Fun with Numbers: State Fiscal Policy Edition


Warning: serious wonkery ahead.  Not for the faint of chart.

Amid discussions of how dire are the fiscal situations of American states and which state most resembles Greece, plus various initiatives on the ballot in the recent election, I was curious how our fair state of Washington stacks up in terms of fiscal responsibility and sustainability.

I pulled spending data on California, Illinois and New York as they’re the most often compared to Greece (Athens-on-the-Pacific/Great Lakes/Hudson respectively).  I also threw in Texas which has outperformed most states economically over the last ten years without being completely dependent on natural resources (sorry Dakotas) and it supposedly has a different governmental philosophy (does “everything is bigger in Texas” extend to fiscal policy?).

The results are surprising as seen in Figure 1 below.  Since 2000, Washington state government spending has grown faster than that of California, Illinois and New York (gulp!).  And that is after being the most frugal through 2006!  New York is actually the most restrained state of the bunch.

Figure 1: Growth in State Government Spending: 2000-2010
(Data is normalized so 2000 spending = 100)

If you look at it just since 2006 in Figure 2, Washington’s spending growth dramatically exceeds the other Hellenic wannabes.  Spending is up almost 60% in five years.  (And note supposedly modest Texas has seen faster growth than California in this period).

Figure 2: Growth in State Government Spending: 2006-2010

My operating assumption is government spending can’t grow much if at all faster than the underlying economy over time.  Unfortunately, that isn’t even remotely the case in Washington, as seen in Figure 3.  Growth in state spending has outpaced the economy massively over the course of the last decade.  The economy has grown by a little over 40% while state government spending has grown by almost three times the economic growth rate.  Now you could argue the growth early in the decade is the result of countercyclical spending and automatic stabilizers in response to the recession after the dot com collapse, but that doesn’t explain more recent growth.  Spending hit an inflection point in 2006 and has grown dramatically faster than the economy since.  This takeoff predates the Second Global Contraction or the Global Financial Crisis or the Big-Ass Recession or whatever we’re supposed to call our current predicament, so it isn’t just countercyclical spending.  In fact it is a straight line up from 2006.

Figure 3: Growth in Washington State Government Spending and Washington State Economy: 2000-2010image_thumb10

For comparison, the same spending vs. economy comparison for California is in Figure 4.  It is a similar graph of excess although California is less of a hockey stick than Washington as they lacked the restraint of Washington in the earlier years.

Figure 4: Growth in California State Government Spending and California State Economy: 2000-2010  image

Now normalizing the data above to show growth hides some interesting comparisons between states.  Washington is the smallest of the states in the sample, with an economy half the size of Illinois and a sixth that of California.  But in relative terms, state government spending consumes a higher percentage of the Washington economy than any of the other four states as seen in Figure 5.  Moreover, it has grown from 10% in 2000 to now almost 14%.

Figure 5: State Government Spending as a Percentage of the Total State Economy: 2009

When you normalize spending for economic growth in Figure 6, allowing faster growing economies to grow their spending faster, California regains the lead for the most growth in state spending relative to underlying economic growth.  Both California and Washington grew state spending relative to economic growth by about three times what New York and Texas did over the last decade.  Washington has had decent economic growth during most of the last decade and outgrew both California and Illinois in absolute terms, but not Texas or New York.  But Washington has been growing spending much faster than any state since 2006 relative to economic growth.  And just to be clear, on this graph, government spending growth exactly in line with economic growth would be a perfectly flat line at 100, so other than Texas briefly, all our states have seen spending significantly outgrowing their economy.  You do see what looks like a countercyclical upswing in spending after the 2000 downturn, but the next upswing starts before the current downturn and just keeps on going even as the economy goes from growth to recession.

Figure 6: State Government Spending Normalized for Economic Growth: 2000-2010image_thumb7

I’m not sure what to conclude other than Washington state spending growth over the last decade seems irresponsible and unsustainable.  Washington was on a relatively modest path but then went nuts in its spending after 2006 and I don’t know why.  Strong economic growth is the absolute best solution for fiscal challenges, but even then you’d like to see growth in government spending tracking the rate of economic growth, and certainly not growing at three times the rate.  Unfortunately, we’re in all likelihood in for a period of slow economic growth over the next few years (read This Time is Different: Eight Centuries of Financial Folly for a good, if depressing, statistical look at the aftermath of financial crises – you can just read the first and last two chapters and skip all the data exposition in between, though you will miss cool asides on Henry VIII’s fiscal policy and how Newfoundland lost its sovereignty.  It also reinforces, starting with the title, the inability of government policymakers and appropriators to learn from past consequences of irresponsible fiscal behavior). 

A Note about Data

The data came from which lets you download raw data for manipulation.  Some of their data is historic, some estimated and some interpolated.  I double checked the data with Federal and individual State sources and, interestingly, none of the numbers matched identically but all were close.  I assume any noise averages out.  To get a full economic cycle, I started with the year 2000.  And these numbers don’t include various off-budget shenanigans or underfunded pension funds or any of the other inexorable headlines of the near future.

My Excel spreadsheet with the underlying data and normalization calculations can be downloaded here for those of you who want to wonk out even further.  And I uploaded it to both Google Docs and Microsoft Office Web Apps so you can have your own personal battle of web productivity solutions.

It would be interesting (but not interesting enough for me to actually do it today…) to look at a couple other things:

  • Compare these spending numbers against other measures of economic performance such as per capita and household income as well as disposable income. 
  • Combined state and local government spending to see if overall spending per head between states is closer. 
  • Where the spending growth came from?  The dataset above lets you break down spending into some standard categories (e.g. healthcare vs. infrastructure).  Did specific categories booming or was it growth across the board?
  • Why did Washington State spending go nuts after 2006?
  • What has happened on the revenue side? How big a gap is there relative to spending as state revenues have declined along with the economy?  This is the biggest factor in sustainability – how well has Washington revenue held up relative to other states?

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