The American Recovery and Reinvestment Act: less stimulating in corrupt states

Abstract

The American Recovery and Reinvestment Act of 2009 was an attempt to “jump-start the economy to create and save jobs” by inducing state spending on an enormous scale. 787 billion US dollars were allocated to the act, which included tax cuts and extension of benefits under Medicaid, but also major investment programs. Under the recovery act, 28 government agencies were each allocated a portion of the available funds, and then decided how to spend the money. Most of the money was awarded as grants, loans or contracts to state governments, which then distributed it further to specific projects. However, while the recovery act may have avoided an even deeper recession, it has largely failed to jump-start the American economy in the intended way. Could it be that the stimulus had less effect than it could have had, because of corruption? Research shows that corruption increases costs of public investment, and reduces the efficiency of public spending. In this paper, I attempt to gauge the effects of corruption on the stimulus package by comparing projects awarded grants in the 50 US states, using a two-level modeling strategy. First, for each state, the cost of a project is modelled as a function of the number of people employed in the project, which yields a job cost coefficient. The assumption is that a lower coefficient implies more efficient spending, since projects with the same amount of labor cost more when the coefficient is higher. Second, the job cost coefficient is modelled as a function of corruption in the state, controlling for other state-level factors. Corruption is measured as the number of convictions for corruption in the state 1976-2009 (Glaeser & Saks 2006). The empirical analysis shows that the job cost coefficient is higher in states where more public officials have been convicted for corruption, implying that corruption may have impaired the possible effect of the stimulus package.