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The Aggregate and Local Economic Effects of Government Financed Health Care

Government-financed health care expenditures, through Medicare and Medicaid, have grown from roughly zero to over 7.6 percent of national personal income over the past 50 years. This paper investigates the stimulative effects of Medicare spending. Using an annual, state-level panel, we regress state income growth on own-state spending and spending in other states, instrumented by unanticipated shocks to aggregate Medicare spending, to estimate local and spillover effects. In our benchmark specification, the own-spending multiplier equals 1.3 and the spillover multiplier equals 0.4. The total Medicare spending multiplier (i.e., local plus spillover) is approximately 1.7.

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