In the aftermath of the consumer debt–induced recession, policymakers have questioned whether fiscal stimulus is effective during periods of high consumer indebtedness. This study empirically investigates this question. Using detailed data on Department of Defense spending for the 2007–2009 period, we document that the open-economy relative fiscal multiplier is higher in geographies with higher consumer debt. The results suggest that in the short term (2007–2009), fiscal policy can mitigate the adverse effect of consumer (over)leverage on real economic output during a recession. We then exploit detailed microdata to show that both heterogeneous marginal propensities to consume and slack-driven economic mechanisms contribute to the debt-dependent multiplier.

We exploit a panel of city-level data with rich demographic information to estimate the distributional effects of Department of Defense spending and its effects on a range of social outcomes. The income and employment generated by defence spending accrue predominantly to households without a bachelor's degree. These households as well as Black and Hispanic households tend to disproportionately benefit from this spending. Defence spending also promotes a range of beneficial social outcomes that are often targeted by government programs, including reductions in poverty, divorce rates, disability rates, and mortality rates, as well as increases in homeownership rates, health insurance rates, and occupational prestige. We compare the effects of defence spending with the effects of general demand shocks and explore reasons for the differential effects of the shocks.

This paper documents a previously unrecognized debt‐related investment distortion. Using detailed project‐level data for 69 firms in the oil and gas industry, we find that highly levered firms pull forward investment, completing projects early at the expense of long‐run project returns and project value. This behavior is particularly pronounced prior to debt renegotiations. We test several channels that could explain this behavior and find evidence consistent with equity holders sacrificing long‐run project returns to enhance collateral values and, by extension, mitigate lending frictions at debt renegotiations.