Cyclical Government Spending Impacts Economy: Employment Drop Leads to Budget Cuts
Government spending that is usually thought to be flexible actually changes predictably with the economic cycle. By analyzing data from U.S. states, it was found that when employment drops by 1%, this systematic part of government spending also decreases by 0.23%. A specific economic model was used to estimate these effects. The study also showed that a previous method for measuring the impact of government spending did a good job overall, but tended to overestimate the long-term effects.