Is All Government Capital Productive?

T he early 1970s witnessed dramatic change in per-capita output and labor-productivity growth rates in the United States. These growth rates averaged 2.2 percent and 2.0 percent, respectively, for the 1950–1969 period compared to 1.3 percent and 0.8 percent for the 1970–1989 period. Aschauer (1989) advances the idea that an important explanatory factor in this productivity slowdown is the government’s stock of capital. Estimating a production function that relates private sector output to private sector labor and capital and to total government capital for the aggregate U.S. economy (1949– 1985), Aschauer finds the output elasticity of government capital to be 0.39.1 That is, for every 1 percent change in government capital, output responds by 0.39 percent. This productivity coefficient, coupled with the sharp fall in the average growth rate of government capital from 4.1 percent for 1950–1970 to 1.6 percent for 1971–1985, constitutes the evidence underlying Aschauer’s view.2 The Aschauer (1989) study is innovative and important. His evidence suggests that government capital plays a significant role in economic growth. His findings are, however, surprising and somewhat unconvincing. The evidence is surprising because the output elasticity of government capital is relatively high and because government capital contains many different types of stocks (e.g., museums, hospitals, airports, prisons, seawalls, and wildlife preservation