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One of the statements of purpose of the American Recovery and Reinvestment Act (ARRA) was to help those most in need. We refer to this as state-contingent fiscal federalism: the distribution of more funds to sub-jurisdictions where the need is amplified by the depth of the recession. This concept fits squarely into the risk-sharing literature which focuses on the role of private and public insurance mechanisms in mitigating the cross-sectional variance of income and consumption. Assessment of the success or failure of the ARRA in helping those most in need boils down to estimating the covariance between the level of disbursement to individual counties and the unexpected change in income. In this paper, the unexpected change of income is estimated from a model of panel income dynamics at the county level (using the deviation of county income from the national average to parse out aggregate uninsurable risk). We find that the halflife of a deviation from the national cycle is about one year, indicating potentially large welfare gains from risk-sharing. Pooling all counties, we estimate a fiscal risk-sharing parameter of -0.131, meaning that about 13% of a typical county-level shock is offset by the state-contingent facet of the policy. While statistically and economically large, it is obviously a long way from the value of -1.0 predicted by full fiscal insurance. Interestingly, when the estimation is stratified by quartiles of the income distribution the fiscal risk-sharing parameter is 0.085 for the first quartile of the income distribution and not statistically significant. The second and third quartiles of the income distribution are predicted to have an offset of 25.6% and 15.7%, respectively. By the metric of preexisting levels of need in terms of the wealth distribution, the ARRA was not successful in meeting its goal of helping those most in need. Results are even more surprising when the sample is stratified by majority party affiliation and the poverty line; ARRA transfers to Democrat leaning counties were more skewed to above poverty line counties than was the case for Republican leaning counties. All of our results come with the caveat that automatic stabilizers and grants to state governments are not part of this investigation. These programs may have been more effective in getting funds to those most in need because they often expanding existing automatic stabilizers with well-known risksharing features (e.g., unemployment insurance). However, the lesson seems to be that discretionary spending through the grant, loan and possibly contracting channels are not consistent with a principle of helping those most in need. JEL Classifications: E0, E6

Did the American Recovery and Reinvestment Act Help Counties Most Affected by the Great Recession?