A central argument of the Tea Party and conservatives is that government spending is out of control and a dramatic departure from history that offends the American character. To that end, here's a graph of total government spending (at the local, state and federal level) as a share of potential GDP. Runaway government spending looks like this:
Wait, it looks like government spending has barely moved, at all. Why is this graph so emphatically undramatic? Two reasons. First, it takes into account the decline in state and local government spending since the recession started, which offset the increase in federal spending. Second, overall government spending looks especially small because the graph divides by a larger denominator: potential GDP, which is what the economy would produce without a recession sanding its gears. Washington always spends more in recessions to offset the penny-pinching among states and families.
All told, federal spending increased 21 percent in the last two years. But total government spending divided by potential GDP increased only a few percentage points.
One explanation for the sorry state of the economy is that although most people think the stimulus is a Big Dig, building new stuff throughout the country, it's turned out to be a Big Fill, helping states and families do old stuff like pay for health care and education. The federal government (which can and does run big deficits) loosened its belt while states (which can't and don't run big deficits) tightened their belts, in unison.
This graph makes another cool observation by distinguishing between government consumption (that's stuff the feds buy, like defense) and government transfers (that's money the government pays us, like Social Security and unemployment insurance). In the late 1960s, we spent much more on defense and much less on health care. But we are increasingly a government that taxes to pay cash promises to Americans rather than taxes to pay for itself.
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