Federal Grants during the Eighties - FEDERAL RESERVE BANK of NEW YORK

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Research Papers

Federal Grants during the Eighties

May 1995 Number 9508

Author: Ronnie Lowenstein

Federal grants policy changed significantly during the eighties. Grants to states and localities decreased as a share of GDP, the first sustained decline in aid since the forties. Restrictions on the use of federal funds were eased with the conversion of categorical matching aid programs into unconditional block grants. At the same time, aid to individuals rose at the expense of other major grants categories. Taken together, these changes in federal grants tended to decrease state and local government investment in physical and human capital. I estimate that the decline in federal grants for physical capital investment curbed average annual growth of state and local capital (as a share of GDP) by roughly 0.5 percentage points during the eighties, and slowed the growth of output by as much as 0.7 percentage points over the decade. Similarly, cuts in grants for job training decreased GDP growth by as much as 0.4 percentage points over the same period.

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