Spatial spillovers and the effects of fiscal stimulus: evidence from pandemic-era federal aid for state and local governments

ABSTRACTWe analyse whether US federal aid to state and local governments impacted economic activity through either direct or cross-state spillover effects during the COVID-19 pandemic. Deploying an instrumental-variables framework rooted in the funding advantage of states that are over-represented in Congress, we find that federal assistance had significantly less impact on state and local government employment, as well as broader measures of economic activity, than estimates from prior crisis responses would imply. The modest employment impacts we find stem largely from the direct effect of states’ own aid allocation, as opposed to spillovers across state lines. These findings point to an important role for variations in fiscal policy transmission mechanisms, namely that cross-state spillovers are less likely to be important when some of the key mechanisms for such spillovers, like robust interjurisdictional supply chains and patterns of consumption, are muted or shut down.KEYWORDS: COVID-19employmentfiscal federalismfiscal policyspatial macroeconomicsspilloversJEL: E6H5H7 ACKNOWLEDGEMENTThis article is based on the following working paper:Clemens, Jeffrey, John Kearns, Beatrice Lee, and Stan Veuger. ‘Spatial Spillovers and the Effects of Fiscal Stimulus: Evidence from Pandemic-Era Federal Aid for State and Local Governments.’ AEI Economics Working Paper 2022-14.DISCLOSURE STATEMENTNo potential conflict of interest was reported by the author(s).Notes1 These four pieces of legislation are the March 2020 Families First Coronavirus Response Act (FFCRA) and Coronavirus Aid, Relief, and Economic Security (CARES) Act, the December 2020 Response and Relief Act (RRA) of 2021 and the March 2021 American Rescue Plan Act (ARPA) of 2021.2 Nakamura and Steinsson (Citation2014), as well as Ramey (Citation2016, Citation2019) and Chodorow-Reich (Citation2020), provide frameworks for interpretation of the different estimates in these literatures.3 We use data from the CRFB’s COVID-19 Money Tracker as of August 19th, 2021.4 As in Clemens and Veuger (Citation2021), ‘[w]e obtain information on the distribution of transit funds for the RRA and ARPA from the US Federal Transit Administration (Citation2021a, Citation2021b). Data on the allocation of ARPA assistance to non-public schools come from the US Office of Elementary and Secondary Education (Citation2021). We obtain estimates of ARPA section 9817 matching increases from Chidambaram and Musumeci (Citation2021). We approximate the allocation of ARPA section 9819 federal matching funds for uncompensated care using FY2021 estimates of federal disproportionate share hospital allotments by state from the Medicaid and Chip Payment Access Commission (Citation2021).’ The Coronavirus Capital Projects Fund outlined in ARPA is distributed according to guidance from the United States Department of the Treasury (Citation2021a).5 Congressional representation per million residents is calculated as #ofRepresentativess+#ofSenatorssPops,y,2020/1,000,000. Clemens and Veuger (Citation2021) show that assigning greater weight to the number of senators does not qualitatively affect the estimated importance of congressional over- and under-representation.6 Supplemental estimates, in which states are paired under the closest regions method, are shown in Appendix Table A3 in the online supplemental data for completeness. Similarly, unweighted estimates in which states are paired using the economic-regions method can be found in Appendix Table A4.7 Notably, while job preservation was a primary goal of both the PPP and federal aid to state and local governments, both programmes targeted additional outcomes as well. A broader analysis of all targeted outcomes, which is beyond this paper’s scope, would be needed to arrive at a complete comparison of each programme’s cost effectiveness.