Bureau of Business Research


Date of this Version



Kansas University BusinessTechnical Report 05-0513, May 2005.


Economic research studies in general have not found that more highways lead to a larger economy in states and regions. Over the last three decades, the presence of more highway capital in a state has not been found to attract more private capital to the economy. Most studies have not found that highways, and new investment in highways, increase the level of employment or labor earnings in the economy overall. Finally, most studies have found that the presence of more highways in a state has done little over the last three decades to make state economies more productive.

To be sure, studies find localized effects. All but the most remote rural counties grew after receiving major investments in interstate and state highways, particularly in key sectors such as manufacturing. This localized growth tended to be part of a reorganization of industry within the larger economy, however, rather than net growth. Counties receiving a highway investment grew, but neighboring counties declined as business activity was drawn toward the highway. No overall growth was observed for states or regions.

What explains these findings? The problem may be a tendency to over-invest in the highway system—in other words, the problem has been a failure to ration investment to only the most critical projects. Public roads and highways can contribute to the efficient functioning of the economy, and recent capital investments have undoubtedly included many worthy projects, including investments to maintain and rebuild the existing highway system as it depreciates over time. But there also may have been too many unnecessary investments in new and expanded highways. The net result is that additions to highway capital stock during the last three decades (over and above maintenance and upkeep) on the whole have not contributed to greater economic activity.

Public highway investments must be limited to high value investments because these investments are funded with tax dollars. Public highway investments can only grow the economy if investments are worth their cost in terms of taxation. The bottom line is that highways must encourage economic activity at least as much as taxation discourages it. If public highway investments cannot be effectively rationed, overinvestment will discourage private sector activity. But if government and government agencies can limit highway capital investments to needed maintenance and rehabilitation projects and critical new investments that are worth their cost in terms of taxation, public highways can make a clear contribution to productivity in state and regional economies.

The performance of states in allocating highway funds is critical. Highways have accounted for between one-quarter and one-third of state and local government capital outlays over the last two decades (United States Department of Commerce, 2001; 2004). State highway capital investments alone accounted for half of the $100 billion that states spend on the road and highway system (U.S. Department of Transportation, 2004). States and regions must focus on rationing highway investments to only high value projects where the benefits of the projects exceed their costs.