Impact of Physical Capital on the Economy

Physical capital may not be quite as important as either human or social capital to economic growth, but major deficiencies in physical capital can nonetheless bring economic growth to a standstill.  Insufficient levels of resources, infrastructure, and environmental health make an economy substantially less competitive in the world economy.  Fixing deficiencies in any of the three (or, better yet, all three) increases economic performance.

However, unlike human and social capital, physical capital can only boost economic activity so much; past a certain point, investing in physical capital will result in diminishing returns.  Countries that attempt to force economic growth by lavish spending on glitzy infrastructure projects (often ones with a poor or negative return on investment) have ended up depriving other parts of the economy of essential funds, actually hurting long-term growth.  We are not immune to this disease, in part because politicians would rather spend billions on glamorous high-tech or vanity projects, like unnecessary airports and bridges, or the latest darling, high-speed rail, than spend the same money to much better effect on maintaining and expanding what we already have.

Similarly, past a certain point doing everything possible to keep the environment healthy becomes economically counterproductive – this has been the biggest tug-of-war between the environmentalist movement and their opponents, who see environmental causes as too detrimental to the economy.  Resources, too, are necessary for a nation and its economy to function, but an over-abundance of valuable resources has consistently proven more of a headache than it’s worth; look up “resource curse” if you aren’t already familiar with the phenomenon.

The US isn’t facing these kinds of too-much-of-a-good-thing problems, for the most part – our infrastructure budget has included some true boondoggles, but for the most part we desperately need more investment (from the private sector as well as governments) in our infrastructure; our resource wealth, while very impressive, is not so large that we’ve become completely immune to a variety of resource shortages; and the state of our environment, while much improved over the last few decades, is still costing us hundreds of billions of dollars worth of damage each year.  All told, it’s not an overstatement to say that the future growth of our economy is highly dependent on us fixing a lot of physical capital issues.

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