Achievement

THE EFFECT OF GOVERNMENT SPENDING SHOCKS. The effect of government spending on income and employment is a central unresolved question in macroeconomics, one difficult to measure because observed increases in government spending are endogenous and correlated with changes in output for reasons that have nothing to do with fiscal stimulus. Trainee Daniel Shoag’s research employs a novel identification strategy to isolate exogenous variation in state government spending: State governments manage large defined-benefit pensions plans for which they bear the investment risk; the idiosyncratic component of their returns is shown to be a strong predictor of subsequent state government spending. Instrumenting with this ‘windfall’ component of returns, Shoag finds that state government spending has a large positive effect on income and employment. He estimates that each dollar of spending raises in-state income by $2.12, and that $35,000 of spending generates one additional job.