The Multiplier Effect of Education Expenditure

39 Pages Posted: 25 Aug 2020

See all articles by Maarten De Ridder

Maarten De Ridder

University of Cambridge

Simona Hannon

Board of Governors of the Federal Reserve System

Damjan Pfajfar

Board of Governors of the Federal Reserve System

Date Written: August, 2020

Abstract

This paper examines the short-run effects of federal education expenditures on local income. We exploit city-level variation in exposure to national changes in the $30-billion Federal Pell Grant Program, which is the largest program to help low-income students attend college in the U.S., to calculate fiscal multipliers of education expenditures. An increase in Pell grants by 1 percent of a city's income raises local income by 2.4 percent over the next two years. This multiplier effect is larger than estimates for military spending (1.5 on average). Multipliers are higher when grants are awarded to students at non-profit colleges, as for-profit colleges absorb most of the grant increases with raises in tuition. Multipliers are also higher during recessions than in expansions: Pell grants can be an effective tool for countercyclical policy that adds to already established benefits, such as, increasing the affordability of college and fostering long-run economic growth.

Keywords: Fiscal expenditure, Pell grants, Education policy, Fiscal multipliers

JEL Classification: H52, H62

Suggested Citation

De Ridder, Maarten and Hannon, Simona and Pfajfar, Damjan, The Multiplier Effect of Education Expenditure (August, 2020). FEDS Working Paper No. 2020-058, Available at SSRN: https://ssrn.com/abstract=3680250 or http://dx.doi.org/10.17016/FEDS.2020.058

Maarten De Ridder (Contact Author)

University of Cambridge ( email )

Cambridge
United Kingdom

Simona Hannon

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Damjan Pfajfar

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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