The Direct and Indirect (Spillover) Effects of Productive Government Spending on State Economic Growth

Abstract

Using data on 48 contiguous U.S. states and a spatial econometric approach, this paper examines short‐ and long‐run effects of productive higher education and highway infrastructure spending financed by different revenue sources on state economic growth. Following the Lagrange Multiplier, Wald, and Likelihood Ratio tests, the data are found to be characterized by both spatial lag and spatial error processes, leading to the estimation of a dynamic spatial Durbin model. By decomposing results of the dynamic spatial Durbin model into short‐ and long‐run direct as well as indirect (spillover) effects, we show that accounting for spillover effects provides a more comprehensive approach to uncovering the effects of productive government spending on growth. We find that, regardless of the financing source, productive higher education and highway spending have statistically significant short‐ and long‐run direct as well as spillover effects on state income growth.

U.S. State and Local Fiscal Policy and Economic Activity: Do We Know More Now?

“…Based on estimation with a dynamic Spatial Durbin model, Ojede et al . () concluded there were spillover effects of state policy, suggesting cooperation was needed among states. Segura () estimated a spatial dynamic panel model and found evidence of spatial spillovers that reduced the estimated effects of a state's own fiscal policy.…”

“…The author interpreted the findings as public services not justifying the taxes that pay for them, though the effect of tax cuts was small. Ojede et al (2018) also examined categories of state and local spending and taxes but limited the number of categories to avoid multicollinearity. The authors found that spending on higher education and highway spending significantly increased per capita personal income growth in both the short run and long run.…”

“…Using a Spatial Durbin model, Anderson and Bernard (2017) found that adding spatial effects in their model affected the estimated effects of the state and local tax burden on per capita income growth. Based on estimation with a dynamic Spatial Durbin model, Ojede et al (2018) concluded there were spillover effects of state policy, suggesting cooperation was needed among states. Segura (2017) estimated a spatial dynamic panel model and found evidence of spatial spillovers that reduced the estimated effects of a state's own fiscal policy.…”

“…A number of studies found spillover effects of state and local expenditures on neighboring economies (Wooster and Lehner, 2010;Anderson and Bernard, 2017;Segura, 2017;Ojede et al, 2018). The existence of spillovers could have a number of potential implications for state and local fiscal policy, both in terms of potential cooperation and competition.…”

State‐level capital and investment: Refinements and update

“…We improve upon their methodology and update their data up to 2015. By providing more accurate estimates of state‐level capital and investment, we provide an essential asset for the large empirical literature that analyzes production (Benos, Mylonidis, & Zotou, ; Brock & Ogloblin, ); total factor productivity (Cardarelli & Lusinyan, ; Sharma, Sylwester, & Margono, ); employment (Liu, ); foreign direct investment (Bode & Nunnenkamp, ; Mullen & Williams, ); tax policy (Reed, ); government spending (Kalyvitis & Vella, ; Ojede, Atems, & Yamarik, ); growth (Reed, ; Turner, Tamura, & Mulholland, ); human capital (Yamarik, , ); inequality (Beenstock, Felsenstein, & Zeev, ); immigration and migration (DiCecio & Gascon, ; Peri, ); resource use (Burnett & Madariaga, ; Metcalf, ); and income convergence (Heckelman, ; Magrini, ).…”