Economia

Journal of Monetary Economics 23 (1989) 177-200. North-Holland

IS PUBLIC E X P E N D I T U R E PRODUCTIVE?*
D avid A l a n A S C H A U E R
Federal Reserve Bank of Chicago, Chicago, IL 60690, USA
Received March 1988, final version received September 1988
This paper considers the relationship between aggregate productivity and stock and flow government-spending variables. The empiricalresults indicate that (i) the nonmilitary public capital
stock is dramatically more important in determining productivity than is either the flow of
nonmilitary or military spending, (ii) military capital bears little relation to productivity, and (iii)
a 'core' infrastructure of streets, highways, airports, mass transit, sewers, water systems, etc. has
most explanatory power for productivity. Thepaper also suggests an important role for the net
public capital stock in the 'productivity slowdown' of the last fifteen years.

1. Introduction
T his p a p e r considers the recent behavior of productivity in the private
U n i t e d States e c o n o m y and the extent to which its m o v e m e n t s can be
e x p l a i n e d b y public-sector capital a c c u m u l a t i o n as well as by theflow of
g o v e r n m e n t expenditures on goods a n d services. M u c h of the traditional
d iscussion of fiscal policy centers on the public-sector deficit a n d the import ance of the decision of the fiscal authorities to issue debt rather than utilize
c o n t e m p o r a n e o u s taxes to cover a particular s p e n d i n g level. G o v e r n m e n t
d eficits are thought to have avariety of effects on the private economy,
r a n g i n g f r o m forcing up real interest rates a n d 'crowding out' private investm e n t in a d d i t i o n a l p l a n t and e q u i p m e n t to raising wealth a n d stimulating
household consumption demand. 1
T h e e q u i l i b r i u m or newclassical approach to fiscal policy presents a different
a nalysis of the impact of fiscal decisions onthe private sector. At the core of
t his perspective o n fiscal policy lies the proposition that, to a first approximat ion, the ( l u m p - s u m ) f inancial p olicies of the g o v e r n m e n t are irrelevant to
p rivate-sector outcomes. This hypothesis of an equivalence between tax a n d
*Earlier versions of this paper were presented at the Federal Reserve Bank of Minneapolis and
theNational Bureau of Economic Research. The author would like to thank, without implicating,
participants in the above seminars as well as ma anonymous referee, Robert Barro, Charles
Calomiris, Randall Eberts, Bruce Peterson, Steven Strongin, and Lawrence Summers.
ISee, for instance, Eisner (1986).
0304-3932/89/$3.50©1989, Elsevier Science Publishers B.V. (North-Holland)

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D.A. Aschauer, Ispublic expenditureproductive?

d ebt finance of a particular time sequence of government spending has been
s ubjected to empirical testing along a number of routes. Boskin (1987), Eisner
(1986), Feldstein (1982), Modigliani and Sterling (1986), and Poterba and
S ummers (1987) recently have presented evidence that private consumption
e xpenditure is stimulated by bond-financed tax cuts.However, Aschauer
(1985), Barro (1978), Kochin (1974), Kormendi (1982), Leiderman and Razin
(1988), Seater (1982), Seater and Mariano (1985), and Tanner (1978,1979)
b alance the scale with contrasting findings. While Hoelscher (1987) finds a
p ositive influence of government deficits on long-term interest rates, Evans
(1985,1986,1987) and Plosser (1982,1987) either have been unable to uncover
a nystatistical association between public-sector bond issuance and interest
r ates or have obtained evidence of a negative relationship.
W hile opinion, along with the evidence, may differ on the appropriateness
o f the fiscal equivalence proposition, the equilibrium approach allows an
i mportant shift of emphasis to the public-sector decisions which are made
r egarding r eal variables such...