Government Spending and the Slump

In assessing the impact of the stimulus on the economy, one trap that many people seem to be falling into is confusing "federal spending" with "government spending." In fact, over 60% of the government purchases contribution to output (i.e., the G component of GDP), comes from state and local government. While federal component of fiscal policy has been expansionary, the state and local part has been pushing in the opposite direction, a problem that may get worse, according to Ezra Klein:

Some 46 states are facing budget gaps that will require them to cut spending or raise taxes. The Center on Budget and Policy Priorities estimates that in 2011, the states will have to come up with a total of $180 billion.

These budget shortfalls are the equivalent of a massive anti-stimulus, which some experts believe has overwhelmed the $787 billion stimulus passed by the federal government in 2009.

On this, see also Bruce Bartlett and Stephen Gordon (and this previous post).