Tom Ault makes an interesting point in the comments:

I’d just like to point out that some commenters are looking at a graph of total
government spending (the sum of federal, state and local spending) and
drawing correlations based on which party controls one or two branches
of the federal government. A quick look at graphs of federal,
state and local spending shows federal spending has hovered around 20%
of GDP since the 50s, while state and local expenditures have risen
steadily over the same period.

At first, Tom’s “quick look” at total federal spending looks dead-on:


Note, however, that there’s pretty big Korean War spike in the early fifties.  From the end of the Korean War to the early Reagan years, the upward trend isn’t as steep as it is for total spending, but it’s still there.  But it’s the second part of Tom’s comment that activates my spidey sense:

I don’t think it is fair to hold either
party at the federal level responsible for what the states do — at
least not without a more sophisticated analysis of the impact of
federal legislation on state expenditures, but certainly not on a
naive correlation drawn from a simple graph.

The amazing thing about state and local spending in the post-war era is how heavily it relies on federal grants.  At the end of WWII, it was about .5% of GDP.  Now it’s about 3.5% of GDP.


Most economists probably doubt that these intergovernmental transfers really increase the size of government much.  After all, can’t states and localities respond to federal grants by spending less of their own money and cutting taxes?  But the naive analysis is probably closer to the truth.  The literature on the so-called flypaper effect confirms that federal money really does stick where it hits.  When I worked with this data, in fact, I generally found that a dollar of grants increased state spending by more than a dollar.  (Unfortunately, my data lumped together matching and non-matching grants, so it’s not clear quite what the mechanism is).

Tom raises some important caveats, but focusing on the feds ultimately makes a lot of sense.  Even though I’m more skeptical of Tiebout competition than almost any economist I know, I still think that without federal subsidies, tax competition between states and localities would have kept their governments a lot smaller than the ones we see today.  And I still can’t figure out whether the current spending spike is a blip, or just a return to long-run trend. 

Any further thoughts?