Military spending helped California

Does fiscal stimulus work in a monetary union? Evidence from US regions

These issues motivate the quest for other sources of pseudo-random variation in government spending. In recent work, our approach has been to exploit regional variation in military spending in the US (Nakamura and Steinsson 2011). We use the fact that when the US embarks upon a military buildup, there is a systematic tendency for spending to increase more in some states than others. For example, when aggregate military spending in the US rises by 1% of GDP, military spending in California on average rises by about 3% of California GDP, while military spending in Illinois rises by only about 0.5% of Illinois GDP.

HT Thoma

This eplains a puzzle I ad struggled with. I expected California to be skewed from the Mid-Atlantic, but the sign of the phase delta surprised me. California did extra well during the Islamic war spending, and seemed almost 180 deg out of phase with the Atlantic. So we would expect that the sign would reverse during emergency stimulus since 2008. The event was an unexpected crash, and the restoration stimulus would patially undo the recent California favoritism.

The Northern and North Eastern economies were neglected during the war, the Pacific was not. The government channel has a regime change, shift west/shift east.