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January 15, 1988

Overall, the 1988 budget called for a
14.3 percent real decline in community and regional development outlays,
and an 8.8 percent real decline in
transportation outlays.'? Thus, as the
needs of many older cities grow and
as local sources of funds to meet these
needs dwindle, the federal government is playing a smaller role in
financing local public works projects.
•

Conclusion

The Eagle Avenue ramp is currently
under repair, with financing cornprised largely of federal funds. Once
reopened, the ramp will provide an
important access to one of Cleveland's industrial areas. While this reno
ovation does not promise to bring
new growth to an area that has lagged
behind the national average during
the last decade, it is nonetheless
necessary for the routine operations
of a local economy.
The solution to other infrastructure
problems may not be as easy. Metropolitan governments are faced with
some very difficult trade-offs berween
the long-run development of the city
and the short- run well-being of subgroups of its population.

Public infrastructure is an important
factor in urban economic development. Whether local governments can
carry a large part of the burden of
financing public investment without
severely curtailing other necessary
programs is not clear. What is clear is
that the longer public works improvements are neglected, the harder it will
be to break the cycle berween deteriorating infrastructure and economic
growth.

-

Douglas Dalenberg is an assistant professor of economics at john Can-oil Uniuersity, Cleveland. Randall W Eberts is an
assistant vice president and economist at
the Federal Reserve Bank of Cleveland.
The views stated herein are those of the
authors and not necessarily those of the
Federal Reserve Bank of Cleveland or of
the Board of Governors of the Federal
Reserve System.

•

Footnotes

1. Pat Choate and Susan Walter, America
in Ruins: Beyond the Public Works Pork
Barrel, Washington, D.C.: Council of State

Planning Agencies, 1981; and National
Council on Public Works Improvement,
Fragile Foundations: A Report on Arnerica's Public Works, Washington, D.C.: U.S.

Government Printing Office, February
1988.
2. Shuara Wilson, "Span Closing Hurts
Few Firms," Crain's Cleveland Business,
September 28, 1987, p. 18.

eCONOMIC
COMMeNTORY

3. Teresa Garcia-Milaand Therese].
McGuire, "The Contribution of Publicly
Provided Inputs to States' Economies,"
Working Paper No. 292, State Universiry
of New York at Stony Brook, Department
of Economics.july 1987.
4. Randall W. Eberts, "Estimating the Contribution of Urban Public Capital Stock to
Regional Growth," unpublished revision
of Working Paper 8610, Federal Reserve
Bank of Cleveland, December 1986.
5. Randall W. Eberts and Michael S.
Fogarty, "Estimating the Relationship
Between Local Public and Private Investment," Working Paper 8703, Federal
Reserve Bank of Cleveland, May 1987; and
David Alan Aschauer, "Is the Public Capital
Stock too Low?" Chicago Fed Letter, Federal Reserve Bank of Chicago, October
1987, No.2.
6. Kevin Deno, "The Short Run Relationship Between Investment in Public Infrastructure and the Formation of Private
Capital," unpublished doctoral dissertation, University of Oregon, 1986.
7. Koichi Mera, Income Distribution and
Regional Development, Tokyo: University
ofTokyo Press, 1975.
8. Eberts (1986), op. cit.

Federal Reserve Bank of Cleveland

Public Infrastructure and
Economic Development
by Douglas Dalenberg and Randall W. Eberts

T

he condition of the nation's public capital stock has received much
publicity over the past several years.
Titles such as America in Ruins and
Fragile Foundations have raised our
awareness of the declining state of
our nation's public works.'

Rather than simply add to this awareness by documenting the deterioration of infrastructure in the Midwest,
this Economic Commentary discusses
the seemingly vicious circle in which
many older cities find themselves
with regard to public infrastructure
and economic development. Cities

9. The Center for Regional Economic
Issues, "A Primer on the Cleveland Area's
Fiscal Environment: Charts and Tables,"
REI Program Paper, October 1987.
10. Northeast-Midwest Congressional Coalition, "The Budget and the Region,"
Washington, D.C: Northeast-Midwest Institute, February 1987.

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 4410 1

One obvious way to break the cycle is
for the local economy to begin to
grow. Public infrastructure investment
provides the essential foundation to
support economic development.

• The Extent of the Problem
The Eagle Avenue ramp on the western edge of downtown Cleveland is
typical of the problem of public infrastructure deterioration and its effect
on urban development. This 58·year·

that have an aging industrial base
often find that they cannot afford to
maintain or improve their infrastructure because of the heavy
demand for welfare programs and the
decline in the tax base caused by a
sagging local economy.

BULK RATE
U.S. Postage Paid
Cleveland, OH
Permit No. 385

Analysis shows that public investment
is necessary for future local economic
development. In many cases, however, cities find themselves in a nowin situation when trying to juggle
their budgets. If city governments
attend to the immediate welfare
needs of the community at the sacrifice of public investment, then these
needs will continue to grow as economic development is stifled. If they
attend to public infrastructure needs,
which can promise more long- term
than short- term benefits, then substantial groups within the community
may suffer.

Material may be reprinted provided that
the source is credited. Please send copies
of reprinted materials to the editor.
Address Correction Requested:
Please send corrected mailing label to the Federal Reserve Bank of Cleveland, Research Department, P.O. Box 6387, Cleveland, OH 44101
ISSN 0428·1276

old structure has received considerable attention in the last year. The only
convenient major transportation link
between rwo key areas of the city, the
ramp was unsafe for several years and
without considerable repair would
have had to be closed. Closing the
ramp would limit access to the surrounding industrial region, threatening to raise the cost of doing business
in this area and to cause the possible
flight of businesses.
We focus on the Eagle Avenue ramp
not because it is unique, but because
it is only one example of the thousands of roads, bridges, and other
public structures that share a similar
condition. Comparable stories could
be told about bridges and ramps in
Pittsburgh, Chicago, or Detroit that
need repair and that in various
degrees impede economic activity.

-

Public infrastructure deterioration
has an important effect on urban
economic development. Many cities
with an aging industrial base are
caught between the need to maintain or improve public capital stock
and the immediate demand for
community welfare programs. Neglecting public infrastructure may
make it more difficult for these cities
to achieve future economic growth.

This highlights a problem that
plagues mature cities. As time passes,
the location of economic activities
within a city or urban area changes.
However, local governments are
obliged in many cases to maintain a
large portion of the existing infrastructure, even when it is used below
capacity. Maintaining the existing capital stock can be a substantial burden.
In the Cleveland area, for example,
every dollar that metropolitan
governments spend on public infrastructure (such as highways, water
treatment and distribution, sewers, or
airports) is used just to maintain the

-

FIGURE 1 PERCENT OF CURRENT INVESTMENT DOLLAR
REQUIRED TO MAINTAIN PUBLIC CAPITAL STOCK
Percent

r-----------------------------------------,

160

1965
1985

120
80
40

O~~~~~~~~~BL~~LL~UU~~~~~

ClevelandChicago Detroit Denver

Dallas Atlanta 40 areas

u.s.

Urban area
SOURCE: Authors' calculations based on public capital stock estimates funded by a
National Science Foundation Grant to Randall Eberts, Michael Fogarty, and Gary
Garofalo; and the Bureau of Economic Analysis gross investment series presented
in Michael). Baskin, Marc S. Robinson, and Alan M. Huber, "New Estimates of State
and Local Government Tangible Capital and Net Income," Working Paper No.
2131, National Bureau of Economic Research, January 1987.

current stock of public capital at its
present level, according to our estimates. This amounts to more than
$50 per person per year.
As can be seen in figure 1, the situation is similar in Chicago: 90 cents of
every public investment dollar goes
toward keeping public capital stock at
its present level. Places that have had
a robust economy during the past
decade, such as Atlanta, Dallas, and
Denver, spend only 20 cents of every
dollar to maintain their level of public capital. The national average is
about 60 cents per dollar.
The trend is increasing for both the
Midwest and the United States. In
1965, it took 60 cents per investment
dollar to maintain the level of public
capital stock for a typical Midwestern
city, while today it requires the entire
dollar. For the United States, the

amount has grown from 20 cents to
60 cents. Thus, while most cities in
the nation are adding to their infrastructure, many Midwestern cities are
dis investing in public capital, or are at
best holding on to what they created
in the past.
Mature cities tend to spend most of
their public investment dollar to keep
public capital at its current level for
two reasons. First, these cities simply
have a greater stock per person, due
to a longer history of accumulating
stock or due to a population decline.
Second, their public works expenditures are decreasing, especially with
respect to the existing capital stock.
Another way to view the problem facing older industrial cities is to look at
the age of their public capital stock.
One measure of age is the percent of
current capital stock put in place
within the last 15 years. As shown in
figure 2, the average for 40 urban
areas is 37 percent. For Cleveland and
Chicago the value is about 20
percent -almost
half the sample
average. In contrast, Atlanta and Dallas have had more than 40 percent of
their capital stock built since 1970.

This difference in age across various
types of cities is disturbing not only
with respect to the condition of capital stock in cities like Cleveland, but
also with respect to the ability of local
areas to adapt to changing demands
for infrastructure. Not only does the
spatial demand for infrastructure
change, but the demand for the various types of infrastructure also varies.
Suburban airports have replaced
downtown railroad stations; freeways
have replaced trolley systems; and an
information-based
economy is
encroaching on a material-processing
economy. Thus, lack of discretion in
how limited funds can be spent is a
serious problem for older cities in
their efforts to position themselves
for future economic development.
•

The Importance

-

FIGURE 2 PERCENT OF CURRENT PUBLIC CAPITAL STOCK PUT IN
PLACE SINCE 1970
Percent
60
r--

50 f-

30 f20

Implicit in much of the discussion of
the need for public infrastructure is
the belief that deterioration in the
quality of a city's public capital stock
reduces the city's attractiveness to
firms and residents, stifling economic
development, productivity, and the
creation of jobs. Furthermore, policymakers concerned with regional
issues have claimed for years that
public infrastructure investment is
one of the primary means to implement a regional growth strategy.
Empirical studies support the established intuition that public infrastructure plays an important role in economic development. In general,

r---

r--

.--.---

10

o

ClevelandChicago Detroit Denver

Dallas Atlanta 40 areas

u.s.

Urban area

of Public Infra-

structure to Economic Development
The importance of public infrastructure to economic development might
be captured in one business owner's
response to the possible closing of
Cleveland's Eagle Avenue ramp: "The
ramp is the only viable way for my
East Side customers to find me."2
When the ramp did close for repairs,
no businesses reportedly shut down.
It is not clear, however, what would
have happened had the ramp closed
permanently.

.--

~

40 f-

SOURCE: See figure I.

studies show that public infrastructure investment affects the growth
rate of a region as measured by personal income.'
The effect of public infrastructure on
economic development can come
through various channels. Research
has found that the level of public
infrastructure significantly affects
manufacturing output in metropolitan
areas.' Studies also show that public
investment stimulates private investment, both in local economies
the national level."

and at

Of particular importance to the issues
discussed here is the finding that
public investment has a greater effect
on net capital formation in distressed
cities than in growing cities." Furthermore, studies show that specific types
of infrastructure, such as transportation and communication, have a larger
effect on economic growth than do
other types of infrastructure."
If public infrastructure indeed provides important services to the private
sector, then another way to measure
the condition of the nation's infrastructure is to compare the growth of
public investment to private investment. We find that the annual rate of

public works investment versus private manufacturing investment in U.S.
cities has declined steadily since the
1950s. Between 1958 and 1978, manufacturing private capital stock has
grown at an annual rate of2.7 percent,
while public capital stock has grown
at an annual rate of 1.6 percent.s
These trends cast doubt on the ability
of current levels of infrastructure to
support future economic expansion.
• Sources of the Problem
The reasons for the general decay of
the nation's infrastructure are many
and varied, and no Single factor can be
blamed. For Cleveland and cities like
it, much of the problem can be traced
to an aging industrial base, which
wields a double-edged sword, both reducing the fiscal base and increasing
the need for welfare programs.
In many cities, immediate welfare
needs have supplanted the longer-run
benefits of public investment programs. For example, poverty-related
social expenditures per capita in
Cleveland increased 55 percent from
1977 to 1985, while the average of

these expenditures for a representative sample of 37 large urban areas
increased only 13 percent. Meanwhile, per capita expenditures on
development services in Cleveland
fell 6 percent over the same period,
while the average in other urban
areas increased 10 percent."
While needs have increased and local
resources have declined, federal assistance has fallen. Federal grantS-in-aid
have dropped to 20 percent of local
government receipts in 1985 from a
high of 30 percent in the late 1970s.
This percentage matches the federal
government's role in 1965, which
predates major federal initiatives such
as the Clean Air and Water acts, general revenue sharing, and many block
grant programs. The states have
picked up about half of the loss of
federal funds, but local governments
must absorb the shortfall through
some combination of raising additional revenues, eliminating services,
cutting back on welfare transfers, or
reducing public investment.
The greatest impact of reduced federal assistance to local governments
has been on infrastructure projects,
primarily because of the way in which
various levels of government have
assumed responsibility for public
works. Local governments are responsible for construction of over 50 percent of the public works investment
in the country, and this percentage is
growing. More than half of the financing for these projects comes from
federal grants, however, and this percentage is declining.
The federal budget for 1988 and the
proposed budget for 1989 have further
reduced some of the key public works
programs and have called for the elimination of others, including Urban
Development and Assistance Grants
and the Economic Development
Administration. Highway funding is
the only area that remains unscathed,
partly because its expenditures come
from a trust fund and do not compete
for funds from the general budget.

-

FIGURE 1 PERCENT OF CURRENT INVESTMENT DOLLAR
REQUIRED TO MAINTAIN PUBLIC CAPITAL STOCK
Percent

r-----------------------------------------,

160

1965
1985

120
80
40

O~~~~~~~~~BL~~LL~UU~~~~~

ClevelandChicago Detroit Denver

Dallas Atlanta 40 areas

u.s.

Urban area
SOURCE: Authors' calculations based on public capital stock estimates funded by a
National Science Foundation Grant to Randall Eberts, Michael Fogarty, and Gary
Garofalo; and the Bureau of Economic Analysis gross investment series presented
in Michael). Baskin, Marc S. Robinson, and Alan M. Huber, "New Estimates of State
and Local Government Tangible Capital and Net Income," Working Paper No.
2131, National Bureau of Economic Research, January 1987.

current stock of public capital at its
present level, according to our estimates. This amounts to more than
$50 per person per year.
As can be seen in figure 1, the situation is similar in Chicago: 90 cents of
every public investment dollar goes
toward keeping public capital stock at
its present level. Places that have had
a robust economy during the past
decade, such as Atlanta, Dallas, and
Denver, spend only 20 cents of every
dollar to maintain their level of public capital. The national average is
about 60 cents per dollar.
The trend is increasing for both the
Midwest and the United States. In
1965, it took 60 cents per investment
dollar to maintain the level of public
capital stock for a typical Midwestern
city, while today it requires the entire
dollar. For the United States, the

amount has grown from 20 cents to
60 cents. Thus, while most cities in
the nation are adding to their infrastructure, many Midwestern cities are
dis investing in public capital, or are at
best holding on to what they created
in the past.
Mature cities tend to spend most of
their public investment dollar to keep
public capital at its current level for
two reasons. First, these cities simply
have a greater stock per person, due
to a longer history of accumulating
stock or due to a population decline.
Second, their public works expenditures are decreasing, especially with
respect to the existing capital stock.
Another way to view the problem facing older industrial cities is to look at
the age of their public capital stock.
One measure of age is the percent of
current capital stock put in place
within the last 15 years. As shown in
figure 2, the average for 40 urban
areas is 37 percent. For Cleveland and
Chicago the value is about 20
percent -almost
half the sample
average. In contrast, Atlanta and Dallas have had more than 40 percent of
their capital stock built since 1970.

This difference in age across various
types of cities is disturbing not only
with respect to the condition of capital stock in cities like Cleveland, but
also with respect to the ability of local
areas to adapt to changing demands
for infrastructure. Not only does the
spatial demand for infrastructure
change, but the demand for the various types of infrastructure also varies.
Suburban airports have replaced
downtown railroad stations; freeways
have replaced trolley systems; and an
information-based
economy is
encroaching on a material-processing
economy. Thus, lack of discretion in
how limited funds can be spent is a
serious problem for older cities in
their efforts to position themselves
for future economic development.
•

The Importance

-

FIGURE 2 PERCENT OF CURRENT PUBLIC CAPITAL STOCK PUT IN
PLACE SINCE 1970
Percent
60
r--

50 f-

30 f20

Implicit in much of the discussion of
the need for public infrastructure is
the belief that deterioration in the
quality of a city's public capital stock
reduces the city's attractiveness to
firms and residents, stifling economic
development, productivity, and the
creation of jobs. Furthermore, policymakers concerned with regional
issues have claimed for years that
public infrastructure investment is
one of the primary means to implement a regional growth strategy.
Empirical studies support the established intuition that public infrastructure plays an important role in economic development. In general,

r---

r--

.--.---

10

o

ClevelandChicago Detroit Denver

Dallas Atlanta 40 areas

u.s.

Urban area

of Public Infra-

structure to Economic Development
The importance of public infrastructure to economic development might
be captured in one business owner's
response to the possible closing of
Cleveland's Eagle Avenue ramp: "The
ramp is the only viable way for my
East Side customers to find me."2
When the ramp did close for repairs,
no businesses reportedly shut down.
It is not clear, however, what would
have happened had the ramp closed
permanently.

.--

~

40 f-

SOURCE: See figure I.

studies show that public infrastructure investment affects the growth
rate of a region as measured by personal income.'
The effect of public infrastructure on
economic development can come
through various channels. Research
has found that the level of public
infrastructure significantly affects
manufacturing output in metropolitan
areas.' Studies also show that public
investment stimulates private investment, both in local economies
the national level."

and at

Of particular importance to the issues
discussed here is the finding that
public investment has a greater effect
on net capital formation in distressed
cities than in growing cities." Furthermore, studies show that specific types
of infrastructure, such as transportation and communication, have a larger
effect on economic growth than do
other types of infrastructure."
If public infrastructure indeed provides important services to the private
sector, then another way to measure
the condition of the nation's infrastructure is to compare the growth of
public investment to private investment. We find that the annual rate of

public works investment versus private manufacturing investment in U.S.
cities has declined steadily since the
1950s. Between 1958 and 1978, manufacturing private capital stock has
grown at an annual rate of2.7 percent,
while public capital stock has grown
at an annual rate of 1.6 percent.s
These trends cast doubt on the ability
of current levels of infrastructure to
support future economic expansion.
• Sources of the Problem
The reasons for the general decay of
the nation's infrastructure are many
and varied, and no Single factor can be
blamed. For Cleveland and cities like
it, much of the problem can be traced
to an aging industrial base, which
wields a double-edged sword, both reducing the fiscal base and increasing
the need for welfare programs.
In many cities, immediate welfare
needs have supplanted the longer-run
benefits of public investment programs. For example, poverty-related
social expenditures per capita in
Cleveland increased 55 percent from
1977 to 1985, while the average of

these expenditures for a representative sample of 37 large urban areas
increased only 13 percent. Meanwhile, per capita expenditures on
development services in Cleveland
fell 6 percent over the same period,
while the average in other urban
areas increased 10 percent."
While needs have increased and local
resources have declined, federal assistance has fallen. Federal grantS-in-aid
have dropped to 20 percent of local
government receipts in 1985 from a
high of 30 percent in the late 1970s.
This percentage matches the federal
government's role in 1965, which
predates major federal initiatives such
as the Clean Air and Water acts, general revenue sharing, and many block
grant programs. The states have
picked up about half of the loss of
federal funds, but local governments
must absorb the shortfall through
some combination of raising additional revenues, eliminating services,
cutting back on welfare transfers, or
reducing public investment.
The greatest impact of reduced federal assistance to local governments
has been on infrastructure projects,
primarily because of the way in which
various levels of government have
assumed responsibility for public
works. Local governments are responsible for construction of over 50 percent of the public works investment
in the country, and this percentage is
growing. More than half of the financing for these projects comes from
federal grants, however, and this percentage is declining.
The federal budget for 1988 and the
proposed budget for 1989 have further
reduced some of the key public works
programs and have called for the elimination of others, including Urban
Development and Assistance Grants
and the Economic Development
Administration. Highway funding is
the only area that remains unscathed,
partly because its expenditures come
from a trust fund and do not compete
for funds from the general budget.

January 15, 1988

Overall, the 1988 budget called for a
14.3 percent real decline in community and regional development outlays,
and an 8.8 percent real decline in
transportation outlays.'? Thus, as the
needs of many older cities grow and
as local sources of funds to meet these
needs dwindle, the federal government is playing a smaller role in
financing local public works projects.
•

Conclusion

The Eagle Avenue ramp is currently
under repair, with financing cornprised largely of federal funds. Once
reopened, the ramp will provide an
important access to one of Cleveland's industrial areas. While this reno
ovation does not promise to bring
new growth to an area that has lagged
behind the national average during
the last decade, it is nonetheless
necessary for the routine operations
of a local economy.
The solution to other infrastructure
problems may not be as easy. Metropolitan governments are faced with
some very difficult trade-offs berween
the long-run development of the city
and the short- run well-being of subgroups of its population.

Public infrastructure is an important
factor in urban economic development. Whether local governments can
carry a large part of the burden of
financing public investment without
severely curtailing other necessary
programs is not clear. What is clear is
that the longer public works improvements are neglected, the harder it will
be to break the cycle berween deteriorating infrastructure and economic
growth.

-

Douglas Dalenberg is an assistant professor of economics at john Can-oil Uniuersity, Cleveland. Randall W Eberts is an
assistant vice president and economist at
the Federal Reserve Bank of Cleveland.
The views stated herein are those of the
authors and not necessarily those of the
Federal Reserve Bank of Cleveland or of
the Board of Governors of the Federal
Reserve System.

•

Footnotes

1. Pat Choate and Susan Walter, America
in Ruins: Beyond the Public Works Pork
Barrel, Washington, D.C.: Council of State

Planning Agencies, 1981; and National
Council on Public Works Improvement,
Fragile Foundations: A Report on Arnerica's Public Works, Washington, D.C.: U.S.

Government Printing Office, February
1988.
2. Shuara Wilson, "Span Closing Hurts
Few Firms," Crain's Cleveland Business,
September 28, 1987, p. 18.

eCONOMIC
COMMeNTORY

3. Teresa Garcia-Milaand Therese].
McGuire, "The Contribution of Publicly
Provided Inputs to States' Economies,"
Working Paper No. 292, State Universiry
of New York at Stony Brook, Department
of Economics.july 1987.
4. Randall W. Eberts, "Estimating the Contribution of Urban Public Capital Stock to
Regional Growth," unpublished revision
of Working Paper 8610, Federal Reserve
Bank of Cleveland, December 1986.
5. Randall W. Eberts and Michael S.
Fogarty, "Estimating the Relationship
Between Local Public and Private Investment," Working Paper 8703, Federal
Reserve Bank of Cleveland, May 1987; and
David Alan Aschauer, "Is the Public Capital
Stock too Low?" Chicago Fed Letter, Federal Reserve Bank of Chicago, October
1987, No.2.
6. Kevin Deno, "The Short Run Relationship Between Investment in Public Infrastructure and the Formation of Private
Capital," unpublished doctoral dissertation, University of Oregon, 1986.
7. Koichi Mera, Income Distribution and
Regional Development, Tokyo: University
ofTokyo Press, 1975.
8. Eberts (1986), op. cit.

Federal Reserve Bank of Cleveland

Public Infrastructure and
Economic Development
by Douglas Dalenberg and Randall W. Eberts

T

he condition of the nation's public capital stock has received much
publicity over the past several years.
Titles such as America in Ruins and
Fragile Foundations have raised our
awareness of the declining state of
our nation's public works.'

Rather than simply add to this awareness by documenting the deterioration of infrastructure in the Midwest,
this Economic Commentary discusses
the seemingly vicious circle in which
many older cities find themselves
with regard to public infrastructure
and economic development. Cities

9. The Center for Regional Economic
Issues, "A Primer on the Cleveland Area's
Fiscal Environment: Charts and Tables,"
REI Program Paper, October 1987.
10. Northeast-Midwest Congressional Coalition, "The Budget and the Region,"
Washington, D.C: Northeast-Midwest Institute, February 1987.

Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, OH 4410 1

One obvious way to break the cycle is
for the local economy to begin to
grow. Public infrastructure investment
provides the essential foundation to
support economic development.

• The Extent of the Problem
The Eagle Avenue ramp on the western edge of downtown Cleveland is
typical of the problem of public infrastructure deterioration and its effect
on urban development. This 58·year·

that have an aging industrial base
often find that they cannot afford to
maintain or improve their infrastructure because of the heavy
demand for welfare programs and the
decline in the tax base caused by a
sagging local economy.

BULK RATE
U.S. Postage Paid
Cleveland, OH
Permit No. 385

Analysis shows that public investment
is necessary for future local economic
development. In many cases, however, cities find themselves in a nowin situation when trying to juggle
their budgets. If city governments
attend to the immediate welfare
needs of the community at the sacrifice of public investment, then these
needs will continue to grow as economic development is stifled. If they
attend to public infrastructure needs,
which can promise more long- term
than short- term benefits, then substantial groups within the community
may suffer.

Material may be reprinted provided that
the source is credited. Please send copies
of reprinted materials to the editor.
Address Correction Requested:
Please send corrected mailing label to the Federal Reserve Bank of Cleveland, Research Department, P.O. Box 6387, Cleveland, OH 44101
ISSN 0428·1276

old structure has received considerable attention in the last year. The only
convenient major transportation link
between rwo key areas of the city, the
ramp was unsafe for several years and
without considerable repair would
have had to be closed. Closing the
ramp would limit access to the surrounding industrial region, threatening to raise the cost of doing business
in this area and to cause the possible
flight of businesses.
We focus on the Eagle Avenue ramp
not because it is unique, but because
it is only one example of the thousands of roads, bridges, and other
public structures that share a similar
condition. Comparable stories could
be told about bridges and ramps in
Pittsburgh, Chicago, or Detroit that
need repair and that in various
degrees impede economic activity.

-

Public infrastructure deterioration
has an important effect on urban
economic development. Many cities
with an aging industrial base are
caught between the need to maintain or improve public capital stock
and the immediate demand for
community welfare programs. Neglecting public infrastructure may
make it more difficult for these cities
to achieve future economic growth.

This highlights a problem that
plagues mature cities. As time passes,
the location of economic activities
within a city or urban area changes.
However, local governments are
obliged in many cases to maintain a
large portion of the existing infrastructure, even when it is used below
capacity. Maintaining the existing capital stock can be a substantial burden.
In the Cleveland area, for example,
every dollar that metropolitan
governments spend on public infrastructure (such as highways, water
treatment and distribution, sewers, or
airports) is used just to maintain the