The Effects of Stimulus Spending on Surrounding Areas

November 19, 2015
government spending and commuters

Government spending on goods and services from the American Recovery and Reinvestment Act of 2009 (ARRA) reached around $350 billion.1 Some of this spending impacted not just the areas receiving the money, but surrounding areas as well, thanks to commuters.

In an article in The Regional Economist, Assistant Vice President and Economist William Dupor explained the “government spending multiplier.” In theory, government spending not only combats recessions through directly increasing gross domestic product and hours worked, but also through spillover effects as additional income in workers’ hands is spent.

The ARRA provided a way to measure this multiplier effect. Recipients of ARRA dollars were required to file quarterly reports that contained ZIP code-level records of dollar amounts, among other information. In the article Dupor discussed the results of a paper he wrote with Peter McCrory, formerly at the St. Louis Fed and now a Ph.D. student in economics at the University of California-Berkeley, in which they used this information in their analysis of the multiplier effect.2

Working under the observation that about one-third of workers in a typical county are employed outside their county of residence, Dupor and McCrory organized the U.S. into about 1,300 distinct local labor markets, using U.S. Census Journey to Work data. These markets were divided further into two subregions:

  • One containing the largest county in the market
  • One made up of the remaining counties in the market

The authors then looked at the effects of government spending in both subregions. They used each subregion’s employment level and wage bill (total amount paid to workers).3 The effect of spending in one subregion is the “direct effect,” and the spending occurring in the neighboring subregion is the “spillover effect.”

Economic Activity and Commuting

Dupor and McCrory found substantial direct and spillover effects within regions interconnected by commuter flows. As noted in the article, stimulus spending in one county increased employment and wage payments in places two to three counties away, as long as the areas were sufficiently connected, as measured by commuting patterns. They found that:

  • One dollar of ARRA spending in a subregion increased wage payments by $0.64 in that subregion.
  • It increased wage payments in the neighboring subregion by $0.50.

In his article, Dupor wrote: “Thus, combining both the direct and spillover effects, there is a greater than one-for-one increase in the wage bill with respect to an increase in the stimulus spending.”

Employment Levels

Dupor and McCrory also examined changes in the employment level to gauge economic activity. They found that, following the first two years after ARRA’s enactment, $1 million of stimulus in one part of a local labor market increased employment by 10.3 persons and increased employment in the rest of the local labor market by 8.5 persons.4

Dupor concluded in his article: “Besides providing evidence in favor of a government spending multiplier, our results should provide caution to other researchers, as well as to policymakers. Failing to take into account positive spillovers could lead policymakers to underestimate the total social benefit of government fiscal intervention.”

Notes and References

1 Drautzburg, Thorsten; and Uhlig, Harald. “Fiscal Stimulus and Distortionary Taxation.” Working Paper 13-46, Federal Reserve Bank of Philadelphia, November 2013. 

2 More information about their analysis can be found in Dupor, William; and McCrory, Peter. “A Cup Runneth Over: Fiscal Policy Spillovers from the 2009 Recovery Act.” Working Paper 2014-029C, Federal Reserve Bank of St. Louis, October 2014, revised August 2015.

3 Data on GDP and its components are not available at the county level.

4 In this study, one job refers to one job-year, or one year of employment for a person.

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