State Unemployment and the Allocation of Federal Stimulus Spending

State Unemployment and the Allocation of Federal Stimulus Spending
James Orr and John Sporn
FRBNY, February 27, 2013





    Using per capita stimulus dollars in a state as the spending metric, the scatter plot below shows the lack of correlation between stimulus spending and state unemployment rates at the time the program was introduced. The lack of correlation is also evident in a comparison of spending with the cyclical change in state unemployment rates at the time.


Major federal spending programs challenge policymakers to appropriate large amounts of money efficiently and expeditiously. We believe five practical considerations drove the ultimate allocation of funds, and that each potentially weakened the link between spending and unemployment. The first was competing program goals. The program was designed to create or save jobs, so the distribution of spending reflected, in part, how and where these effects would be most likely to occur. The program also had the stated goal of stabilizing state and local government budgets. In fact, it has been argued in at least two articles that this may have been a more important goal of the program. (See FRBSF Economic Letter and an NBER working paper.)

Second was timing, particularly the need to get the spending up and running as quickly as possible. While the ARRA did create one new program, the State Fiscal Stabilization Fund, the majority of the spending relied on temporarily augmenting the size of existing federal-aid programs to states while using the existing formulas governing the distribution of that aid. Third was the jobs per dollar of spending. Jobs per dollar of spending differs across programs, so that metric, rather than spending per capita, might be expected to be positively correlated with unemployment rates. Fourth, there was a sense that this stimulus program offered an opportunity for expanded federal funding of infrastructure and education projects that could lead to longer-term economic benefits for states. Finally, equity considerations, both within and across programs, implied that each state should receive some funds and that no state should have an average level of spending that was too far from the mean.

The distribution of the $27.5 billion of aid to states through the Federal Highway Administration of the Transportation Department illustrates the allocation process. The spending was specifically allocated for projects that restore, repair, and construct federal highways. The funds had to be spent within three years and, for large metro areas, had to be consistent with the relevant metropolitan area transportation plan. Similar aid had been provided by the federal government to states for a number of years. The aid constituted 5 percent of total ARRA spending, and the projects were 100 percent federally funded.

The allocation of ARRA aid was determined as follows: The program set aside $1 billion for aid to Native American reservations and federal lands, on-the-job-training programs, Puerto Rico and other U.S. territories, and administrative expenses. Of the remaining funds, roughly 50 percent was distributed to states based on the formula used to distribute highway aid in 2008, and 50 percent was distributed based on each state’s share of total lane miles (25 percent), total vehicles miles traveled (40 percent) on federal-aid highways, and each state’s share of the taxes paid by highway users (35 percent). There were also some funds set aside for sub-state areas with a population of less than 200,000. The graph below shows that this allocation formula led to highway spending across states that did not have a positive relationship with unemployment rates.


The increase in spending on federal-aid highways, nevertheless, could be viewed favorably from several standpoints. There was an effort to make the spending equitable in that there were initial set-asides for segments of the population, and then all states with federal-aid highways received funding. The spending was timely, aided by the use of existing highway funding allocating formulas and existing project eligibility guidelines. Also, there are potentially positive long-term economic impacts of the funding from an improvement in state transportation infrastructure.

In sum, practical considerations in targeting new federal spending under a vast program like the ARRA led to spending that was less linked to state unemployment rates than might be expected. Estimates vary as to the effects of the ARRA, but larger questions remain. Did the particular way that the funds were targeted affect the ultimate impact of the program? Would a given amount of funding distributed in another way have been more effective? Would future anti-recessionary spending programs benefit from pre-planned allocation formulas? Answering those questions would take more than a blog post.


James Orr

John Sporn is a senior analyst in the Federal Reserve Bank of New York’s Markets Group.

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