State Government Spending

The CBPP has a new report out about the decline in state government expenditures during the Bush administration. It’s pretty striking – state spending has taken quite a tumble over the past few years, as the following chart shows.

Source: CBPP.

The CBPP report details many particular examples of state government services that have been and will be cut in reaction to reduced state government revenue – examples that are very painful and costly to millions of individuals. But some people have also wondered if this is large enough to have any macroeconomic consequences. If state spending is currently 0.3% of GDP less than it was for during the 1990s, that translates into a reduction in state spending of about $35 billion per year. While not a huge number, it is certainly large enough to undo a non-negligible portion of the Bush tax cuts (especially since the majority of the Bush tax cuts is probably saved anyway, not spent). If we were to add local government spending cuts to these cuts in state spending, I suspect that the effect of this contraction in S&L spending counteracts a large portion of the increased consumption that results from last year’s tax cut.

It’s a good example of fiscal policy that’s a failure.

Kash