and equipment more economically.
The economic consequences that are most critical are network and dynamic effects. Transportation investments do more than change where economic growth happens: they also influence how much growth occurs. They should be weighed in terms of the social rate of return they create for the nation as a whole; not just their impacts on specific affected areas.
The nations successful companies reap these benefits every day. (6.) For example, the Coca Cola Midwest bottling plant has been shipping its product over highways using "double bottoming," a tandem trailer arrangement that reduces handling costs, reduces overall mileage, and increases driver productivity. Special refrigerated "Rolling Warehouses" make it possible for the Coca Cola plants to pre-load trailers to meet orders at the point the product is manufactured. Drivers come with their tractors and have the trailers ready to deliver, with exactly the right mix of products. The Wal-Mart Stores, Inc. quick response program works out of a set of distribution centers located on key north-south and east-west routes on the Interstate Highway System. It has improved its ability to schedule production and reduce its inventory, as well as improve customer service. General Motors' Just-in-Time production system uses about 7,000 trucks to provide daily support to its 29 domestic assembly plants. A typical plant unloads about 120 truckloads of parts and supplies each day, and speedy, reliable highway access allows General Motors to meet very precise production schedules. This system has reduced inventory costs and improved competitiveness. Campbell Soup Company is also using Just-in-Time delivery, together with its Select Supplier program, to reduce inventory, cut waste, and reduce handling costs. It has also allowed the company to improve product quality by using fresher ingredients.
As these illustrations show, the benefits of the nation's highway system are felt by a diverse array of industries. One of the key findings of the Nadiri analysis, which examined the rate of return of the highway stock on 35 different industries, is that the economic benefits are distributed widely, across almost all sectors of the economy.
Throughout the economy, highway transportation is doing things today that it could not do before the Interstate System was built. Elimination of congested urban bottlenecks allows intercity shipments to extend for longer ranges with greater reliability. This allows consolidation of production and warehousing facilities, lets industries reach broader markets, and creates economies of scale. Companies are able to locate facilities on lower-cost land, reach larger labor markets, and cut inventory, storage, and handling costs. By reducing the costs of haulage, transportation investments have broadened the market area for industry, both domestically and internationally. Improvements in the speed and reliability of transportation permit the uninterrupted supply of raw materials, components, and finished goods, allowing plants and equipment to run more efficiently. Reliable transportation is key to Just-In-Time inventory systems, which diminish the need for large inventories.
Productivity improvements like these have been stimulated in all transportation-using industries, and that means virtually every sector of the economy. These are network effects: the key economic benefits come through the provision of a national network. Additions to the system not only benefit the localities affected, but they also permit the entire network to perform better. Thus elimination of a bottleneck in St. Louis may benefit a manufacturer in San Francisco or a retailer in Orlando. The interstate interdependency of haulage is reflected in the pattern of ever longer shipments. An average shipment by truck traveled 416 miles in 1995, up by 77 percent above the average shipment length of 235 miles in 1950. The substitution of highway transportation for other factors of production is also reflected in total trucking tonnage, which grew by 324 percent between 1950 and 1995, while the GNP grew by 273 percent during that same period. (7.)
Which Investments Create Growing Room?
Pressures to balance the budget mean that any investments in surface transportation infrastructure must compete for the limited funds available. Public funds have often fallen short of the mark, and throughout our nation's history we have augmented direct authorizations of public funds by using land grants, tolling authorities, bonding, and numerous other devices to make long-term investments without being unduly constrained by short-term financial limitations. With today's intense concern about budgetary pressures, the pendulum appears to have swung to the other extreme, however: the nation's highway program is increasingly being used to bankroll deficit-reduction efforts. Is it sound policy to fund deficit reduction at the expense of transportation investment? No, if you can select investments in transportation that outperform public and private investments, as was the case in the 1950s. Yes, if there are no such opportunities to create growing room in the current context. That is the crux of the issue at this juncture. . The nation's stake in this matter is vast, and it pervades every sector of the economy. The nation spent $1,150 billion on transportation in 1995 -- about one sixth of the GNP. This includes $348 billion in trucking expenditures; $599 billion that people spent to buy cars, gasoline, tires, insurance, parking, and the like; $70 billion for passenger airline fares; and $127 billion that federal, state, and local governments spent on transportation services and facilities. (7.) The U.S. total transportation bill is about three quarters the size the Federal Budget. The reauthorization of surface transportation programs will have profound effects not only on this huge sector, but on the entire economy. The efficiency, speed, and reliability of transportation have vital consequences on agriculture, construction, manufacturing, service industries, and every other sector of the economy. Public investments in facilities and private investments in vehicles, communications, and control systems are key to continued economic growth.
The economy and the transportation system will continue to grow. If the past is a guide, this growth will be substantial. During the past decade, freight transportation, measured in ton-miles, grew by 37 percent and passenger transportation grew by 44 percent. The highway portions of these totals grew even faster: intercity truck ton-miles increased by 50 percent, and intercity automobile passenger miles increased by 44 percent. If these growth rates persist throughout the next decade, both passenger and freight volumes on the nation's roads will be more than double what they were ten years ago.
Which transportation investments will yield the greatest economic benefits? One of the morals of recent economic explorations of this question is that the investments must fit the context, and the context is constantly changing. Public investments in transportation in the past appear to have been most successful when they could create a new environment that bred new uses of the system. These appear to have been to network improvements rather than stand-alone projects. Four parts of the program authorized in the previous surface transportation bill deserve special attention in this respect: preservation of the Interstate System, the National Highway System, the capacity to fill intermodal gaps, and Intelligent Transportation Systems.
Preservation of The Interstate System
Although the Interstate System has been completed and most program attention is rightfully focused on other needs, the maintenance of the Interstate System, both physically and functionally, continues to be of prime economic importance. The initial investment in this system produced very high social rates of return. Disinvestment in this system could cause correspondingly large economic disruption. While it is difficult to interpret historic studies of economic impacts in terms of today's programs, one of the most applicable inferences is that keeping the Interstate in good repair is a top priority.
Closely tied to this is preserving the functional capacity of the system. Local traffic congestion threatens national network performance in many places. There are no easy solutions. The strong economic performance of past investments on this system, however, also signal the high looming costs of not keeping ahead of the needs.
The National Highway System
The participants at the Eno Forum on the Economic Returns from Transportation Investment noted that the Interstate Highway System was underutilized at first, but it created room for rapid future growth. New tools or new capabilities can create unanticipated new fields of economic opportunity. Investments of this sort do not simply meet an existing demand. They create new demands by opening the door to entirely new activities. This is perhaps most easily seen in the case of computers, where applications that appeared exotic a few years ago have become commonplace components of household appliances and automobiles. Similarly, new transportation system capabilities have contributed to the creation of catalog businesses, overnight package delivery services, and just-in-time manufacturing. Many of these new businesses or capabilities were not foreseen before the supporting communications, computing, and transportation investments to support them were made: the new businesses seized the "growing room" that the new investments created.
The National Highway System, like the Interstate Highway System, could improve the reliability and throughput of those parts of the surface transportation system that will be most heavily used. Just as the creation of the Interstate Highway System brought important network benefits by tying together the leading centers of production and activity, so too might the National Highway System have similar effects by targeting national priority on the key routes selected for the National Highway System. Is this the right investment for today's context? Nadiri's analysis sheds some encouraging light on this question. He separately examined the net social rate of return from investments in non-local roads, using the same general approach that he used for his analysis of total highway capital stock. He found that returns had fallen over the decades in both cases, but that capital invested in non-local roads always showed a return about which was about one and one half times that estimated for the total highway stock. Even in recent years, the investment in non-local roads showed a return of 16 percent, or paid back the public investment in six years. This compared favorably to private investments in general, which showed a return of 11 percent.
Percent Annual Net Social Rate of Return on Investment
Net Social Rate of Return
1950-1959 1960-1969 1970-1979 1980-1989
Total Highway Capital Stock
35.2 34.8 16.1 10.0
Non-local Highway Capital Stock
47.9 47.4 23.8 16.1
Private Capital Stock
13.4 14.0 12.0 11.0
These findings, which apply to the actual investments made in non-local roads during the 1980s, do not necessarily apply to the investments the National Highway System in future years. Nevertheless, they do suggest that one key target of opportunity lies in expansion of the national network to include additional heavily traveled routes.
Most transportation is planned, managed, and run one mode at a time. Things that happen between the modes have been outside the scope of most companies or organizations. Customer demands are changing this. In the case of freight transportation, huge investments in ports, containers and terminals that have made intermodal freight traffic one of the fastest growing parts of the overall transportation scene. In the case of passenger transportation, government agencies are increasingly seeing their role tied to improving overall performance, not merely building infrastructure or running a certain kind of vehicle.
The "intermodal" emphasis in the Intermodal Surface Transportation Efficiency Act (ISTEA) of 1991 targeted an important feature of the overall network the often neglected edges between the modes. Rather than tightly limiting the way that federal funds for infrastructure can be used, ISTEA allowed flexibility in substituting other projects that would increase system performance. It encouraged planning that embraced all the modes. It created new program categories to address emerging needs.
Intermodalism brings a new solution to an old problem. The fact that individual modes are poorly coordinated parts of a larger system has been recognized for years. It was this insight that drove the creation of the U.S. Department of Transportation in 1966. Administration after administration has called for an integrated, national transportation system, but the challenge has proven far easier to repeat than to meet. Every individual and every business in the country has a stake in transportation, and the organizations and topical jurisdictions that have evolved reflect pervasive interests. Parts of transportation are private, parts public; parts are federal, and others state or local. Earlier calls for an integrated national transportation system appeared to hint at some sort of command and control superstructure, a specter that spread paralyzing fear among virtually every firm and organization involved. Intermodalism represents a strategy for getting better coordination without the threat of excessive central control. It targets the rough edges between current divisions of responsibility. It may offer a strategy for achieving the economic benefits associated with network effects, not just for the highway network, but for the transportation network as a whole. . Intelligent Transportation Systems (ITS)
The stunning rate of progress in communications, computer, automated identification, global positioning systems, and other areas have opened vast new windows of opportunity in the degree of coordination that is technologically and economically viable. Activities that were too complex to manage previously show great potential today. Continued advances in Intelligent Transportation Systems could yield great benefits in efficiency, safety, and service. These emerging systems could potentially improve the coordination of transportation services, permit better use of existing facilities, introduce new navigational capabilities, make travel safer, lead to more efficient management of highway incidents, and bring many other benefits. With or without government investment here, there is little doubt that the vehicle/highway system fifty years from now or even twenty years from now will embody products and capabilities that are unimaginable today. Like the Interstate Highway System, which created unanticipated growing room for many economic opportunities, ITS has the potential to bring radical change to how the nation's surface transportation affects the economy.
This is a critical period in the evolution of the nation's surface transportation programs. The current reauthorization comes at a time of intense budgetary pressures. It comes at a time when the national stake in transportation is not clearly defined and not well recognized. The Interstate Highway System has been completed, but keeping it in repair and preserving the type of service it provides will continue to be top priorities. As this system has been completed, other highway and bridge programs have not generated the same commitment to common purpose that characterized the Interstate System. The National Highway System, which focuses on the principal routes of interstate commerce and travel, is still emerging and the funding to maintain this system has yet to be provided. Intermodalism, which might offer an effective strategy for setting priorities and focusing resources on key opportunities in the overall transportation network, still represents only a very small part of the program. Without additional resources, this set of opportunities will appear to be a diversion from existing highway and transit programs, which are struggling to deal with their traditional scope. Intelligent Transportation Systems promise many benefits, but most of these will take years to realize. In the absence of a strong and unifying interest in the nation's transportation programs, rivalries between states, modes, or projects are eclipsing the fundamental questions.
Growth in the economy will continue to hinge on wise transportation investments. Budgetary pressures will make it exceedingly difficult to free the funds that are needed for investment. The Congress will have to make the difficult allocation of resources between transportation investments, deficit reduction, and other priorities. The new investments are made will have immense economic consequences, as will any net disinvestments that result if the service provided by existing systems is allowed to deteriorate. It is essential for continued economic health that you target the available funds on those programs and systems that will do the most for economic growth.
Recent economic analysis has shown that the returns from investment have varied widely in recent years. Sometimes they have been dramatically stronger than what private investments have earned, sometimes about the same. Finding investments that produce maximum economic growing room appears to be key to effectiveness. Forty years ago, that meant channeling funds into the creation of the Interstate Highway network, an investment which generated very high economic returns. It is not clear which, if any, programs would yield similar benefits today. Inasmuch as past experience suggests that network effects are at the core of effectiveness, four programs preservation of the Interstate Highway System, improving the National Highway System, filling intermodal gaps, and Intelligent Transportation Systems appear to warrant special consideration. These programs have the potential to afford the growing room that has characterized effective programs in the past. In the current struggle for funds, however, these programs particularly the newer ones are apt to be shortchanged and cast as diversions. That would be unfortunate. To achieve the high rates of return that history shows to be possible, it is important to look past the immediate, site-specific consequences of the program and support the program elements that fuel the nation's economy as a whole.
Other Works Referenced in this Statement
1. Rick Szostak, The Role of Transportation in the Industrial Revolution: A Comparison of England and France, 1991
2. A. J. Youngson, Overhead Capital: A Study in Development Economics, 1967.
3. The World Bank, Sustainable Transport: Priorities for Policy Reform, 1996.
4. David Aschauer, Is Public Expenditure Productive?, 1989
5. M. Ishaq Nadiri and Theofanis P. Mamuneas, "Highway Capital and Productivity Growth," in Economic Returns from Transportation Investment, Eno Transportation Foundation, 1996.
6. Apogee Research, Inc., Case Studies of the Link Between Transportation and Economic Productivity, 1991.
7. Eno Transportation Foundation, Transportation in America: Historical Compendium, 1939-1985, 1989 and Transportation in America: 1996, 1996.