Defence spending – and perhaps government spending more generally – may not be a useful way to boost employment at the national level. That is one of the conclusions of research by William Dupor, to be presented at the Royal Economic Society''s annual conference in Brighton in March 2016. At the same time, his study finds that increased military spending has a long-term positive effect on household incomes.
Dr Dupor, an economist at the Federal Reserve Bank of St. Louis, begins by noting that at $840 billion, the 2009 stimulus package had a larger budget impact in the United States than its military appropriations in Iraq since 9/11 (1). Yet years afterwards, Americans remain nearly evenly divided on whether the stimulus actually worked (2).
One set of studies that commentators have used as support for the stimulus (and other government spending programmes) addresses the issue by comparing whether the division of money across regions in a county correlates with job creation across those regions (3). The commentators observe that several studies have found episodes where the answer is yes (4). But does this regional evidence necessarily mean that – for a nation overall – government spending increases employment?
In this new study, Dr Dupor tackles this question and concludes that the answer is no (5). The reason is because of potential ''spillovers'' across states. As a simple example, suppose the US Defense Department buys goods in California, and this spending leads to inflows from some workers in Oregon. There would be a negative spillover of spending in California on employment in Oregon. In simple terms, the negative effect on Oregon would partially offset the positive effect on California.
Dr Dupor''s research constructs a new data set of US defence spending at the state level, covering nearly the entire period from the Second World War. He then estimates the impact of national defence spending on a state''s employment after controlling for that state''s own defence spending.
This allows him to capture both the direct (or ''local'') effect of spending as well as the spillover effect. He finds a negative spillover effect that is big enough to offset the local effect of spending in a state. This negative spillover implies that defence spending (and perhaps government spending more generally) may not be a useful way to boost employment at the national level.
Dr Dupor also studies the effect of government spending on households'' income. The results there are subtler. He finds little spillovers in the first few years following government spending and a positive spillover in the years afterward.
In the aggregate, he finds no impact on income in the short run and a positive effect in the longer run. Specifically, after 10 years, $1 of military spending increases households'' income by roughly $1.60.
''Local and Aggregate Fiscal Policy Multipliers'' (Paper previously circulated as: ''Local Fiscal Multipliers, Negative Spillovers and the Macroeconomy'') Dr William Dupor, Federal Reserve Bank of St. Louis (6)
(1) A. Belasco, ''The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11,''Congressional Research Service, Dec. 8, 2014. Congressional Budget Office, ''Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output in 2014,'' February 2015.
(2) Morning Consult, ''Poll: American Attitudes on Financial Regulation and Government Actions on Dodd-Frank, U.S. Auto Bailout, TARP and the Stimulus Package,'' June 2, 2014.
(3) H. Boushey, ''Now Is the Time To Fix Our Broken Infrastructure,'' Center for American Progress, September 22, 2011. M. Greenstone and A. Looney, ''The Role of Fiscal Stimulus in the Ongoing Recovery,'' The Hamilton Project, July 6, 2012. C. Romer, ''The Fiscal Stimulus, Flawed but Valuable,'' The New York Times, Oct. 20, 2012.
(4) D. Wilson, ''Fiscal Spending Jobs Multipliers: Evidence from the 2009 American Recovery and Reinvestment Act,'' American Economic Journal: Economic Policy, 2012. G. Chodorow-Reich, L. Feiveson, Z. Liscow and W. Woolston, ''Does State Fiscal Relief During Recessions Increase Employment? Evidence from the American Recovery and Reinvestment Act,'' American Economic Journal: Economic Policy, 2012.
(5) W. Dupor, ''Local and Aggregate Fiscal Policy Multipliers,'' Working Paper, Federal Reserve Bank of St. Louis, 2016.
(6) The opinions expressed do not reflect the views of the Federal Reserve Bank of St. Louis or the Federal Reserve System
