Federal, State, and Local Governments: Evaluating Their Separate Roles in Us Growth

Abstract

We use new US county level data (3,058 observations) from 1970 to 1998 to explore the relationship between economic growth and the size of government at three levels: federal, state and local. Using 3SLS-IV estimation we find that the size of federal, state and local government all either negatively correlate with or are uncorrelated with economic growth. We find no evidence that government is more efficient at more or less decentralized levels. Furthermore, while we cannot separate out the productive and redistributive services of government, we document that the county-level income distribution became slightly wider from 1970 to 1998. Our findings suggest that a release of government-employed labor inputs to the private sector would be growth-enhancing.

Keywords: Economic Growth, Federal Government, State Government, Local Government, Fiscal Federalism, Oates' Decentralization Theorem, County-Level Data

JEL Classification: O40, O11, O18, O51, R11, H50, H70