Pethokoukis, Economics, U.S. Economy

NY Fed study: Spending of stimulus funds had ‘little correlation’ with state unemployment rates

Credit: New York Fed

Credit: New York Fed

Honest proponents of the 2009 Obama stimulus will concede it failed to do what most Americans thought it was supposed to do — bring about a strong, sustainable economic recovery and dramatically lower unemployment. Most will then add, “It should have been bigger.”

A new analysis from the New York Fed raises questions whether a larger stimulus, while it might have worked better on paper or according to Keynesian economic models, would have been much more effective in reality. The study found that the allocation of stimulus funds, such as highway infrastructure investment, “had little association with state unemployment rates”:

Fiscal stimulus, in the form of large discretionary increases in federal spending and tax reductions, is often triggered by a strong and persistent rise in the national unemployment rate. The most recent example was the $860 billion (6 percent of GDP) stimulus contained in the 2009 American Recovery and Reinvestment Act (ARRA), adopted in the context of rising unemployment rates. The spending components of the program were varied, including federal transfers to state governments to support education and social services, assistance to unemployed and disadvantaged individuals, and funds for capital construction projects. The majority of the stimulus funds were allocated to state governments and, since the program was motivated by high and rising aggregate unemployment, a reasonable expectation would have been that states with high unemployment rates would receive large allocations. Our analysis of the distribution of ARRA funds across states shows that the expanded assistance to unemployed workers was indeed highly correlated with state unemployment rates. It turned out, however, that most other state allocations had little association—positive or negative—with state unemployment rates. The ultimate distribution instead seemed to reflect a number of practical considerations involved in implementing such a vast spending program.

What weakened the link between spending and unemployment? The paper offers a number of possibilities including:

1. Stabilizing state and local government budgets may have been a higher priority.

2. To get the money pushed out the door ASAP, the majority of the spending relied on temporarily augmenting the size of existing federal-aid programs to states while using the existing formulas governing the distribution of that aid.

3. Spending wasn’t just about immediate benefits like job creation, also “there was a sense that this stimulus program offered an opportunity for expanded federal funding of infrastructure and education projects that could lead to longer-term economic benefits for states.”

4. “Equity considerations” meant Washington didn’t want any state to be far above or below average. Great for North Dakota, bad for Nevada.

In short, the stimulus was inefficiently spent (not to mention it also raised the baseline for future spending). Any public choice economist would hardly be surprised at a finding that a variety of political considerations trumped the economic ones. Much better to have used monetary easing to deal with the demand side of the economy.

4 thoughts on “NY Fed study: Spending of stimulus funds had ‘little correlation’ with state unemployment rates

  1. The NY Fed is the MOST CORRUPT of the whole Federal Reserve system. By they admitting this, they MUST have some AGENDA in the background. WATCH OUT!
    Will it be WWIII or what?

  2. Spend trillion(s) and it just barely moves the dial on GDP and employment forward. Threaten to not spend $85B (or $45B) and GDP and employment will plumett and the Dark Ages will be upon us. Why do people even listen to them anymore??

    • Good question Gene, good question. But at least now they are recognizing the stimulus was not efficient. If they wanted to have stimulus of that size they just needed not to tax people, corporations, etc. by 500 billion in 2009 and 300 billion in 2010. Or something like 400 billion in 2009, 300 billion in 2010 and 100 billion in 2011. Easy stimulus, potentially much better results, same debt.

  3. China did it right their stimulus was massive in correlation to their GDP.China also knew it had to be efficient,and it was.The US stimulus was mostly transfer payments,and only a small amount went to direct infrastructure investment.It basically was a waste of time & money,poorly thought out from top to bottom.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>