Excess Capacity and Heterogeneity in the Fiscal Multiplier: Evidence from the Obama Stimulus Package

Arindrajit Dube, Ethan Kaplan and Ben Zipperer, Working paper, August .


We estimate local multipliers from the ARRA (Obama stimulus) bill using cross-county variation in expenditure. We use within-state variation, and include other demographic controls as well as a predicted employment control using an industry shift-share measure. We estimate a peak annualized employment multiplier of 1 job-year per $100K spent per county resident and a 2 year average multiplier of 0.75. We do not find nonlinearity in the marginal treatment effect of a dollar in stimulus spending, but do find strong evidence of heterogeneous treatment effects: the employment response is much greater in counties with greater excess capacity. In above median excess capacity counties, the 2 year multiplier is 1.38. The level of spatial aggregation of the estimation has a large impact on estimation. Spatially aggregated multipliers rise to as high as 3.28 jobs per $100K spent per resident. Our smaller county-level estimates imply that ARRA created 1.97 million jobs. A spatially optimal stimulus, targeted to high excess capacity counties, would have created 83% more (3.60 million) jobs. Our cross-sectional results are consistent with macro-economic models with state-dependent fiscal multipliers. In addition, they also suggest that the state dependency arises from the presence of excess capacity in the economy during deep recessions, and not solely due to the zero lower bound on nominal interest rate. Our evidence is also inconsistent with equilibrium models where a positive multiplier arises from a drop in wealth resulting in an increase in the labor supply

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