Stimulus to states to give good bang for buck-SF Fed

(This report is part of a Reuters series on infrastructure)

By Ros Krasny

CHICAGO, April 20 (Reuters) - The huge federal fiscal stimulus funds now heading to state governments seems likely to yield a strong bang for the buck, according to an economist at the Federal Reserve Bank of San Francisco.

Allocations between states "do not represent the absolute optimal stimulus (but) they are on the whole well-directed," senior economist Daniel Wilson said in newsletter released on Monday.

"The economic impact of this support for state governments is more likely to exceed than to fall short of forecasts," Wilson said.

The $787 billion American Recovery and Reinvestment Act (ARRA) was signed into law in February, with as much as $300 billion of the total earmarked for states, mostly spread across four key programs.

A number of state public works projects dependent on ARRA funding already have begun, and states are incorporating expected stimulus funds into 2009-2010 budgets, Wilson said.

The economist termed the largest slice of the pie, the $90 billion fiscal relief fund meant to shore up financing for state Medicaid programs, "well targeted" because it is geared toward states with the most severe fiscal strains.

A separate $40 billion line of aid provided to fund more unemployment insurance should also have a strong impact by getting money into the hands of the people most likely to spend rather than save -- the unemployed.

By contrast, the distribution of at least $70 billion to fund transportation projects, and the largest source of unrestricted funds in the ARRA, "clearly appears less than optimal," Wilson said.

That money will likely be carved up using a formula based on factors such as a state's total highway miles, and needed repairs to roads and bridges previously identified by the Department of Transportation.

"They are not designed to account for a state's economic condition," and could be skewed toward more sparsely populated states that have tended to fare better during the current downturn because of their recent natural resources boom, the economist said.

Critics have charged that the closer a state's economy is to operating at capacity, or full employment, the greater the potential for public investments to "crowd out" potential private investments, Wilson noted.

However, since all U.S. states have seen unemployment rise substantially during the long recession, "it's hard to argue that any state ... does not have idle capacity that can be put to use on major construction projects," he said. (For more on infrastructure, please visit: here) (Reporting by Ros Krasny; Editing by Jan Paschal)