The government spending multiplier: Evidence from county level data

Abstract

The passage of the American Recovery and Reinvestment Act (ARRA) of 2009 has brought fiscal policy to the forefront once again. The size of the “multiplier” of government spending becomes of critical importance for determining the effect of stimulus programs. Yet there is considerable controversy about this issue. This study adds to the discussion on the size of the multiplier by using earnings data by county. This allows the creation of a panel data that includes 3141 counties for the time period 2001–2012. We estimate the federal government spending multiplier to be approximate 1.5. Our estimate for state and local spending multipliers are considerably smaller. Our results have implication for policy in that federal programs will be more effective for stabilization county economies than state or local spending.

Keywords:

• Fiscal policy
• Government spending multiplier
• Zero bound monetary policy

Acknowledgements

Funding for the research for this paper came from the Domenici Institute at New Mexico State University.

Notes

1 See CBO, 2012, Table 2, pp. 6–7.

2 Bureau of Economic Analysis, Personal income and earnings by industry (Tables CA05 and CA05N) (http://bea.gov/iTable/iTable.cfm%3Freqid=70%26step=1%26isuri=1%26acrdn=5).

3 Of course, states can and do run capital budget deficits by routinely funding construction projects by issuing bonds.

4 For example, In Grant County, NM, the largest employer is the Freeport McMoRan-owned Chino & Tyron cooper mines. The mines were shut down in 2009, then re-opened in 2010. To reopen the mine required a $150 million refurbishment. Total earnings in Grant County adjusted for inflation increased by 6.4% in 2008 as the mines were prepared for closure, fell 11.4% in 2009 after closure, and increased by 12.0% in 2011 when the mines re-opened. During the same time period, real government earnings were −0.1% in 2009, but otherwise grew between 0.4% and 2.4%.

5 Specifically, Auerbach and Gorodnichenko (2011) conclude that the long run multiplier over five years was between 0 and 0.5 for expansions and from 1 to 1.5 for recessions. See Riera-Crichton, Vegh, and Vuletin (2014) and Christiano, Eichenbaum, and Rebelo (2011).