Historical Economics: U.S. State and Local Government

As Americans reconsider the relative sizes and roles of federal, state, and local government in the federal system, there is renewed interest in how the system functioned and changed in past decades. Twentieth-century trends are well documented. At the start of the century, governments at all levels absorbed and disposed of about one-tenth of gross product; now, near the end of the century, the proportion is about one-third. Government not only grew relative to the economy; it also became more centralized. The federal share of all governmental revenues and expenditures was approximately one-third when the century began; now it is about two-thirds. The state share of the state and local "fisc" (revenues and expenditures) was about one-seventh in 1902; now it is about one-half. (1) One implication of these trends is that local government, the largest fiscal component (about 60 percent) of the federal system in terms of revenue at the start of the century, is now the smallest - although intergovernmental transfers raise local government to rough parity with state government in terms of expenditures. The reduction in the relative fiscal role of local government was especially rapid in the New Deal years after 1932. Contrary to widespread impressions, government's growth rate did not accelerate in the 1930s; the significant change in that era was a shift of government spending from the local to the federal level. (2) What about the decades before the twentieth century? Was government in the aggregate increasing its share of the U.S. economic pie? Were centralizing trends already in place? And, in what ways did fiscal and other activities of federal, state, and local governments interact with each other and with the private sector? Initial approaches to these questions reveal several problems. For example, there was virtually no comprehensive quantitative record of state and local fiscal activity for the first century or more of U.S. history. Further, although the data on revenues, expenditures, and debts needed to construct such a record exist in the voluminous reports of state, county, and municipal authorities, it would be a major task to retrieve, codify, and compile them. Fortunately, each of us independently was interested in the questions, and so we formed a partnership to tackle the job. We have made considerable progress in retrieving and processing the data. (3) Our ultimate goal is to present and analyze a comprehensive quantitative record of U.S. fiscal federalism from 1790 to the present. This research summary reports on some of our findings to date. Government's Economic Share Since our work is still in progress, we can only speculate in an informed way on the trends in government's share of gross product and fiscal centralization. Federal revenues and expenditures increased as a proportion of gross product over the course of the nineteenth century, but not much. The federal share was in the 1-2 percent range from 1790 to 1860, rising to more than 3 percent by the beginning of this century. (4) Our findings for several large states (New York, New Jersey, Ohio, and North Carolina), for which our state and local fiscal data for the early decades of U.S. history are most complete, indicate a wide range of variation. Before the Civil War, state and local government in New York raised and spent on a per capita basis well in excess of per capita federal revenues or expenditures. But in North Carolina, at the other extreme, state and local per capita fiscal activity averaged only 30 to 40 percent of federal levels. (5) In New Jersey and Ohio, per capita state and local revenues and expenditures roughly equaled the per capita federal budget at several antebellum dates. Projecting (very tentatively) on the basis of such partial returns, we think our estimates for the early decades will indicate an overall state and local fiscal share roughly comparable to the federal government's share of the economy. …