Government Spending and Economic Recovery: A State Comparison during the Great Recession

Abstract

In late 2007, the U.S. entered the worst recession since the Great Depression. State and local governments saw large decreases in their revenues and, due to their constitutions, were forced to balance their budgets, usually by reducing spending. The loss in state and local government spending during the recession was countered by two large federal expenditures totaling over a trillion dollars. Every state had a different amount of per capita government spending during the recession. This paper aims to answer the question: did states that, relative to other states, had high amounts of per capita government spending recover faster economically than states with low amounts of per capita government spending? Using national macro data, much of which comes from the census and the Bureau of Economic Analysis, and OLS models, I conclude that states that had high amounts of government spending, either in their capital or current budgets, recovered 5% faster in both GSP and payroll. The data also suggest that the full effect of the stimulus spending was over by 2011.