Why the Federal Government Shouldn’t Use the States to Implement Fiscal Stimulus

[C]hannelling the stimulus package through state governments exposed it to agency costs, free-riding problem, and political expediency. As a result, the stimulus has failed to meet its objectives at the state level. The lesson is that fiscal stimulus should be conducted centrally.

That’s Robert Inman, writing over at Vox. He summarizes forthcoming research with Philadelphia Fed economist Gerald Carlino (I don’t believe the draft is on line yet). They find:

[A]n income multiplier for federal transfers to states of only 40 cents for each dollar of federal aid even after 20 quarters.

He also sums up his solo paper on states in fiscal distress:

ARRA’s assistance was largely distributed as a per capita transfer. Projected fiscal deficits did lead to more assistance, but ARRA covered at most $0.25 of each dollar of projected state budgetary shortfalls. The other important determinant of ARRA funding was whether the state’s Senators had membership on an important congressional committee making fiscal policy. Controlling for state population, deficits, and committee membership, the state’s rate of unemployment at the time of passage had no statistically significant impact on the level of assistance.

These results largely corroborate Veronique deRugy’s work.

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