Working Paper: NBER ID: w21680
Authors: Gerald Carlino; Robert P. Inman
Abstract: The Great Recession and the subsequent passage of the American Recovery and Reinvestment Act returned fiscal policy, and particularly the importance of state and local governments, to the center stage of macroeconomic policy-making. This paper addresses three questions for the design of intergovernmental macroeconomic fiscal policies. First, are such policies necessary? Analysis of US state fiscal policies show state deficits (in particular from tax cuts) can stimulate state economies in the short-run, but that there are significant job spillovers to neighboring states. Second, to internalize these spillovers, what central government fiscal policies are most effective for stimulating income and job growth? Both federal tax cuts and transfers to households and firms and intergovernmental transfers to states for lower income assistance are effective, with one and two year multipliers greater than 2.0. Third, how are states, as politically independent agents, motivated to provide increased transfers to lower income households? The answer is matching (price subsidy) assistance for such spending. The intergovernmental aid is spent immediately by the states and supports assistance to those most likely to spend new transfers.
Keywords: Fiscal Policy; Economic Unions; State Governments; Job Growth; Intergovernmental Transfers
JEL Codes: E62; H77
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| State deficits (H62) | Local economies (R11) |
| State deficits (H62) | Job growth in neighboring states (J69) |
| Federal tax cuts (H29) | Income growth (O49) |
| Federal tax cuts (H29) | Job growth (O49) |
| Intergovernmental transfers (H77) | Income growth (O49) |
| Intergovernmental transfers (H77) | Job growth (O49) |
| Matching price subsidy assistance (H53) | State transfers to lower-income households (H53) |
| State transfers to lower-income households (H53) | Immediate spending by states (H76) |
| Federal aid (F35) | State economic performance (H79) |