Government spending as a stabilizing force

Posted by: Michael Mandel on October 07

One big difference between now and the Great Depression is that government spending is far bigger as a share of the economy.

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This chart shows government spending—federal, state, and local—as a share of GDP. These numbers include direct spending on salaries and purchases, and spending on transfer programs such as Social Security, Medicare, and Medicaid.

The question is whether these flows are interrupted by the current credit crisis. On the state level, if California’s tax revenues fall and the state can’t borrow, then it will have to make big cutbacks in spending. That suggests there may be a very big role for the federal government in lending to state and local governments.

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Reader Comments

Joe Cushing

October 7, 2008 10:38 PM

I hope the states run out of money. It seems running out of money is the only way to get them to slow spending. I hope the Federal government doesn't loan too much to them either. I'll take a hit on the economy if it means the sates figure out that they can live with less spending. While, we're at it, I hope the federal government figures out it is over its head too. I wish the government would go back to spending 7% like it used to.

I'm glad your chart started at 0%. Most charts don't and that is distorting.

Brandon W

October 8, 2008 07:14 AM

Maybe if California and Massachusetts received as much back from the Federal Gov't as they put in, they wouldn't be facing shortfalls. California sends in $1, and gets $0.78 back. Massachusetts sends in $1, and gets $0.82 back.** Meanwhile, Palin's Alaska sends $1 and gets $1.84 back, and McCain's Arizona gets $1.19 for every dollar it sends to the Federal Gov't. (Illinois and Delaware get $0.75 and $0.77 back, respectively).

** You can see this on a chart I posted on my blog: http://brandonw.posterous.com/republican-states-on-welfare

LAO

October 8, 2008 04:17 PM

If I'm not mistaken, the converse chart -- percent of GDP generated by private enterprise -- would show an alarming downward slope.

Neither chart would be quite so extreme if expressed as GDP per capita, since the population has more than doubled from 123 million in 1930 to 300 million in 2006. It also would probably not have such an exaggerated spike if it looked backwards at an average GDP.

Brandon W, thanks for the state data. One of Denny Hastert's (R-IL) last acts was to aim $4 billion in federal highway funding at Illinois, with the stipulation that Illinois has to match it to get it, and it's about to expire. The state is so strapped that there's just no way they are going to come up with $4 billion -- Republicans are taking great pleasure in using it to make a laughing stock of the Democratic governor and legislature. I found a chart at nationalpriorities.org that says the IRS collected $119 billion from Illinois in 2005 but only $81 billion was returned. Arizona got back $15 billion more than they paid. Hmmm. Delaware is apparently an outlyer because of so much incorporating there when there is often not a physical presence. I have to admit that it is also distorted by the clustering of Social Security recipients in certain states.

LAO

October 8, 2008 04:22 PM

Michael,

Actually, I was surprised that today's globally coordinated central bank rate cut did not inspire you to renew your question about a global "Fed".

Lord

October 8, 2008 08:52 PM

This is the time for government to step up, not down. Mistakes like that worsened and lengthened the Great Depression.

Jack O.

March 11, 2009 03:46 AM

Less input over greater output is of course better than the reverse. With the present crisis government spending must be done wisely.State spending was about $10 billion per state annually on corrections. Many people feel that this is far too much so are considering changes to save cash. Most people would love to see less offenders who don’t need to be jailed released and then monitored in order to free up a little more on the state budget. It is estimated that many offenders do not need to be incarcerated if they haven’t committed any violent crime. It is hard to justify locking someone away for some minor offenses. It seems some codes in the law may get some corrections of their own.

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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