A STUDY OF THE COUNTERCYCLICAL ASPECTS OF TOTAL GOVERNMENT FISCAL POLICY, 1929-40*

Abstract

THE PURPOSE OF THIS study is to investigate the countercyclical aspects of federal-state-local fiscal policy during the period of 1929-40 and to consider the implications of this analysis as it relates to the feasibility of coordinating countercyclical fiscal policy at all three levels of government. There are serious limitations to a co-ordinated federal, state, and local fiscal program for economic stabilization. These limitations are (1) the bias of state and local tax structures in favor of taxing consumption and the inflexibility of state and local tax structures; (2) the legal, institutional, and market difficulties experienced by state and local governments in obtaining credit; (3) the inability of state and local governments to stabilize capital expenditures; (4) the over-all failure of total government net spending to be properly timed, co-ordinated, and of a sufficient magnitude to replace the deficiency in private spending. A long-run vision will envisage progress in overcoming many of the difficulties of state and local governments; however, the immediate emphasis of this study is on the encouraging findings that would seem to verify the feasibility of a co-ordinated fiscal program. These encouraging factors were as follows: (1) During the 1930's social and economic conditions fostered a higher level of federalstate spending, reflecting a growing sense of responsibility for economic stabilization. (2) State-local tax and spending structures became more centralized during the 1930's, with state taxes and spending a larger ratio of the total. States are in a better position to pursue a countercyclical fiscal policy than are local governments. States have more and better-administered tax sources, better borrowing facilities, and a more flexible, dispersed spending program than do local governments. (3) Federal grants and federal loans to state and local governments played an anticyclical role during the 1930's and offer a means by which federal, state, and local fiscal policy may be