June 11, 2012

State and Local Governments Outpace Growth of Private Sector

State and local governments depend on the private sector for their survival. Almost every dollar that these governments spend is either borrowed or taxed from the private economy. Yet, for more than half a century, these governments have continuously outpaced the growth of the private sector on which they depend.

In the chart below, Mercatus Center senior research fellow Matthew Mitchell uses inflation-adjusted data from the Bureau of Economic Analysis to illustrate the unsustainable growth of these governments. The blue line shows the size of the private sector as a multiple of its 1950 value and the red line shows the size of state and local government spending as a multiple of its 1950 value.

The graph shows that, after 60 years, the private economy is 5 times its 1950 size. But state and local governments are spending almost 13 times as much as they did in 1950. “This is like a household whose income has grown five-fold over a period of time,” Mitchell reports. “That's great news. But, unfortunately, their spending habits have grown 13-fold. This divergence is unsustainable.”

Matthew Mitchell is a senior research fellow at the Mercatus Center at George Mason University.