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Are state governments roadblocks to federal stimulus? Evidence from highway grants in the 2009 Recovery Act

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  • Sylvain Leduc
  • Daniel Wilson

Abstract

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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Bibliographic Info

Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2013-16.

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Date of creation: 2013
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Handle: RePEc:fip:fedfwp:2013-16

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Keywords: Public investments ; Infrastructure (Economics) ; Roads ; State finance ; American Recovery and Reinvestment Act of 2009;

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  1. Singhal, Monica, 2008. "Special interest groups and the allocation of public funds," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 548-564, April.
  2. Gilles Duranton & Matthew A. Turner, 2009. "The Fundamental Law of Road Congestion: Evidence from US cities," Working Papers tecipa-370, University of Toronto, Department of Economics.
  3. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
  4. Sylvain Leduc & Daniel Wilson, 2012. "Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment," NBER Chapters, in: NBER Macroeconomics Annual 2012, Volume 27, pages 89-142 National Bureau of Economic Research, Inc.
  5. Michaels, Guy, 2007. "The Effect of Trade on the Demand for Skill - Evidence from the Interstate Highway System," CEPR Discussion Papers 6056, C.E.P.R. Discussion Papers.
  6. Baicker, Katherine & Clemens, Jeffrey & Singhal, Monica, 2012. "The rise of the states: U.S. fiscal decentralization in the postwar period," Journal of Public Economics, Elsevier, vol. 96(11), pages 1079-1091.
  7. Gramlich, Edward M, 1979. "Stimulating the Macro Economy through State and Local Governments," American Economic Review, American Economic Association, vol. 69(2), pages 180-85, May.
  8. Daniel J. Wilson, 2012. "Fiscal Spending Jobs Multipliers: Evidence from the 2009 American Recovery and Reinvestment Act," American Economic Journal: Economic Policy, American Economic Association, vol. 4(3), pages 251-82, August.
  9. John F. Cogan & John B. Taylor, 2012. "What the Government Purchases Multiplier Actually Multiplied in the 2009 Stimulus Package," Book Chapters, in: Lee E. Ohanian & John B. Taylor & Ian J. Wright (ed.), Government Policies and the Delayed Economic Recovery, chapter 5 Hoover Institution, Stanford University.
  10. Brian Knight, 2002. "Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program," American Economic Review, American Economic Association, vol. 92(1), pages 71-92, March.
  11. James Feyrer & Bruce Sacerdote, 2011. "Did the Stimulus Stimulate? Real Time Estimates of the Effects of the American Recovery and Reinvestment Act," NBER Working Papers 16759, National Bureau of Economic Research, Inc.
  12. Gabriel Chodorow-Reich & Laura Feiveson & Zachary Liscow & William Gui Woolston, 2012. "Does State Fiscal Relief during Recessions Increase Employment? Evidence from the American Recovery and Reinvestment Act," American Economic Journal: Economic Policy, American Economic Association, vol. 4(3), pages 118-45, August.
  13. Robert P. Inman, 2008. "The Flypaper Effect," NBER Working Papers 14579, National Bureau of Economic Research, Inc.
  14. Nathaniel Baum-Snow, 2007. "Did Highways Cause Suburbanization?," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 775-805, 05.
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