(Photo: Reuters / Jason Reed )
U.S. Vice President Biden and speaks alongside California Governor Schwarzenegger in Washington
U.S. federal government spending has not worked as well as politicians had hoped.
The jobs market, consumer spending, and housing prices are some of the important metrics that are recovering slower than expected.
Recently, Robert Inman, an economics professor at the University of Pennsylvania, put forth a rather fresh theory to explain the ineffectiveness of federal stimulus.
The federal government relies on state governments as agents to administer many stimulus programs like road-building and welfare support. State governments, however, have their own "selfish" agenda and spend federal stimulus money in a way that isn't always in the best interest of the entire country, said Inman.
States' Dilemma of Stimulus Leakage
When a government generates demand by spending money, sometimes the benefits of that demand -- i.e. revenues for businesses and job creation -- will leak if foreign companies meet that demand.
While leakages to foreign countries on a national level is debatable, stimulus leakage among U.S. states is a reality. Travel restrictions, language & cultural barriers, and trade barriers are low or non-existent, so demand is easily met by outside states. When that happens, state governments are essentially missing out on tax revenues and job-creation, which are the motivations of stimulus spending in the first place.
During a national recession, there is evidence that states hoarded much of their stimulus money to spend at a later date, when the economy had recovered, said Inman. Stimulus money may not reach lower-income residents if a state is dominated by middle-income voters. States may also be unwilling to fund infrastructure projects whose costs are justified by benefits to the country but not by the benefits to the states alone.
But besides self-interested economic distortions, federal stimulus money is also subject to "pork-barrel" politics on a state and local level.
Numerically speaking, the federal aid transferred to states for administering had an income multiplier of 40 cents on the dollar even after twenty quarters, which is significantly lower than the multiplier for aid administered directly by the federal government, said Inman.
Email Hao Li in New York at email@example.com.
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