Working Paper: NBER ID: w16561
Authors: Price V. Fishback; Valentina Kachanovskaya
Abstract: If there was any time to expect a large peace-time multiplier effect from federal spending in the states, it would have been during the period from 1930 through 1940. Interest rates were near the zero bound, and unemployment rates never fell below 10 percent and there was ample idle capacity. We develop an annual panel data set for the 48 states from 1930 through 1940 with evidence on federal government grants, loans, and tax collections and a variety of measures of economic activity. Using panel data methods we estimate a multiplier, defined as the change in per capita state economic activity in response to an additional dollar per capita of federal funds. The state per capita personal income multiplier with respect to per capita federal grants was around 1.1. Some point estimates for multipliers for nontransfer grants and nonfarm grants were higher but not statistically significantly different from one. There is some evidence that AAA farm grants had negative or no effect on personal income. Federal grants had stronger effects on consumption than on personal income, but they had no positive effect on various measures of private employment.
Keywords: federal spending; multiplier effect; Great Depression; state economies
JEL Codes: E62; H50; N12; N42; R11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| per capita federal grants (H77) | per capita state personal income (D31) |
| Federal grants (I28) | consumption (E21) |
| Federal grants (I28) | private employment (J68) |
| nontransfer grants (H77) | per capita state personal income (D31) |
| nonfarm grants (H81) | per capita state personal income (D31) |
| AAA farm grants (Q18) | personal income (D31) |
| Federal spending (H51) | local economic activity (R11) |