Where to Spend Stimulus Money?

by: Ryan Avent

Ed Glaeser continues his great writing about the effects of recession within the United States over at Economix. In a post Tuesday, Glaeser focuses on the prospects for regional recovery. As you might expect, the east coast is showing signs of stability; state unemployment rates ticked down or stayed flat in most east coast states between February and March.

As Glaeser notes, the right coast is service sector and knowledge economy heavy, which has been a good thing to be during the past few months given the massive declines in industrial production. And just today we learn that service sector activity moved a step closer to expansion in April. Given that that’s a national gauge, it’s probable that service activity in some east coast cities is already expanding.

On the other end of the spectrum is the Midwest and the west coast. The struggles of the Midwestern industrial sector, and automobiles in particular, are well documented, but the west coast’s problems are a little more difficult to understand. There is a significant manufacturing presence (and agricultural industry) along the Pacific, it’s true, but there are also hubs of knowledge economy activity and service sector production. Why the struggles on the left coast?

I think the magnitude of the housing bust in California is a relevant factor, but that can only explain part of the pain. Perhaps more important is the Asian orientation of the west coast economy. We’ve seen global trade volumes plummet, sinking Asian import and export volumes at a stunning clip. Asia’s trade recession has to have hurt a range of businesses on the west coast, from port and shipping companies to tech firms to tourist businesses and retail.

But if that’s the explanation, then that’s actually good news for the west. Most Asian economies, and China especially, have been very aggressive in pursuing stimulus, and the economic news out of the region has been largely positive throughout the spring. If Asia comes back quickly, and there’s reason to believe it will, then so too will the left coast economy.

The picture is less bright for the Midwest, which entered recession before most of the country and will probably leave it later than everyone else. This raises an interesting question: Where should stimulus money be spent, on the strongest metropolitan and regional economies or the weakest? I’ve argued this several ways in the past. I suspect the multiplier is likely to be largest in relatively strong economies, which would make for a stronger budget picture, allowing for a larger total volume of spending through the recession. On the other hand, I’ve written that it doesn’t matter where you spend it, so long as you focus the spending on just a few metropolitan areas (I freely admit this is politically impossible).

Where best to spend the stimulus depends in some part on what role one intends for the spending. If there’s a hope that stimulus will facilitate needed sectoral shifts — getting folks whose jobs have vanished forever into new growth industries — then there’s a strong case for focusing the spending on the hardest hit places, either on direct vouchers to facilitate geographic relocation, or in significant public investments to accelerate the move away from dying industries. Economists strongly favor the direct voucher approach, a position I’ve challenged recently.

But it does seem that to arrest decline, one should spend in strong markets, while to turn the L-shape into a U-shape one should spend in weak markets.