Government spending as a stabilizing force

One big difference between now and the Great Depression is that government spending is far bigger as a share of the economy.

This chart shows government spending—federal, state, and local—as a share of GDP. These numbers include direct spending on salaries and purchases, and spending on transfer programs such as Social Security, Medicare, and Medicaid.

The question is whether these flows are interrupted by the current credit crisis. On the state level, if California’s tax revenues fall and the state can’t borrow, then it will have to make big cutbacks in spending. That suggests there may be a very big role for the federal government in lending to state and local governments.