When the government writes checks, consumers spend more

Alex Verkhivker | Jun 19, 2018

How do people change their spending habits in response to government stimulus? This question has been fiercely debated in the economics community—but researchers from the Federal Reserve Banks of St. Louis, Richmond, and San Francisco and the University of Richmond report that every $1 in stimulus awarded during the Great Recession led to an average of 18 cents in consumer spending at the local level.

In 2009, Congress passed legislation that allocated roughly $840 billion in benefits, entitlements, and grants to save jobs and fund relief programs for people most affected by the downturn. The spending included $228 billion in government-awarded grants, contracts, and loans that were spread across many industries—in particular education, transportation, infrastructure, and energy.

To determine how this stimulus affected consumer spending, the researchers connected government data with spending data collected from households and retailers by the Nielsen Company, and auto loan data from the Federal Reserve Bank of New York. With data sets covering various time periods between 2001 and 2015, the researchers sought to understand spending patterns before, during, and after the stimulus that lasted from 2009 to 2012.

They looked at areas where the stimulus was awarded independent of local economic conditions. For example, the Department of Education gave funds to places that had a higher rate of children with disabilities, regardless of how hard those places had been hit by the recession. The researchers explain that this allowed them to draw a clearer line from stimulus to consumer spending.

In aggregate, every $1 in stimulus ...

... led to 40 cents in additional spending.

They find that the stimulus did boost consumer spending. For every additional $1 in government funding, people in affected US counties spent an additional 6–11 cents on cars. Data collected by shoppers themselves suggests that for every $1 increase in stimulus, consumer spending rose 8–12 cents. Meanwhile, data collected at retailers’ registers suggests an even bigger spending boost: between 11 and 23 cents for every $1 of stimulus. These average out to an overall 18-cent increase in spending on retail and auto purchases.

These findings capture how stimulus affected local economies, but not necessarily the aggregate effect. After all, spending changes in one county can help or hurt economies in other areas. To better understand the bigger picture, the researchers created a model to map the impact of the 18-cent “local multiplier” onto the national economy—and determine that the aggregate impact of stimulus was more than twice as big as the local one. Trade relationships between regions helped boost economies elsewhere, so overall, every $1 in stimulus led to 40 cents in additional spending.