Bye, Bye Federalism. Hello Growing Government.

USA Today gleefully reports that exploding spending by state and local governments is “helping to put the brakes on the nation’s economic decline”. It includes this table:


State and local spending are on the rise (annual rate, change from previous quarter):
2008, First quarter 5%
2008, Second quarter 7.70%
2008, Third quarter 4.80%
2008, Fourth quarter -8.30%
2009, First quarter -2.60%
2009, Second quarter 4.80%

Source: Bureau of Economic Analysis

Yeah, the theory of stimulus is that when the private economy contracts in a recession, government spending should grow to offset, temporarily, that decline, until economic growth returns.

There are a number of problems with that. First, that increase in government spending is not driven by an increase in productivity the way private sector growth is, it is driven by borrowing against the next economic boom. That debt becomes a drag on the next growth cycle.

And the USA Today article highlights the second one very well. Increases in government spending are rarely temporary. Indeed, the article points out

State and local governments are adding new workers and raising pay:

• Employment. State and local governments added 12,000 workers, a 0.1% increase, in the quarter, reports the Bureau of Labor Statistics. The private sector cut 1.3 million jobs, a 1.2% reduction, during this time. Federal employment was flat.

• Compensation. Pay and benefits rose at a 4% annual rate in the second quarter for state and local workers, BLS reports.

So, state and local governments are using temporary federal funds to make permanent staff and pay increases. This assures a state and local fiscal crisis when the stimulus funds quit flowing.

Oh, and for a bonus, the state and local governments are selling their independence for these stimulus funds “Federal cash is now the No. 1 revenue source for state and local governments, surpassing sales and property taxes, the government data show.”