This analysis examines the relationship between federal public investment spending and economic development in the special case of Appalachia. We propose that the effects of federal public investment spending on economic development operate indirectly through private capital accumulation. We use a spatial lag regression model to test our ideas for the 1980s and the 1990s. In the first step, we show that average federal public investment spending from 1983-1989 and 1993-1999 has net positive effects on measures of private capital accumulation in Appalachia. In the second step, we add three indicators of county economic development in 1989/1999 and find that earnings and non-farm employment growth during the respective decades predicts higher levels of economic development at the end of the decades. However, while federal public investment spending has positive effects on measures of private capital accumulation, it has no direct effect on measures of economic development. (Contains 3 figures and 3 tables.)