Are State Governments Roadblocks to Federal Stimulus? Evidence from Highway Grants in the 2009 Recovery Act

From Sylvain Leduc and Dan Wilson:

We examine how state governments adjusted spending in response to the large temporary increase in federal grants under the 2009 American Recovery and Reinvestment Act (ARRA). We concentrate our analysis on ARRA highway grants, which were especially likely to crowd out states’ own highway funding given the lack of matching requirements and according to past research on federal highway grants. The mechanism used to apportion ARRA highway grants to states allows us to isolate exogenous changes in these grants. In addition, we show that the original 1944 proposed layout of the interstate highway system strongly predicts the cross-state distribution of the ARRA highway grants and we use this layout as an alternative instrument. We find that states increased highway spending in 2010 nearly dollar-for-dollar with their apportioned grants, implying little if any crowd-out. Moreover, we find that over the entire 2009- 2011 period, ARRA highway grants crowded in highway spending, resulting in roughly two dollars in spending for each dollar in grants. We show that our results are not unique to the ARRA period, but rather are consistent with a strong effect from grants dating back at least to the early 1980s. This latter result contrasts with earlier research (Knight 2002) and we document the sources of the difference.

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About ozidar

Graduate student at UC Berkeley, studying public finance & labor economics. https://sites.google.com/site/omzidar/
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7 Responses to Are State Governments Roadblocks to Federal Stimulus? Evidence from Highway Grants in the 2009 Recovery Act

  1. Pingback: Links for 07-31-2013 | Symposium Magazine

  2. ThomasH says:

    This result does not take account of the possibility that other kinds of S&L spending fell as S&L expenditures were shifted to transportation. To be totally effective, the Federal aid should come with a requirement of an increase in debt.

    • mike gramig says:

      With regard to the specific policy action of the ARRA, the fact remains that it in and of itself did not crowd out spending. It just points out the fungibility of money and that anything lerss than global policy action can cause this effect. The point remains that stimulus has stimul;us effects and that more extensive use of this policy tool is indicated by its effects.

      • Thomas L. Hutcheson says:

        I agree. It’s one of the drawbacks of requiring special legislation to do contercyclical policy. The problem is that S&L governments cannot run larger deficits during periods of high unemployment as the Federal government can (although the fall in interest rates should encourage them to undertake projects that they would not when interest rates are higher). A much larger part of counter-cyclical policy should be automatic, such as tying the duration of unemployment insurance to the rate of unemployment, making grants-in-aid partially dependent on the fall in S&L tax revenues as a result of recession, perhaps funding a higher portion of Medicaid federally during rescessions, etc.

        >________________________________ > From: owenzidar >To: thutcheson2000@yahoo.com >Sent: Saturday, August 10, 2013 1:15 PM >Subject: [New comment] Are State Governments Roadblocks to Federal Stimulus? Evidence from Highway Grants in the 2009 Recovery Act > > > > WordPress.com >mike gramig commented: “With regard to the specific policy action of the ARRA, the fact remains that it in and of itself did not crowd out spending. It just points out the fungibility of money and that anything lerss than global policy action can cause this effect. The point rem” >

    • mike gramig says:

      Sorry for the sloppy writing –
      With regard to the specific policy action of the ARRA, the fact remains that it, in and of itself did not necessarily crowd out spending. Your observation, well noted, just points out the fungibility of money and that anything less than global policy action can allow this effect. The point remains that federal spending has stimulus effects and that more extensive use of this policy tool is indicated by those effects.

  3. Pingback: Stae Governments are NOT Roadblocks to Federal Stimulus | Symposium Magazine

  4. Pingback: Sylvain Leduc and Dan Wilson: Are State Governments Roadblocks to Federal Stimulus?: Noted for August 4, 2013

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