Local Effects of a Military Spending Shock: Evidence from Shipbuilding in the 1930s

I estimate the effect of government spending at the county level using a previously little studied 1934 naval spending program. This act aimed to build up the Navy to treaty allowances, stimulated by fears about Japanese military expansion. Using data from historical sources, I find that manufacturing output, employment, earnings, retail sales and household consumption all grow faster in the 1930s in counties hosting shipyards before 1934. An exercise to translate these results to an aggregate government spending multiplier suggest a multiplier of $2.64 during the Great Depression. JEL Codes: E62, E63, E65 ∗Economist, Economic Policy Division, Office of Management and Budget, Washington, DC; The views expressed in this paper are those of the author and do not reflect the views of the Office of Management and Budget or the Executive Office of the President. This research was conducted as part of a dissertation while undergoing graduate studies at the University of Houston. [email protected]; I am grateful to Bent Sørensen, David Papell, German Cubas, and Dietrich Vollrath for their advice and guidance in writing this paper. Joshua Hausman, Volodymyr Korsun, and Wen Long also provided helpful comments, as did participants in seminars at the University of Houston, University of Texas, Sam Houston State University, the Bureau of Economic Analysis, the U.S. Treasury Department, the Office of Management and Budget, the Congressional Budget Office, Babson College, Saint Louis University, and the 90th annual conference of the Western Economic Association International. All errors are my own.