Stimulus Spending Research Articles

Investment incentives attract foreign direct investment: evidence from the great recession

Do investment incentives influence private firms’ location decisions? Whereas prior research emphasizes tax incentives, we focus on incentives that require real-time government spending including job training and infrastructure. Real incentives influence where firms invest by resolving costly information asymmetries, and are subject to budget constraints that give rise to political targeting. This paper evaluates how real incentives shape the location decisions of foreign firms, investors who suffer from acute information asymmetries. We leverage features of the Great Recession and the 2009 American Recovery and Reinvestment Act stimulus, which temporarily increased states’ fiscal capacity to fund real incentives. During the narrow stimulus spending window, states that received more federal Medicaid stimulus—instrumented with the exogenous component of the Act’s funding formula—attracted more foreign direct investment (FDI) and increased state spending on real incentives. The stimulus window approximately coincides with FDI’s temporary geographic expansion into US counties that lacked a history of these investments. On average, these counties had narrow vote margins in the prior gubernatorial election and garnered more state real incentive spending. These correlates are pronounced in counties with idle industrial capacity and in states whose governors sought re-election. Tax incentives had no effect on FDI. These findings have important implications for the efficacy of investment incentives and the political economy of industrial policy.

Political Connections, Allocation of Stimulus Spending, and the Jobs Multiplier

Political Connections, Allocation of Stimulus Spending, and the Jobs Multiplier

Economic recessions and decarbonisation: analysing green stimulus spending in Canada and the US

ABSTRACT Existing research has demonstrated that government policies often prioritise growth over climate during economic downturns. Yet government stimulus spending during economic downturns also offers an opportunity for decarbonisation through long-term investments in infrastructure, transportation electrification, building efficiency, and clean energy technologies able to reduce emissions and sustainably shift the economy away from fossil fuels. We study the size and distribution of green stimulus spending in response to two recent economic downturns – the 2008 financial crisis and the 2020 Covid-19 pandemic. Focusing on Canada and the US – two major economies with strong incumbent fossil fuel interests – we explore the determinants of green stimulus spending. Counter to conventional wisdom, our findings provide little evidence to support the notion that institutional permeability to industry lobbying influenced the share of green stimulus spending. Instead, drawing on a novel dataset on green recovery spending and lobbying, we show that the strength of liberal parties in the legislatures shapes the distribution of stimulus funds. Our analysis suggests that liberal parties committed to decarbonisation can leverage economic crises to align economic and climate policy making, even in the face of strong lobbying efforts by the fossil fuel sector.

Debt in the time of COVID-19: creditor choice and the failures of sovereign debt governance

ABSTRACT While countries in the Global North have staved off the worst economic and health effects of the COVID-19 pandemic through massive stimulus spending, this option has been unavailable to many low- and middle-income countries, largely because high debt burdens have constrained fiscal spending. Nevertheless, almost no debt relief has materialized. The ad hoc approach to sovereign debt governance that emerged out of the debt crises of the 1980s helps explain why. It established an absolute commitment to upholding the right of private creditors to choose whether to participate in debt restructurings that has helped obstruct all significant sovereign debt governance reforms, preventing meaningful debt relief even in the context of the worst humanitarian crisis since the Great Depression.

Myth and Reality in the Great Inflation Debate: Supply Shocks and Wealth Effects in a Multipolar World Economy

This article critically evaluates debates over the causes of U.S. inflation. We first show that claims that the Biden stimulus was the major cause of inflation are mistaken: the key data series—stimulus spending and inflation—move dramatically out of phase. While the first ebbs quickly, the second persistently surges. We then look at alternative explanations for the price rises. We assess four supply-side factors: imports, energy prices, rises in corporate profit margins, and COVID. We argue that discussions of COVID’s impact have thus far only tangentially acknowledged the pandemic’s far-reaching effects on labor markets. We conclude that while all four factors played roles in bringing on and sustaining inflation, they cannot explain all of it. There is an aggregate demand problem. But the surprise surge in demand did not arise from government spending. It came from the unprecedented gains in household wealth, particularly for the richest 10% of households, which we show powered the recovery of aggregate US consumption expenditure, especially from July 2021. The final cause of the inflationary surge in the U.S., therefore, was in large measure the unequal (wealth) effects of ultra-loose monetary policy during 2020–2021. This conclusion is important because supply-side (and thus potentially inflationary) pressures are unlikely to subside soon. Going forward, COVID, war, climate change, and the drift to a belligerently multipolar world system are all likely to keep straining global supply chains. Our conclusion outlines how policy has to change to deal with a world of steady, but irregular supply shocks, including Covid’s continuing impact on labor markets. By their nature, such shocks create problems that monetary policy can cope with only at an enormous cost; they require targeted solutions. But when supply plummets or becomes more variable, fiscal policy also has to adapt: existing explorations of ways to steady demand over the business cycle have to embrace much bolder macroeconomic measures to control over-spending when supply is temporarily constrained.

Energy innovation funding and institutions in major economies

Accelerating energy innovation for decarbonization hinges on public investment in research, development and demonstration (RD&D). Here we examine the evolution and variation of public energy RD&D funding and institutions and associated drivers across eight major economies, including China and India (2000–2018). The share of new clean energy grew at the expense of nuclear, while the fossil fuel RD&D share remained stable. Governments created new institutions but experimented only marginally with novel designs that bridge lab to market to accelerate commercialization. In theory, crisis, cooperation and competition can be drivers of change. We find that cooperation in Mission Innovation is associated with punctuated change in clean-energy RD&D growth, and clean tech competition with China is associated with gradual change. Stimulus spending after the financial crisis, instead, boosted fossil and nuclear only. Looking ahead, global coopetition—the interplay of RD&D cooperation and clean tech competition—offers opportunities for accelerating energy innovation to meet climate goals.

Effects of perceived scarcity on COVID-19 consumer stimulus spending: The roles of ontological insecurity and mutability in predicting prosocial outcomes.

In 2021, the United States government provided a third economic impact payment (EIP) for those designated as experiencing greater need due to the COVID‐19 pandemic. With a particular focus on scarcity and ontological insecurity, we collected time‐separated data prior to, and following, the third EIP to examine how these variables shape consumer allocation of stimulus funds. We find that scarcity is positively associated with feelings of ontological insecurity, which, interestingly, correlates to a greater allocation of stimulus funds toward charitable giving. We further find evidence that mutability moderates the relationship between ontological insecurity and allocations to charitable giving. In other words, it is those who feel most insecure, but perceive that their resource situation is within their control, who allocated more to charity giving. We discuss the implications of these findings for theory, policy‐makers, and the transformative consumer research (TCR) movement.

Unpacking the COVID-19 rescue and recovery spending: an assessment of implications on greenhouse gas emissions towards 2030 for key emitters

This paper analyses how fiscal stimulus spending in response to the COVID-19 pandemic supports the low-carbon transition. We developed a new framework to categorise rescue and recovery spending measures according to their level of greenness and their type of expected impact on greenhouse gas emissions. This framework allows to better capture how measures’ emission impacts may unfold over time and to identify the share of fiscal spending missing robust conditions or incentives to be considered low carbon. We assess nearly 2500 measures announced by 26 emitters as of May 2021, representing around 67% of global GHG emissions excluding land use in 2019. Our findings show that the largest share (35%) of spending with potential GHG emission implications went to measures that cannot be explicitly coded as high-carbon or low-carbon but substantiate current business-as-usual practice (‘supporting the status quo’). Our assessment reveals the different magnitudes to which the emitters have missed the opportunity for a green recovery. Low-carbon spending is sizeable (22%) across countries. However, almost two-thirds will likely rather unfold its impact over time. This fiscal spending may trigger emissions reductions through enabling or catalytic causal effects over time but will not necessarily lead to direct emission reduction impacts before 2030.

US Fiscal Stimulus and Value of Dollar

Our study examines the impact of government stimulus spending on the US dollar’s exchange rate. We apply the VECM model on US data from 1980 to 2020 with US dollar’s exchange rate as the dependent variable and the quantity of domestic money supply, amount of domestic government purchases, quantity of money supplied by the foreign country (China), and the foreign country’s output as independent variables. Our study finds that, while the long-run impact of US fiscal stimulus spending on the dollar’s exchange rate is negative, it has no effect in the short run. Also, the coefficient associated with the error￾correction term, ECT, is negative but insignificant at 5% significance level, which implies that any short￾term fluctuation in the US dollar’s exchange rate will not be adjusted toward its long-run value.

Global governance and the Global Green New Deal: the G7\u2019s role

Current headlines suggest that the world at large has missed the opportunity to ‘build back better’ from COVID-19 by way of a green recovery. However, such claims do not consider novel trends among plurilateral summit institutions, especially the extent to which global governance of a green recovery is encapsulated by the burgeoning norm bundle of the ‘Global Green New Deal’. Plurilateral summit institutions like the G20, G7 and the BRICS have the potential to play a key governance role in implementing a Global Green New Deal, given the breadth and depth of reform required to ‘build back better’ from COVID-19. This contribution adopts a practice-relationist methodology to explore this thesis. Green recovery practice is analysed through novel interrogation of the open-source stimulus spending data of the Global Recovery Observatory. The results reveal that the G7, the G20 and the BRICS are all funding proportionally more clean than dirty stimulus in response to COVID-19. However, the proportion of clean stimulus is much stronger among members of the G7. A relationist frame is then used to assess this practice against the potential norm entrepreneurship role of the G7, both as individual member states and as a collective. It concludes that although this norm entrepreneurship role is undoubtedly nascent, it yields valuable insights into the pathways and barriers for further norm diffusion of the Global Green New Deal among plurilateral summit institutions. In this way it highlights the unique role plurilateral summit institutions can play in not only globalising the green new deal, but crucially operationalising it. Thus, while the world may not yet be ‘building back better’ as a collective, it is institutional norm entrepreneurs who currently hold the blueprints.

Common Mental Disorders and Economic Uncertainty: Evidence from the COVID-19 Pandemicin the U.S.

Mental health disorders represent an enormous cost to society, are related to economic outcomes, and have increased markedly since the COVID-19 outbreak. Economic activity contracted dramatically on a global scale in 2020, representing the worst crisis since the Great Depression. This study used the COVID Impact Survey to provide insights on the interactions of mental illness and economic uncertainty during COVID-19. We used a probability-based panel survey, COVID Impact Survey, conducted in the U.S. over three waves in the period April-June 2020. The survey covered individual information on employment, economic and financial uncertainty, mental and physical health, as well as other demographic information. The prevalence of moderate mental distress was measured using a Psychological Distress Scale, a 5-item scale that is scored on a 4-point scale (total range: 0–15). The mental distress effect of employment, economic, and financial uncertainty, was assessed in a logit regression analysis conditioning for demographic and health information. It is found that employment, health coverage, social security, and food provision uncertainty are additional stressors for mental health. These economic factors work in addition to demographic effects, where groups who display increased risk for psychological distress include: women, Hispanics, and those in poor physical health. A decrease in employment and increases in economic uncertainty are associated with a doubling of common mental disorders. The population-representative survey evidence presented strongly suggests that economic policies which support employment (e.g., job keeping, job search support, stimulus spending) provide not only economic security but also constitute a major health intervention. Moving forward, the economic uncertainty effect ought to be reflected in community level intervention and prevention efforts, which should include strengthening economic support to reduce financial and economic strain.

Can US Fiscal Stimulus Negatively Affect US Balance of Trade?

In an attempt to take the U.S. economy out of recession or to stimulate a sluggish economy, US presidents, democrats and republicans alike, have used an expansionary fiscal policy. While an expansionary fiscal policy raises the GDP, it also raises a nation’s import due to increased income brought about by the expansionary fiscal policy. If the increase in a nation’s import exceeds that in export, it negatively impacts the nation’s balance of trade. So, our study examines the impact of US government stimulus spending on the nation’s balance of trade. We use a general equilibrium framework and apply the VECM model on US data from 1980 to 2020. Our study finds that, while the long-run impact of US fiscal stimulus spending on US balance of trade is positive and significant, the short-run impact is negative. We also found that any short term fluctuation in US balance of trade is adjusted to its long-run equilibrium level.

Political Connections, Allocation of Stimulus Spending, and the Jobs Multiplier

<ns3:p>Using American Recovery and Reinvestment Act (ARRA) data, we show that firms lever their political connections to win stimulus grants and that public expenditure channeled through politically connected firms hinders job creation. We build a unique database that links information on campaign contributions, state legislative elections, firm characteristics, and ARRA grant allocation. Using exogenous variation in political connections based on ex-post close elections held before ARRA, we causally show that politically connected firms are 38 percent more likely to secure a grant. Based on an instrumental variable approach, we also establish that a one standard deviation increase in the share of politically connected ARRA spending lowers the number of jobs created per $1 million spent by 7.1 jobs. Therefore, the impact of fiscal stimulus is not only determined by how much is spent, but also by how the expenditure is allocated across recipients.</ns3:p>

SHORT AND LONG-TERM IMPACTS OF US FISCAL STIMULUS ON US INCOME

ABSTRACT Our study examines the impact of US government's stimulus spending on the nation's income. We apply the VECM model on US data from 1980 to 2020. We also estimate impulse response of our model variables by giving one standard deviation positive shock to each of our model variables. From our VECM estimates as well as impulse responses, we find that, while the long-term impact of US fiscal stimulus spending on US GDP is positive and significant, the short-term effect is insignificant. Keywords fiscal stimulus spending, stationarity, cointegration, VECM, short-term impact, long-term impact

Rethinking “Economic Fundamentals” in an Era of Global Physical Shocks: Insights from the Philippines Experience with COVID-19*

AbstractHaving “strong macroeconomic fundamentals,” as the Philippines supposedly did pre-COVID-19, matters much less (if at all), in and of itself, to economic outcomes in the context of a physical shock. Using a model for 21 countries including ASEAN+3, developing East Asia and South Asia, as well as Australia and New Zealand to explain the difference in actual 2019 and forecasted 2020 GDP growth, we find that, ceteris paribus, stronger national capacities to detect and respond to emerging outbreaks (in particular, laboratory capacity) are associated with better short term economic outcomes. For the Philippines, up to 3.6 percentage points in lost GDP growth forecasted in 2020 could have been saved. Our results suggest that a dearth in health system capacity should be prioritized over and above any other type of spending, including traditional stimulus (e.g., large-scale infrastructure) spending. Our results also underscore the need to rethink what is necessary for the stability and resilience of an economy—what are the “economic fundamentals”—in an era of global physical shocks, including those brought about by climate hazards. Given physical shocks, efficient and prepared government institutions matter. A macro economy is not resilient if these are not.

Political Connections, Allocation of Stimulus Spending, and the Jobs Multiplier

<ns3:p>Using American Recovery and Reinvestment Act (ARRA) data, we show that firms lever their political connections to win stimulus grants and public expenditure channeled through politically connected firms hinders job creation. We build a unique database that links campaign contributions and state legislative election outcomes to ARRA grant allocation. Using exogenous variation in political connections based on ex-post close elections held before ARRA, we causally show that politically connected firms are 64 percent more likely to secure a grant. Based on an instrumental variable approach, we also establish that state-level employment creation associated with grants channeled through politically connected firms is nil. Therefore, the impact of fiscal stimulus is not only determined by how much is spent, but also by how the expenditure is allocated across recipients.</ns3:p>

The trouble with naïve Keynesianism

AbstractSince the Keynesian Revolution of the 1930s, many prominent economists have argued that a useful policy response to economic depression is to boost government spending. But pressure to spend quickly increases the potential for waste and inefficiency: this is ignored or dismissed in the Keynesian literature. For example, a widely cited cost–benefit analysis of stimulus spending does not even acknowledge the possibility of waste, and some Keynesians go so far as to argue that wasteful spending during a crisis can nonetheless be desirable. Here we extend the typical analysis by accounting explicitly for the leading sources of cost including waste, resource costs, and the excess burden of taxation. Our results suggest that stimulus spending that is largely wasteful is unlikely to generate net wealth. A proper response to economic depression must consider the possibility that government waste can render stimulus spending counterproductive.

State-level Federal Stimulus Funds and Economic Growth: The American Recovery and Reinvestment Act

The American Recovery and Reinvestment Act encompassed a substantial federally-funded state-level fiscal stimulus. The objectives of the Act were to increase employment and stimulate economic growth. While the level of the fiscal stimulus was potentially endogenous, a direct analysis of its effects leads to biased results. To circumvent this, the effect of the stimulus on economic growth was studied using instrumental variable estimation, since the distribution of a large part of the funds was based on conditions exogenous to the economic downturn. A cross-state two-stage least squares estimation procedure was used to quantify the effect of the stimulus on economic growth and to show that the robust significant positive effect of the stimulus amounts to a fiscal multiplier of almost 1.6. The results further show that the positive effect of stimulus spending remained significant until the end of the first term of the Obama presidency.

Ten Years After the Financial Crisis: What Have We Learned from the Renaissance in Fiscal Research?

This paper takes stock of what we have learned from the “Renaissance” in fiscal research in the ten years since the financial crisis. I first discuss the new innovations in methodology and various strengths and weaknesses of the main approaches to estimating fiscal multipliers. Reviewing the estimates, I come to the surprising conclusion that the bulk of the estimates for average spending and tax change multipliers lie in a fairly narrow range, 0.6 to 1 for spending multipliers and -2 to -3 for tax change multipliers. However, I identify economic circumstances in which multipliers lie outside those ranges. Finally, I review the debate on whether multipliers were higher for the 2009 Obama stimulus spending in the United States or for fiscal consolidations in Europe.

Optimal Public Expenditure with Inefficient Unemployment

This article proposes a theory of optimal public expenditure when unemployment is inefficient. The theory is based on a matching model. Optimal public expenditure deviates from the Samuelson rule to reduce the unemployment gap (the difference between current and efficient unemployment rates). Such optimal “stimulus spending” is described by a formula expressed with three sufficient statistics: the unemployment gap, the unemployment multiplier (the decrease in unemployment achieved by increasing public expenditure), and the elasticity of substitution between public and private consumption. When unemployment is inefficiently high and the multiplier is positive, the formula yields the following results. (1) Optimal stimulus spending is positive and increasing in the unemployment gap. (2) Optimal stimulus spending is zero for a zero multiplier, increasing in the multiplier for small multipliers, largest for a moderate multiplier, and decreasing in the multiplier beyond that. (3) Optimal stimulus spending is zero if extra public goods have no value, it becomes larger as the elasticity of substitution increases, and it completely fills the unemployment gap if extra public goods are as valuable as extra private goods.