The Household Effects of Government Spending

This chapter examines how households respond to changes in a particular type of government spending: military contracts awarded by the Pentagon. Results show significant differences in the effects of government spending, depending on the state-specific unemployment rate. In states with relatively low unemployment, government spending could have insignificant or even negative effects on private consumption. In contrast, private consumption increases in high-unemployment states, suggesting that in such states, the multiplier is likely to be positive. Fiscal policy can have important distributional effects, since there is significant heterogeneity in households' responses to shifts in government spending.