State and Local Government Spending Growth and Private Sector GSP Growth: An Examination of the 50 States and the District of Columbia

Abstract

In this paper we create an index that measures the growth of the 50 state governments and the District of Columbia’s expenditures relative to the growth of their private sector economies. In a state where government expenditures grow faster than the private sector economy as a whole, the amount of resources the government controls increases over time. This can have a negative effect on economic growth in the long run, since economic growth is driven by resource use and innovations in the private sector. We use two measures to describe the size of state and local government: state and local government’s contribution to Gross State Product (GSP) from the Bureau of Economic Analysis, and state and local direct general expenditures from the Census Annual Finance Survey. We then contrast these figures with private sector GSP, as measured by the BEA.