Multiplier Effects of Federal Disaster-Relief Spending : Evidence from U.S. States and Households

Can government spending have a large effect on private consumption and income? This paper uses a novel dataset on federal government disaster-relief spending, combined with both household and state-level consumption, income and employment data, to answer this question. My estimates show that the demand shock created by government disaster-relief spending can have a large multiplier effect, and that this effect comes from the government's influence on the labor market. I show that, in states receiving disaster-relief spending from the federal government, households who are most likely to work for disaster-relief related jobs have the largest consumption growth. When a state receives such spending, the industries in this state that provide most disaster-relief related jobs experience the largest employment growth. My findings are supportive of the job-creation channel emphasized in New Keynesian models of the transmission of government spending shocks