TALKING POINTS Economic Benefits of Transportation Investment Feb. 28, 2002 Investment in the nation’s highway infrastructure is critical if America is to remain strong and prosperous in the 21st century. Studies show that highway infrastructure investments generate important economic benefits, such as reducing production costs, improving productivity and encouraging private capital investment. Studies also show that each $1 billion of federal spending on infrastructure, combined with a state match of 20 percent to yield a total expenditure of $1.25 billion, supports about 47,500 jobs across the nation. Q. You say each $1 billion of federal spending, combined with state funds, supports 47,5000 jobs. How do you derive that figure? The estimate is from JOBMOD, an income and employment estimation model developed for the FHWA by the Center for Transportation Studies at Boston University. JOBMOD is an economic input-output model based on the U.S. Commerce Department’s 1992 Benchmark Input-Output Accounts of the United States and modified to specifically reflect labor and materials usage on federal-aid highway projects. Q. What kinds of jobs are generated? Different occupations will be supported in a wide array of industries. For $1 billion in federal- aid highway construction spending, coupled with a 20 percent state match, we would expect to see 12,453 jobs in the highway construction sector, 7,132 jobs in the materials supplying industries, 6,939 jobs in businesses that sell goods and services to those making construction materials and equipment, and 21,052 jobs in all sectors of the economy when construction workers and others spend their wages. Q. Can you describe how investments work their way through the economy and be more specific about some of the industry areas affected? The benefits occur in several rounds. The first round of employment and income benefits occur in the highway construction industry and in industries supplying equipment and materials for construction projects. Using the $1 billion figure and the state match, we see that employment in highway construction and materials supplying industries would grow by 19,673 jobs, of which 12,454 occur in the highway construction sector and 7,219 in materials supplying industries. Worker incomes would increase by $573 million. In addition to the substantial numbers of construction jobs, first-round employment effects are particularly large in transportation and warehousing, business and professional services, stone and clay products, petroleum refining, wholesale trade, fabricated structural metal products, and non-metallic minerals mining. A second-round of employment and income effects occur in the production sector because of the demand for additional inputs needed to expand output in industries that supply highway construction materials. An additional 6,851 jobs from indirect employment in the production sector will generate income of $213 million. Indirect employment in the second round is distributed across a much wider array of industry sectors than first-round effects. In addition to employment gains in business services, transportation and warehousing, and wholesale trade, relatively large numbers of jobs also occur in primary iron and steel manufacturing, finance insurance and real estate, automotive repair services, machinery and equipment, crude petroleum and natural gas, chemicals, and rubber products. Overall, the dollar value of first and second-round goods and services produced by the additional highway construction spending is $2.93 billion. This implies a combined direct and indirect output multiplier of 2.34. When direct and indirect employment incomes are spent, a third round of employment and income benefits can be expected. This is frequently termed “induced” employment and reflects producer’s response to an increase in consumer demand for all types of goods and services. The total number of jobs generated by the additional spending is 21,052, with third-round employment income estimated at $528 million. The largest employment gains occur in the service sector, including wholesale and retail trade, business services, health services, restaurants and amusements, educational and social services, and finance insurance and real estate, and communications. However, large induced employment effects also are observed in textiles and apparel, construction, agriculture forestry and fisheries, food and kindred products, printing and publishing, electric equipment and electronic components, motor vehicles and parts, paper and allied products, and rubber products. In all, the dollar value of goods and services produced across all sectors of the economy as result of a $1.25 billion increase in highway construction expenditure is $6.097 billion, implying an overall spending multiplier of about 4.77. Employment income from first-, second- and third- round effects total $1.313 billion, and the number of jobs generated is 47,576. Q. You say the federal-aid program supports all these jobs and is critical to the nation’s economy. Is that just your opinion? No. Recognition of transportation investment as a crucial factor in economic growth and the transformation of cities and regions is more than conventional wisdom. Federal and state policy makers, as well as economists, private sector officials and academic experts have noted the contribution of various kinds of transportation to America’s economy over the last two centuries. More recently, economic reports and studies have observed positive economic relationships between highway infrastructure and both the level of economic output and the productivity of private capital. Ishaq Nadiri’s August 1998 report, called “Contributions of Highway Capital to Output Productivity Growth in the U.S. Economy and Industries,” is one of the more recent studies that highlight the benefits of increased highway investment. Q. You say highway investment provides other benefits. What are some of them? Clearly, greater employment is only one category of economic benefit. Many economic studies show that highway infrastructure investments: (1) reduce production costs in almost all industry sectors, (2) encourage private capital investment in plant and equipment, (3) make a significant contribution to productivity growth in the United States, (4) influence inventory and business logistics practices, (5) affect the location and scale of business activity, (6) generate sizable direct consumer benefits, (7) affect the level and composition of consumer spending, (8) enhance domestic competition, (9) promote international competitiveness, and (10) produce large income and employment effects. Q. You mention federal investment. What about state and local government? Our state and local partners recognize the importance of infrastructure to our economy and to our quality of life. State and local public funding for surface transportation infrastructure is more than $90 billion annually, or about three times that of the federal government. Total government funding (federal, state, local) for surface transportation reached almost $120 billion in 2000, an increase of 17.6 percent over 1997. Q. What about the impact on employment from the proposed reduction in highway spending? Even with the downward adjustment of RABA in fiscal 2003, the states will have experienced a net increase of $4.7 billion in additional funding over the life of RABA to help them meet critical transportation needs. At the same time, the immediate impacts to the economy are limited because of the nature of the federal-aid highway program. Because of the slow way the program spends out, the impact of RABA adjustments, whether positive or negative, on cash distributions also is spread out slowly over time. In addition, states have flexibility with multi-year authority, so the impacts of obligation control can be tempered.