Optimal Fiscal Policy, Public Capital, and the Productivity Slowdown

This paper: (1) shows that optimal transition dynamics in a simple endogenous growth model can account for much of the behavior of the stock of public capital in the U.S. economy over the last 70 or so years; (2) shows that the observed decline in the U.S. ratio of public to private capital since the mid-1960s might be interpreted as a movement toward the optimal balanced growth ratio, even for public capital output elasticities as high as 0.10; (3) shows that a non-optimal public investment policy of the type consistent with U.S. data does not have much impact on the growth rate of labor productivity in our model, suggesting that other explanations for the U.S. productivity slowdown should be considered