The analysis allows for the facts that U.S. states are part of a wider monetary and economic union with free factor mobility across all states and that state residents and firms may purchase goods from "neighboring" states. Those purchases may generate economic spillovers across neighbors. Estimates suggest that states can increase their own state employment by increasing their own deficits. There is evidence of spillovers to employment in neighboring states defined by common cyclical patterns among state economies. For large states, aggregate spillovers to its economic neighbors are approximately two thirds of the large state's job growth. Because of significant spillovers and possible incentives to free-ride, there is a potential case to actively coordinate (i.e., centralize) the management of stabilization policies. Finally, when these deficits are scheduled for repayment the job effects of a temporary increase in state own deficits persist for at most one to two years and there is evidence of a negative impact of state jobs.
Local Deficits and Local Jobs: Can U.S. States Stabilize Their Own Economies?
WP 13-11 - Using a sample of the 48 mainland U.S. states for the period 1973-2009, the authors study the ability of U.S. states to expand their own state employment through the use of state deficit policies.