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

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.