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Is public expenditure productive? Is there a shortfall or excess in public capital investment? We address these old issues in the light of new econometric tools. It is argued that the Cobb‐Douglas specification that ignores nonlinearity inherent in the functional relationship of the production technology causes incorrect estimates of input elasticities. To avoid possible model misspecification, we use Li‐Racine generalized kernel estimation. This procedure is used to estimate the returns to private capital, employment, and public capital in gross state product from a panel of 48 states for 17 years. In contrast to previous studies, we find that the return to public capital is positive and significantly different from zero.