Demand Stimulus as Social Policy

This paper estimates the distributional and social consequences of Department of Defense (DOD) contract spending using a city-level (CBSA) panel dataset spanning 2005–2016. The research question is whether demand stimulus — specifically DOD spending, the largest category of U.S. discretionary government spending — has differential effects across demographic groups and whether it improves social outcomes typically targeted by dedicated government programs. A secondary question is whether these effects are specific to DOD spending or common to any demand shock.

The empirical strategy exploits variation in DOD contract spending from USAspending.gov, constructing a proxy for outlays over time using contract duration, and instrumenting with a Bartik-type shock (location’s average DOD share interacted with aggregate contract spending). The main specification is a two-year differenced panel regression with CBSA and time fixed effects. Social outcomes come primarily from the American Community Survey (ACS), covering 290 CBSAs; mortality data come from the CDC; crime data from the FBI/NACJD. For comparison, the authors construct a general demand shock series using the standard Bartik shift-share approach across two-digit industries, which is nearly uncorrelated with the DOD shock (correlation -0.07).

Main findings on distributional effects: A 1 percent increase in DOD spending as a share of local earnings raises overall average ACS earnings by 0.43 percent but raises average earnings for households without a bachelor’s degree by 0.71 percent, and raises average earnings for Black households by a slightly larger amount, while Whites receive the majority of total income. The employment rate rises by 0.22 percentage points per percent increase in DOD spending. Labor force participation is largely unchanged in aggregate, but rises 0.08 percentage points for the middle-aged (41–61) and 0.14 percentage points for those with a bachelor’s degree.

On social outcomes: The poverty rate falls 0.08 percentage points, driven entirely by those without a bachelor’s degree. Food stamp (SNAP) receipt falls 0.08 percentage points. Self-reported disability rates fall, particularly among households without a bachelor’s degree. Occupational prestige rises by 0.024 points overall (0.037 for those without a bachelor’s degree). Travel time to work falls by 6.7 minutes per day, implying an annual benefit exceeding $558 per worker at a value of time of $10/hour. Marriage rates rise and divorce rates fall for some demographic groups. Homeownership increases significantly for some groups. Mortality falls, with 2.61 fewer deaths per 100,000 among those age 45–65 and 8.49 fewer deaths per 100,000 among those over 65 per percent increase in DOD spending; health-related deaths account for the majority of the decline. Crime is largely unaffected, except for a statistically significant reduction in vehicle theft.

Comparing DOD to general demand shocks: Although both raise total earnings by similar amounts ($0.56 and $0.63 per dollar of shock, respectively), the general demand shock produces only about half the employment rate response (14.3 vs. 24.5 percentage point increase for households without a bachelor’s degree), concentrates earnings gains among already-employed, higher-educated, and White households, produces weaker effects on disability and occupational prestige, increases mortality by approximately 100 deaths per 100,000, and increases crime (vehicle theft and aggravated assault). The differential mortality response is partly attributed to differential pollution effects: general demand shocks raise the median AQI substantially, while DOD shocks do not. The differential employment effects of DOD shocks are explained primarily by city and occupational composition rather than industry composition: DOD shocks are directed toward smaller, lower-earnings cities with lower employment rates and fewer college-educated residents, and toward construction, manufacturing, and production/maintenance occupations with high no-bachelor’s shares.

Scope conditions: Results are identified using CBSA-level variation over 2005–2016. DOD spending is treated as predominantly supply-side-driven and not directly entering household utility or local infrastructure. The social outcome results are local partial-equilibrium estimates and do not account for general equilibrium spillovers across CBSAs.

Q: What is the core identification strategy, and why is DOD spending considered a valid instrument for demand stimulus? A: DOD contract data from USAspending.gov are used to construct a proxy for outlays (distributing contract obligations over contract duration), and this measure is instrumented with a Bartik-type shock (location’s average DOD share times aggregate contract growth). The Bartik IV isolates the component of DOD contracts associated with new production, addressing endogeneity and the “anticipated contracts” problem. DOD spending is treated as predetermined relative to local business cycles and does not directly enter household utility or local infrastructure, isolating the aggregate demand channel.

Q: Which demographic groups receive the most total income from DOD spending, and which see the largest relative gains? A: In absolute terms, the majority of wage and salary income from DOD spending accrues to Whites and to those without a bachelor’s degree. However, adjusting for existing income shares, Black households and households without a bachelor’s degree experience the largest proportional increases in average earnings: a 1 percent increase in DOD spending as a share of local earnings raises average earnings for no-bachelor’s households by 0.71 percent, compared to a 0.43 percent increase in overall average earnings.

Q: How does DOD spending affect employment at the extensive margin, and what does this imply about who benefits? A: A 1 percent increase in DOD spending as a share of local earnings raises the overall employment rate by 0.22 percentage points. The large employment response among those without a bachelor’s degree (24.5 percentage points in the comparative analysis) implies that DOD spending disproportionately benefits previously unemployed workers rather than simply raising wages for those already employed.

Q: Does DOD spending increase labor force participation? A: There is no detectable aggregate effect on labor force participation rates, suggesting limited effects of demand stimulus on the participation margin over short horizons. However, participation rises 0.08 percentage points for the middle-aged (41–61) and 0.14 percentage points for those with a bachelor’s degree. The population response is strongest for those without a bachelor’s degree, though the estimate is imprecise.

Q: What are the poverty and welfare effects of DOD spending? A: A 1 percent increase in DOD spending as a share of local earnings reduces the poverty rate by 0.08 percentage points, with the entire effect concentrated among households without a bachelor’s degree. SNAP (food stamp) receipt falls by 0.08 percentage points. Medicaid receipt falls significantly for young children, while children substitute into private health insurance, leaving overall child health insurance coverage unchanged.

Q: How does DOD spending affect disability rates? A: A 1 percent increase in DOD spending leads to a 0.001 percentage point reduction in self-reported disability rates among households without a bachelor’s degree. The effect is most apparent for this group, the middle-aged, and Whites. In the comparative analysis, the employment margin accounts for a disability decline of -0.051 for no-bachelor’s households, nearly half of the total disability decline of -0.114 for that group.

Q: What are the occupational prestige and commute time effects? A: A 1 percent increase in DOD spending raises a city’s average occupational prestige score (Siegel score) by 0.024 points, with the effect concentrated among no-bachelor’s households (0.037). Commute time falls by 6.7 minutes per day; at a value of time of $10/hour, this implies an annual benefit of approximately $558 per worker.

Q: How does DOD spending affect household formation outcomes? A: Marriage rates increase and the likelihood of single parenthood decreases for White households. Divorce rates decrease for middle-aged and Black households. White households become more likely to own homes and less likely to live in multi-family homes. Estimates for Black and Hispanic households are imprecise.

Q: What are the mortality effects of DOD spending, and how do they compare to general demand shocks? A: A 1 percent increase in DOD spending as a share of local income leads to 2.61 fewer deaths per 100,000 among those aged 45–65 and 8.49 fewer deaths per 100,000 among those over 65, with health-related deaths accounting for the majority of the decline. This implies the DOD must spend approximately $25 million to save a life aged 45–65, exceeding the typical value of a statistical life. By contrast, a general demand shock increases mortality by approximately 100 deaths per 100,000, consistent with Ruhm’s (2000) finding that mortality is procyclical; mortality increases from general shocks are also concentrated among those over 45.

Q: What explains the divergent mortality effects of DOD and general demand shocks? A: One mechanism explored is pollution: general demand shocks raise median AQI substantially while DOD shocks leave AQI largely unaffected, consistent with Ruhm’s (2000) emphasis on deteriorating health behaviors during expansions. The paper also points to differential occupational and geographic composition: DOD shocks flow to construction, manufacturing, and production/maintenance occupations rather than to higher-pollution or higher-accident-risk activities common in broad economic expansions.

Q: How do the crime effects differ between DOD and general demand shocks? A: DOD spending shocks are associated with a statistically significant reduction in vehicle theft but no significant change in other crime categories. General demand shocks, by contrast, appear to increase vehicle theft and aggravated assault. Voter turnout falls substantially in response to a general demand shock; both shock types reduce Democratic vote shares.

Q: What is the key mechanism explaining why DOD shocks have stronger social effects than general demand shocks? A: Despite similar average earnings effects for no-bachelor’s households (0.71 for DOD vs. 0.69 for general shocks), DOD shocks produce a much larger employment rate increase for that group (24.5 vs. 14.3 percentage points). The authors show that this employment margin accounts for large shares of the differential declines in poverty, food stamp receipt, disability, and improvements in marriage rates and occupational prestige.

Q: What accounts for the differential employment effects on no-bachelor’s households between DOD and general demand shocks? A: Of the 0.21 percentage point differential employment effect, roughly one quarter is associated with differences in the no-bachelor’s share across industries. Differences across cities and across occupations each account for much larger shares. DOD shocks are directed toward smaller, lower-income, lower-employment cities with fewer college-educated residents, while general demand shocks go to larger, richer cities with more elastic housing supply and higher education levels.

Q: Which industries and occupations drive DOD’s stronger employment effects for no-bachelor’s workers? A: Within industries, DOD-induced employment gains for no-bachelor’s workers are strongest in construction and manufacturing, with much milder effects from general demand shocks in these industries. The occupations benefiting most are military occupations (broadly defined) and Production and Maintenance occupations, which rank among the lowest in occupational prestige for no-bachelor’s workers.

Q: How does DOD spending compare to targeted social programs in achieving distributional goals? A: The paper argues that although DOD spending is not designed as social policy, its effects on earnings for households without a bachelor’s degree, poverty reduction, disability reduction, homeownership, and occupational upgrading mirror the stated objectives of many targeted programs (job training, housing subsidies, SNAP, Medicaid). At the same time, DOD-induced life savings cost approximately $25–45 million per life, exceeding the typical value of a statistical life, so the mortality benefits cannot alone justify the spending.

Local DOD earnings multiplier: The dollar amount of earnings for a demographic group produced by a dollar of local DOD spending over a two-year period, estimated using a two-year differenced panel regression with CBSA and time fixed effects, instrumented by a Bartik-type shock.

Bartik-type IV shock: An instrumental variable constructed as the product of a location’s average share of DOD contract spending and aggregate contract spending in a given period; used to isolate the component of DOD contracts associated with new production rather than anticipated or smoothed payments.

General demand shock: A Bartik shift-share shock constructed from local industry employment shares and national industry-level growth rates across all private-sector industries, used as a comparison series to evaluate whether DOD spending effects are generic or specific to defense contracts (correlation with DOD shock: -0.07).

Extensive margin of employment: The change in the employment rate (entry from unemployment or non-participation into employment) as distinct from hours or wage adjustments among the already-employed; identified in the paper as the primary mechanism linking DOD shocks to differential social outcomes for no-bachelor’s households.

Deaths of despair: Drug-and-alcohol-related deaths and deaths by suicide, following Case and Deaton (2020); examined here at higher frequency as an outcome of labor market earnings changes induced by aggregate demand stimulus.

Occupational prestige (Siegel prestige score): A summary measure of job quality based on survey-derived perceptions of occupational standing (Siegel 1971), aggregated to the CBSA level by demographic group; used as a measure of upward job-ladder mobility in response to demand stimulus.

Source text origin: A classification of the text basis for a paper summary — full PDF or OA-HTML versus abstract-only; the pipeline hard-blocks summaries derived solely from abstract text.