Possible Insight

Don’t Forget the State Budgets!

with 4 comments

Surprise!  Another post on state budgets.  Apparently, this topic has become at least a pet peeve and perhaps a mild obsession.  Today, I saw that Tyler Cowen replicated a graph from a post by Karl Smith, a professor at UNC.  The claim is that government tax revenues aren’t growing as fast as they used to and that eventually this may result in a relative decrease in the role of government.  (There’s a backstory of political commentary here that I’m ignoring because it’s not relevant to my point.)

Of course, Karl only looked at federal government revenues.  However, with my state budget OCD, I immediately saw the flaw in this analysis.  As one would expect from a public economics professor, he did a good job of controlling for inflation and population, but he forgot that the federal government isn’t the only one with it’s hands in our pockets.

Here are his graph of real per capita federal revenues and my graph of real per capita federal+state+local revenues.

Karl claims that the slope has changed since 2000 so that the rate of growth has significantly slowed or even turned negative.  But I claim that if you add in state and local revenues, the peak to peak trend seems relatively steady since about 1980.  (Note that Karl’s graph is of quarterly data and mine is of annual data, because the state and local series is only available yearly.)

Here are his graph and my graph of the 10 year growth rates:

The peak and trough from this last business cycle look very slightly lower, but my eyeball estimate is that it’s not significant.  Government spending has continued it’s inexorable rise.  All that’s happened is we’ve shifted the relative tax burden modestly from the federal level to the state+local level.

(Like Karl, I generated the data using the Federal Reserve Bank of St Louis’ FRED Graph tool.)

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Written by Kevin

June 7, 2011 at 12:17 pm

Posted in Government

4 Responses

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  1. That’s great work. Thanks.

    Anonymous

    June 8, 2011 at 7:07 pm

  2. That’s great work. Thanks.

    Anonymous

    June 8, 2011 at 7:07 pm

  3. Deflate by GDP instead of (pop*cpi) and you get a very different picture.
    http://research.stlouisfed.org/fredgraph.png?g=WJ

    Todd White

    June 28, 2011 at 4:43 pm

    • Of course.  Government activity above a modest level suppresses growth rates.  So you would expect government growth to eventually reach its maximum percentage of economic activity.  But this is an indictment of government activity.

      If government were useful, it’s absolute level would grow but it’s percentage of GDP would drop.

      Anonymous

      June 30, 2011 at 10:34 pm


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