Stimulate the economy or local and state spending?

One  nearly invisible issue in the stimulus debate is this:  How will this affect state and local budgets and behavior? Given the magnitude of the proposed infusion,  it’s gotten very little attention.

The theory of grants isn’t esoteric, it’s an entire subject in public finance.

Consider the flypaper effect.  Intergovernmental transfers may stimulate more local public spending, than an equivalent dollar of citizen funds.  That is, federal money “sticks where it hits.”  There are many competing explanations.

Here is a good survey by Thaler and Hines (1996).