If one were to look at a standard textbook breakdown of GDP (expenditure approach), we would find the following changes occurring during the recent recession:
G (Government Purchases) doesn’t appear to have changed much. Where did all the hundreds of billions of stimulus dollars go?
Well, it is a little bit complicated. The G portion of aggregate expenditure only captures spending by federal, state and local governments on newly produced goods and services during a given period. For instance, the federal portion under G only shows federal government consumption and federal government gross investment. It does not include interest payments on debt or transfer payments.
To get a closer look at where the stimulus dollars went, it is worth looking at federal government current expenditure (which includes federal government consumption, various transfer payments, and interest paid on debt). The graph below highlights changes in federal government current expenditure (along with government consumption and transfer payments).
An interesting item under transfer payments is federal government grants to state and local governments, which has grown recently.
Most of the US stimulus spending was oriented towards infrastructure spending, grant provisions to states, social welfare spending and even tax cuts. Many of these items are not part of G, and hence we have just a slight change in G's share of GDP between 2007 and 2009.
A Note (BEA classification):
In the national accounts,
- Direct payment from a federal agency to a business to support current production or operations is classified as a subsidy
- Direct payments made to state or local governments are classified as grants or capital transfers.
- Payments associated with the acquisition or disposal of an asset is classified as a capital transfer.
Here is a nice chart (from the BEA) on stimulus spending:
To get an overall picture of the size of the government in the US, it is relevant to look at total government expenditure as a % of GDP. Total government expenditure is a comprehensive measure of government spending at all levels (includes federal government outlays, federal grants and state and local government expenditures)
