Excess Capacity and Heterogeneity in the Fiscal Multiplier: Evidence from the Recovery Act joint with Arindrajit Dube, Thomas Heglandy and Ben Zipperer

Abstract:

We estimate local multipliers using cross-county variation in expenditure in the ARRA. We use within state variation, and include other demographic controls as well as a predicted employment control using an industry shift-share measure. We find that counties receiving more stimulus expenditures had followed parallel employment trends prior to the ARRA as compared to other counties. We estimate an average annualized employment multiplier of 1.211 job-years per $100K spent per county resident. We find strong evidence of heterogeneous treatment effects: the employment response is much greater in counties hit harder by the Great Recession, and hence with likely greater excess capacity. In below median excess capacity counties, the employment multiplier is 0.39. In above median excess capacity counties, the multiplier rises to 2.83. These findings imply that an employment-maximizing stimulus package targeted to high excess capacity counties would have created 83% more (3.60 million) jobs. While our findings are consistent with state-dependent fiscal multipliers, the heterogeneity is not due to the zero-lower bound since our cross-sectional variation in excess capacity holds the interest rate constant. Instead, our findings suggest that the spatial variation in multipliers reflects variation in the depth of the recession across different labor markets. Consistent with the evidence on hysteresis, we find that the employment impact of the stimulus was long lasting and have likely persisted through the current expansion.