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The Government Is Not Just Washington

Ezra Klein has a good column this weekend pointing out that the discussion of federal deficits and the stimulus misses the fact that the federal stimulus has, at best, merely counteracted the anti-stimulus from the states. State governments must balance their budgets, which means that during recessions they cut spending and raise taxes, which in turn deepens the recession. If you look at the total policy effect of government as a whole, it's not a massive stimulus but really a big nothing:

Because some of the federal stimulus dollars were saved rather than spent, the effective stimulus we've had has been less than the $789 billion that's often touted. It might even be less than $610 billion shortfall in the states. Which would mean the anti-stimulus overwhelmed the stimulus. Or, you could look at it in reverse: Nick Johnson, who directs the State Fiscal Project at CBPP, says that "the effect of the federal stimulus was to wipe out the negative effect of the state contraction."

There is a broader analytic lesson here: you can't look at the federal government in a vacuum. Often federal policy is merely counteracting state policy. You can see this with taxes. Most of the time, when conservatives want to make it look like rich people pay all the taxes, they look only at income taxes, and ignore more regressive payroll taxes. More honest conservatives will look at the total federal tax burden. Former Bush Council of Economic Advisors chairman Greg Mankiw recently posted this chart of federal taxes:

That looks reasonably progressive. But, of course, one reason why we need a progressive federal tax code is that state and local taxes are highly regressive. And the combined effect of federal, state and local taxes is not all that progressive:

We have made the decision to divide our government between federal, state and local levels. The latter two are going to tend toward regressive tax policy (because, among other things, it's easy for rich people to move across the county or state line if they're getting taxed at a higher rate.) Conservatives have driven a discussion about how the poorer half of the country has gotten off easy, and isn't paying anything for government. That statement relies on ignoring not only payroll taxes but also state and local levies. If we have decided as a nation that some functions of government will be handled at the state and local level, then state and local taxes have to be considered part of the cost of government. Pretending that federal policy is national policy is a way of making national policy look a lot more liberal than it really is.