With all the talk on TV, radio, and the Internet about the size of government in the United States, you could be forgiven if you thought government spending has increased in during the recession. The thing is, it hasn’t.
Federal expenditures have increased, but total government spending in the U.S. has “barely changed,” said Martin Eichenbaum, a professor of economics at Northwestern University. “Why? Because local and state government spending went down the toilet because they have to have balanced budgets.”
“Spending in real terms remained constant, roughly,” said Sergio Rebelo, a professor of finance at the Kellogg School of Management. “What happened and what people think happened is very different.”
Part of the illusion is due to the size of the federal stimulus plan, Rebelo said, but because state and local spending declined substantially, total government spending has remained the same. Federal, state, and local government spending has barely budged since the first quarter of 2009 and has only increased about 4.5 percent since the fourth quarter of 2007. That’s roughly in line with inflation over that same period (4.66 percent).
What’s more, federal spending as a fraction of GDP has dropped over the past fifty years, according to early results from new research by Eichenbaum, Rebelo, and their colleague Lawrence Christiano. Compared with the early 1960s, today’s federal government spends about 60 percent less when measured against GDP. State and local outlays, after steadily increasing in the 1960s, have remained relatively constant until recently.