ECONOMIC REPORT OF THE PRESIDENT

In designing the Recovery Act, one component around which
there was substantial uncertainty was aid to State and local governments.
Rising unemployment was devastating state tax revenues, and economists
feared that state balanced-budget requirements would force State
and local governments to cut spending and employment just as their
economies and citizens needed those funds and jobs the most. For this
reason, the incoming economics team urged Congress to include in the
Recovery Act transfers from the Federal Government to the States to stabilize
their coffers. As a practical matter, this was accomplished primarily
by temporarily increasing the fraction of Medicaid spending (always a
joint Federal/State program) covered by the Federal Government. The
final Recovery Act included roughly $140 billion of state fiscal relief of
this and other sorts.
Though the logic of the action was sound, because such fiscal
transfers are rare there was only limited empirical evidence on their
likely effects. CEA helped fill that knowledge gap by doing a careful
study of the state fiscal relief done through the Recovery Act. The study,
conducted by four CEA staff economists, was included in CEA’s first
quarterly report to Congress on the effects of the Recovery Act. CEA
economists used the fact that some of the variation in the fiscal relief
across States was due to pre-existing differences in the generosity of
their Medicaid programs, rather than to state economic conditions, to
accurately identify the employment effects of these transfers. The estimates
indicated that the effects were substantial. Indeed, the estimated
job effects were sufficiently large that the state fiscal relief appeared to
be one of the most cost-effective components of the legislation. The four
economists ultimately expanded their study into a paper, which was
published in the American Economic Journal: Economic Policy (where it
won the best paper prize in 2013).1
This CEA analysis of state fiscal relief was influential in subsequent
policy discussions and recommendations. Though the American economy
started growing again in the summer of 2009, job losses continued
throughout the year and unemployment remained painfully high. The
economics team debated at length the relative merits of many measures
to spur job growth. Interestingly, about the only thing we didn’t debate
was the desirability of additional state fiscal relief. What had been a logical
but untested action in the Recovery Act was now understood to have
been an effective job-creation tool—thanks in part to CEA’s analysis.
There was easy agreement that it belonged in any second comprehensive
1 Gabriel Chodorow-Reich, Laura Feiveson, Zachary Liscow, and William Gui Woolston.
2012. “Does State Fiscal Relief During Recessions Increase Employment? Evidence from the
American Recovery and Reinvestment Act.” American Economic Journal: Economic Policy
4(3): 118–145.
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