During the past four years the US economy has experienced the worst recession since the 1930s. In the most recent fiscal year real output was only 1% higher than four years earlier while federal spending adjusted for inflation increased by 24%. The dramatic increase in federal spending was in response to the belief it would promote a stronger economy.
Some believe the recent massive increase in federal spending has helped to prevent an even weaker economy. Others believe the increase in federal spending prevented a more vigorous recovery. Examining the historical relationship between federal spending and economic activity can provide insights regarding the normal relationship between federal spending and economic activity.
Throughout most of the past century rapid increases in federal spending have been associated with periods of economic weakness. The usual explanation for this pattern is that federal spending increases in response to a weak economy and then slows as the economy strengthens. While this may be true, it doesn’t resolve the issue.
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