On This PageJuly 1992, No. 59

In this Chicago Fed Letter, I look at the implications of the choice of consumption versus investment strategies by state and local governments, both nationally and within the five Seventh District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin.

Buy Now, Invest Later: State and Local Government Spending Strategies
Last Updated: 07/30/92
 Economists often call for an increase in public spending in order to spur economic growth. For example, despite the yawning federal budget deficit, 100 economists, including six Nobel laureates, recently proposed that federal spending on education and infrastructure be increased in order to stimulate growth in the economy. Proposals such as this one favor investment oriented government spending over consumption oriented spending. While both types of spending—consumption or investment—may be helpful in boosting short run aggregate spending during an economic downturn, investment spending carries the added benefit of stimulating longer term welfare, growth, and international competitiveness. Programs such as public aid, prisons, and government administration tend to have benefits which are immediately consumed. Other expenditures such as education and infrastructure development are investment oriented, producing returns to society years after the initial expenditure. Traditionally, the use of spending as an agent of economic growth has been primarily a concern of the federal government. However, during the 1980s, many program responsibilities fell upon state and local governments as federal support was withdrawn. Left to fend for themselves, state and local governments have shown more interest in using fiscal policy to help their economies grow. The question is: have state and local governments been adopting investment oriented spending strategies by boosting expenditures on education, infrastructure and the like?