By Hao Li: Subscribe to Hao's RSS feed
September 17, 2010 12:16 PM EDT
U.S. federal government spending has not worked as well as politicians had hoped.
The jobs market, consumer spending, and housing prices are some of the important metrics that are recovering slower than expected.
Recently, Robert Inman, an economics professor at the University of Pennsylvania, put forth a rather fresh theory to explain the ineffectiveness of federal stimulus.
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The federal government relies on state governments as agents to administer many stimulus programs like road-building and welfare support. State governments, however, have their own "selfish" agenda and spend federal stimulus money in a way that isn't always in the best interest of the entire country, said Inman.
States' Dilemma of Stimulus Leakage
When a government generates demand by spending money, sometimes the benefits of that demand -- i.e. revenues for businesses and job creation -- will leak if foreign companies meet that demand.
While leakages to foreign countries on a national level is debatable, stimulus leakage among U.S. states is a reality. Travel restrictions, language & cultural barriers, and trade barriers are low or non-existent, so demand is easily met by outside states. When that happens, state governments are essentially missing out on tax revenues and job-creation, which are the motivations of stimulus spending in the first place.
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