To Spend or Not To Spend? An Empirical Analysis of the Fundamental Role of State Governments in Economic Output

  • Stephen Holt
  • Matt McCreary
  • Lindsay Haslebacher
Keywords: recession, economic growth, state government, political party, gross domestic product

Abstract

Amidst an economic recession and a long period of high rates of unemployment, the appropriate role of government expenditures in creating economic growth has become a major feature in current political discourse at both the federal and state level. This article uses an endogenous growth model to examine the fundamental relationship of state-level government spending and per capita GDP. Specifically, the analysis uses state-level data covering a six-year period controlling for state workforce characteristics, distribution of industrial activities, and tax revenue sources to develop a working model of state economies. The analysis found that state government spending had a positive, statistically significant effect on per capita GDP. The marginal return in per capita GDP for an additional dollar per capita of public expenditure was found to be between $1.89 and $2.39. In addition, indicator variables for political party in power were added to examine correlations between political party control and economic outcomes. The political party in power had no significant effect on GDP. The positive, statistically significant correlation between GDP and public expenditures alongside political variables with no significant effect on GDP indicates specific policies implemented by state governments may have more explanatory power of economic output than political party control.

Author Biographies

Stephen Holt
Stephen Holt is graduating with his Master of Public Policy from The George Washington University. His concentration is program evaluation and management. He earned a Bachelor of Arts degree at the University of Florida with a double major in Political Science and English. He currently serves as a Research Assistant at Westat in the Education Studies Group.
Matt McCreary
Matthew M. McCreary is a Major in the US Army. He is in his final year of the Master of Public Policy program at The George Washington University where he is concentrating in national security policy. Matthew earned a Bachelor of Arts degree at The Ohio State University with a double major in Economics and Political Science. His next assignment will be as an interagency fellow at the Department of State. He is married to the former Gretchen Green from Marion, OH, and they have two children, Harper Lee and Greyson Michael.
Lindsay Haslebacher
Lindsay Haslebacher is in her final year of the Master of Public Policy program at The George Washington University where she is concentrating in urban policy. Lindsay earned a Bachelor of Arts degree at The University of North Carolina at Chapel Hill with a double major in Public Policy and Political Science and an interdisciplinary minor in “Philosophy, Politics, and Economics.” She is currently a graduate fellow for Research and Assessment within The George Washington University’s Student and Academic Support Services division.
Published
2012-05-01
Section
Articles