Stimulus Package Analysis: Which Type of Spending Created The Most Jobs?

Bruce Sacerdote and James Feyrer, both of Dartmouth, have produced a paper that looks at how the stimulus package (American Recovery and Reinvestment Act) affected employment, and which type of spending had the most (and least) amount of impact. It’s among the first detailed analyses of employment and earnings effects from the stimulus that uses actual employment outcomes. Here’s the abstract (full version here):

We use state and county level variation to examine the impact of the American Recovery and Reinvestment Act on employment. A cross state analysis suggests that one additional job was created by each $170,000 in stimulus spending. Time series analysis at the state level suggests a smaller response with a per job cost of about $400,000. These results imply Keynesian multipliers between 0.5 and 1.0, somewhat lower than those assumed by the administration. However, the overall results mask considerable variation for different types of spending. Grants to states for education do not appear to have created any additional jobs. Support programs for low income households and infrastructure spending are found to be highly expansionary. Estimates excluding education spending suggest fiscal policy multipliers of about 2.0 with per job cost of under $100,000.

The authors split federal spending into three types:

Agencies providing block grants to fund local government employment, including spending by the Departments of Education and Justice used to fund teachers and police;

Support to low-income families, including spending by the Departments of Agriculture, Health Education and Welfare, and Housing and Urban Development, a large component of which was food stamps, Medicaid, and rental assistance

Paying for new infrastructure projects, especially through building projects funded by the Departments of Transportation and Energy.

Their results show that certain types of spending are more effective at creating jobs than others.

Perhaps most intriguing is our analysis of how the impacts on employment appear to differ by type of spending. Transfers to the states to support education and law enforcement appear to have little effect. This is consistent with a model where the states consider the grants to be temporary and therefore avoid making permanent changes based on the transfer. States may have used the money to lower borrowing or limit tax increases. Cogan and Taylor (2010) find that this is the case.

On the other hand, support for low income households appear to have been extremely effective with Keynesian multipliers of over 2 and a cost per job of under $100,000. This is consistent with low income individuals having a high marginal propensity to consume. Infrastructure spending such as highway projects had impacts that were nearly as large. This all suggests that a stimulus package that did not include state level grants for local services would have been more effective per dollar than the actual stimulus package.

Though they conclude that the stimulus was generally effective, the authors point out the fundamental problem with evaluating its effectiveness: The lack of a counterfactual. We’ll never know what would’ve happened if we hadn’t had the stimulus. Which is why the “things would’ve been much worse…” story has been difficult for the Obama administration to sell, particularly with unemployment still above 9%.