From Daniel Wilson, “Are Fiscal Stimulus Funds
Going to the ‘Right’ States?” at the SF Fed (h/t Torsten Slok at DB):
…While
it is too early to tell whether the overall stimulus
package will have its intended effects, this review
suggests that, by and large, the distribution of federal
stimulus funds is indeed tilted toward those states most
likely to spend the funds quickly and effectively.
Figure 1: Are Fiscal Stimulus Funds
Going to the “Right” States?
The Letter continues in the conclusion:
The Fiscal Relief Fund, however, appears to be
well-targeted because it is geared toward those states
with the most serious fiscal strains.And the sheer
magnitude of the $90 billion fiscal relief program is
enough to ensure that ARRA fiscal aid funds will
in aggregate be allocated to those states most likely
to spend the money quickly. What’s more, aid provided
to states to fund additional unemployment
insurance benefits is directly aimed at getting money
into the hands of unemployed people, who are generally
considered to have high propensities to spend
rather than save.
Of course, readers who do not believe in the existence of economic slack will be unconvinced by this demand-side argument.
For earlier discussion of the timing of stimulus, see [1] [2]; for size, see [3]; for range of effectiveness (from CBO): [4]; for an explanation of the theoretical divide in assessments, see: [5]; for a primer on one real business cycle view of the world, see: [6].
Update 6pm Pacific: Here’s an exchange between myself on Garett Jones on CBS’s Moneywatch debating the merits of the stimulus package.
Menzie, do you think the best method to determine need or effectiveness of stimulus is by the size of the state budget shortfall?
While I like the idea of giving money to the states, it seems that population or a projected return on investment would be better allocation method? I just do not trust government budget accounting. Illinois has plugged it budget shortfal through sale – lease back arrangements. The cash from the sale plugs the current budget, but creates a future cash flow void.
Menzie wrote:
Of course, readers who do not believe in the existence of economic slack will be unconvinced by this demand-side argument.
Menzie,
How right you are! Most of the “slack” is malinvestment that will never be able to be used. For example the “slack” of drywall, paint, nails, the cement slab, and on and on used to build half a house now sitting idle cannot be recovered to be used used to build a much needed school. The steel in the cars sitting idle on showroom floors cannot be used as rebar to repair bridges. Because “slack” is determined in the aggregate the Keynesian totally misses the practical day to day concerns of living.
But there is another phenomenon. Banks are being paid interest on their reserves (the FED’s way of creating negative interest rates – paying banks to take their money. That seem really smart doesn’t it?) so the banks are not lending. They can make money from the FED with no risk. So money that is dumped into the economy by the states will ultimately go into bank reserves and draw risk-free interest. So much for the multiplier effect. And because there is no fundamental change in how they do “business” the over-spending states will soon be back at the federal trough for another dose of swill.
Proof, once again, that Congress, in its inefficient manner, does obey some rational laws of supply and demand.
Change the direction of causality and you have poorly run (and presumably inefficient) state governments getting most of the stimulus funds. This suggest the stimulus money is going to the places where its least likely to be invested well.
The x-axis should really be some change variable (e.g. increase in budget deficit). Its more interesting to see if funds are going to the places most likely to have slack resources.
I agree with Matt, it is depressing to witness all this turmoil and Congress continues to do the “wrong” thing. As a citizen of this country, it is saddening day by day. What happened to the change we were promised?
Menzie-
Can you give an historical example of a stimulus program that was effective?
I appreciate that we appear to be allocating federal funds across US states in a reasonably equitable manner, but I think it misses a larger question: How are federal funds being allocated across sectors?
A quick look at a Bloomberg news report a couple of weeks ago suggests we are committed to spending (vs. actual expenditures) SEVEN TIMS as much money (Treasury, other USG depts/agencies, and the Fed) to Wall Street firms ($9.3 trillion) as we are to American states, businesses, and households ($1.3 trillion). We’ve also backstopped bad GSE debt with a couple of trillion in additional Treasury commitments.
So, is that a reasonable allocation of federal funds??
Prior to the recession states had built up, in aggregate, a record level of reserves. We could expect a state with more reserves to provide a weaker impact from Federal aid, so the budget shortfall could be a misleading indicator, in and of itself.
There is the contrary moral hazard issue; you would not want to reward or punish states with more or less aid, depending on how neglectful they have been at establishing reserves for rainy days.
This is just an observation not a charge of intent, but look at the distribution by those states going Democrat in the past election and those going Republican, especially the smaller states. This could be because of political distribution, but it could also be that Republicans are better at running state governments, or something else.
DickF is right. You can almost draw a line between Kansas and Nevada where the “blue” states begin. I can’t say that this is surprising, but it’s nice to have confirmation. Thanks Minzie.
Mike: Excuse my confusion, but OH, MI, ME, VA, IA, FL, MD, NC, CO are all to the left of the indicated dividing line, but went “blue” in 2008.
Give me a break. The answer to the question, “Are Fiscal Stimulus Funds Going to the ‘Right’ States,” is obvious. It is always an error when government planners make the decisions and transfer funds from one group to another. What we need is for the government to stop meddling and to let the malinvestments be liquidated by the markets as should happen in a free market system. We got in this mess due to interventions of the Fed and the government. More intervention will not help us.
2008 was an anomalous observation resulting mostly from the deep hatred of George W. Bush. I’m still amazed at how many people voted against a candidate who was neither nominated nor eligible for the ballot.
A more realistic look reveals that it was the first time a democrat had won NC since 1976 and VA since 1964. CO has only been blue one other time since ’64 and even that was during the infamous Perot election. OH and FL would more accurately be described (and are every four years ad nauseam) as “swing” states than as truly conservative.
That leaves LA on the right and 3 ?blues? on the left, all of which I believe are more than adequately covered by the “almost” in my last post. Are you really going to stake your opposition to this obvious divide on 4 misbehaving observations?
Mike: If you want to re-categorize to account for “noise” associated with the 2008 election, then that’s your prerogative. Of course, this is an issue that is similar in structure to “is it trend or cycle?”.
Vangel: Would you like to provide some substantiating data (numbers, regression coefficients, anything) for your wide-ranging assertion?
I have to say, while there may be some truth to the inefficiency of government allocation of funds, doing nothing and ‘letting the free market’ fix things, hardly deals with the most pressing problems facing the U.S. economy today. Even if malinvestments were liquidated quickly, the credit markets are still frozen for the present, consumer confidence in future growth is still low, and the private sector is in no position to promise a quick recovery to the growing number of unemployed. First, many would argue rightly that it was not too much government intervention that got us into this mess, but too little. Second, it was precisely the government’s inactivity that aggravated the Great Depression; rather than increase the money supply the government let it fall, which pushed up interest rates and depressed the economy even further than it already had been. Finally, while fiscal spending does not always work the way it should, in severe economic downturns it is the only lever (next to monetary policy) that can be used to ease the economic blow to millions of people–many people staring at unemployment probably appreciate the effort to get them the checks that will keep their families fed.