THE ECONOMIC IMPACT OF FEDERAL SPENDING ON STATE ECONOMIC PERFORMANCE
May 26, 2009
Federal government spending comes with costs. Every dollar the government spends must first be removed from the pocket of the private sector -- through higher taxes or higher borrowing. Either way, government spending crowds out private sector spending, diminishing the private economy's rate of growth. In other words, increased government spending makes citizens poorer because it takes their money now while reducing their future income.
The impact of accepting unemployment insurance (UI) funds from the American Recovery and Reinvestment Act of 2009 (ARRA) is particularly subject to discussion, say researchers from the Buckeye Institute:
- UI expenditures increase during a recession, which often drains state trust funds.
- Historically, the federal government steps in to cover the increased costs, but with strings that require expanded UI benefits.
- Once the temporary federal money has run dry, states have historically been forced to ramp up their collections in order to maintain the additional support previously provided by the federal government.
This relationship illustrates that increases in government spending relative to the size of the private sector causes a reduction in the overall growth of the economy, says researchers:
- For example, between 1965 and 1983, the government expenditure wedge grew quickly, rising 16.6 percentage points to 49 percent.
- Growth in the private sector slowed to 2.5 percent per year.
- On the other hand, between 1983 and 1988, growth in the private sector accelerated to 5.1 percent per year as the government expenditure wedge fell 3.3 points back down to 45.7 percent.
Consequently, the cost of accepting federal dollars from the ARRA will be a long-term drain on the private sector, says the Institute:
- The ARRA will increase the government expenditure wedge from 49.16 percent to 52.41 percent.
- This increase will reduce the growth in real net business output by 2.5 percent, which translates to a reduction of 1.7 million jobs nationally.
Source: Donna Arduin, et al., "The Economic Impact of Federal Spending on State Economic Performance: An Ohio Perspective," Buckeye Institute for Public Policy Solutions, April 2009.
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