THE AMERICAN RECOVERY AND REINVESTMENT ACT: Impact on local economies

01 Jun 2018

The cost of creating each new job through the American Recovery and Reinvestment Act was approximately $53,000, according to research by Bill Dupor and Peter McCrory, published in the June 2018 issue of the Economic Journal. Their study, which examines the local economic consequences of the $350 billion of government spending via grants, loans and contracts that the legislation provided, also finds that:

• Each dollar spent in the local labour market increased the wage bill by $1.14.

• This spending had a direct and indirect impact. In the counties directly receiving aid, wages increased by $0.50, whereas in the neighbouring counties of the same local labour market, wages increased by $0.64.

• The direct effect on wages was in both the goods and services sector, while the indirect effect was mainly in the services sector.

The US government passed the American Recovery and Reinvestment Act in 2009 in response to the economic downturn that started in 2007, the biggest recession since the Great Depression. The legislation was intended to stabilise the economy, create jobs and assist the regions that were most negatively affected.

According to a 2015 report by the Congressional Budget Office, this fiscal intervention cost the government approximately $840 billion. That total comprised tax relief, spending on transfer programmes, such as unemployment insurance benefits, and public spending on goods and services, such as new highway infrastructure, green energy investment, basic scientific research, salaries for educators and much more. In total, more than 30 federal agencies assisted in distribution of the spending.

The new study examines the effects of the increased spending on the local economies that received aid, and the extent to which these effects were propagated to neighbouring areas. To do this, the authors use commuting flows between US counties to divide the country into approximately 1,300 local labour markets. These are each then split into two sub-regions: the largest county by population and its neighbours.

The legislation required recipients of aid to submit reports on when and where money was being spent. The researchers use the reports from more than 570,000 recipients (businesses, government agencies, non-profit organisations) to identify how much aid each county received.

They then estimate the direct effects of the aid by studying the employment and wage bills in the different sub-regions and comparing those that received more to those that received less. Similarly, they estimate indirect effects by comparing sub-regions connected to neighbouring sub-regions that received more aid with sub-regions with neighbours that received relatively less aid.

The researchers find considerable direct and indirect effects – with each dollar of aid in a sub-region increasing its wage bill by $0.50 and its neighbour''s wage bill by $0.64. The uptick in wages in the recipient sub-regions was in both the goods and services sectors while the indirect effect was principally in the services sector. The cost of creating a job in a local labour market was approximately $53,000.

It is important to note that the local effects need not be equal to the aggregate effects of the Recovery Act, and thus should be interpreted with caution. Among other forces, the trade in intermediate goods across labour markets and the extent to which households anticipate (and react to) the future taxes required to finance the Recovery Act complicates the analysis. How to map the local estimates to the aggregate effects is the focus of research in progress.

''A Cup Runneth Over: Fiscal Policy Spillovers from the 2009 Recovery Act'' by Bill Dupor and Peter B McCrory. Bill Dupor is assistant vice president at the Federal Reserve Bank of St. Louis. Peter McCrory is a PhD candidate in economics at the University of California, Berkeley.

Bill Dupor

billdupor@gmail.com