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Are State Governments Roadblocks to Federal Stimulus? Evidence on the Flypaper Effect of Highway Grants in the 2009 Recovery Act

Author

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  • Leduc, Sylvain

    (Federal Reserve Bank of San Francisco)

  • Wilson, Daniel J.

    () (Federal Reserve Bank of San Francisco)

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.

Suggested Citation

  • Leduc, Sylvain & Wilson, Daniel J., 2013. "Are State Governments Roadblocks to Federal Stimulus? Evidence on the Flypaper Effect of Highway Grants in the 2009 Recovery Act," Working Paper Series 2013-16, Federal Reserve Bank of San Francisco, revised 29 Sep 2015.
  • Handle: RePEc:fip:fedfwp:2013-16
    DOI: 10.24148/wp2013-16
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    References listed on IDEAS

    as
    1. Sylvain Leduc & Daniel Wilson, 2013. "Roads to Prosperity or Bridges to Nowhere? Theory and Evidence on the Impact of Public Infrastructure Investment," NBER Macroeconomics Annual, University of Chicago Press, vol. 27(1), pages 89-142.
    2. Gramlich, Edward M, 1979. "Stimulating the Macro Economy through State and Local Governments," American Economic Review, American Economic Association, vol. 69(2), pages 180-185, May.
    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. Òscar Jordà, 2005. "Estimation and Inference of Impulse Responses by Local Projections," American Economic Review, American Economic Association, vol. 95(1), pages 161-182, March.
    5. 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 251-282, August.
    6. 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.
    7. Guy Michaels, 2008. "The Effect of Trade on the Demand for Skill: Evidence from the Interstate Highway System," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 683-701, November.
    8. 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.
    9. 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 118-145, August.
    10. Gilles Duranton & Matthew A. Turner, 2011. "The Fundamental Law of Road Congestion: Evidence from US Cities," American Economic Review, American Economic Association, vol. 101(6), pages 2616-2652, October.
    11. Nathaniel Baum-Snow, 2007. "Did Highways Cause Suburbanization?," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 775-805.
    12. Robert P. Inman, 2008. "The Flypaper Effect," NBER Working Papers 14579, National Bureau of Economic Research, Inc.
    13. 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.
    14. 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.
    15. 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.
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    Citations

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    Cited by:

    1. Chang Liu & Guangrong Ma, 2016. "Taxation without representation: local fiscal response to intergovernmental transfers in China," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(5), pages 854-874, October.
    2. Emma Hooper & Sanjay Peters & Patrick Pintus, 2018. "The Causal Effect of Infrastructure Investments on Income Inequality: Evidence from US States," Working Papers halshs-01684565, HAL.
    3. Gerald A. Carlino & Robert P. Inman, 2013. "Macro fiscal policy in economic unions: states as agents," Working Papers 13-40, Federal Reserve Bank of Philadelphia.
    4. Clemens, Jeffrey & Cutler, David M., 2014. "Who pays for public employee health costs?," Journal of Health Economics, Elsevier, vol. 38(C), pages 65-76.
    5. Jordà, Òscar & Schularick, Moritz & Taylor, Alan M., 2015. "Betting the house," Journal of International Economics, Elsevier, vol. 96(S1), pages 2-18.
      • Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2014. "Betting the House," NBER Chapters,in: NBER International Seminar on Macroeconomics 2014, pages 2-18 National Bureau of Economic Research, Inc.
    6. Reingewertz, Yaniv, 2014. "Fiscal Decentralization - a Survey of the Empirical Literature," MPRA Paper 59889, University Library of Munich, Germany.
    7. Mario J. Crucini & Nam T. Vu, 2017. "Did the American Recovery and Reinvestment Act Help Those Most in Need? A County-Level Analysis," NBER Working Papers 24093, National Bureau of Economic Research, Inc.
    8. repec:kap:iaecre:v:23:y:2017:i:4:d:10.1007_s11294-017-9655-7 is not listed on IDEAS

    More about this item

    Keywords

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

    JEL classification:

    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H76 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Other Expenditure Categories
    • R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning
    • R53 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Public Facility Location Analysis; Public Investment and Capital Stock

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