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Column: Government spending boosts economy

January 24, 2021

by Beth Giesting, director of the Hawaii Budget & Policy Center

Link to column on Honolulu Star-Advertiser website

As the Legislature convenes, lawmakers will be tasked with addressing the state budget shortfall. How much will the state be spending over the next two years? What services will be supported? Where will the money come from to pay for it all? These questions are all the more significant because state spending plays a crucial role when times are hard.

The Great Recession of 2007-09 taught us a lot about how public spending decisions help or hinder economic recovery. The following lessons should guide lawmakers as they develop a budget for challenging times.

Economic recovery depends on state spending.

When the private sector slows down, the government must step in to keep spending levels on an even keel.

Economists find that, during a recession, $1 in public spending adds between $1.50 and $2 to the economy. In the same way, public spending cuts multiply economic damage.

Cuts made to Hawaii’s spending during the Great Recession have had lasting effects, and studies from other states show that economic recession lingered longest where budgets were reduced, while recovery was fastest where spending remained steady.

Government services help people and the economy.

The pandemic has threatened people’s health, as well as their economic security. In times like these, more people need the safety net of government-supported health care, food, housing and other essentials.

These services are not just essential to the recipients: They also provide a boost to the economy. When people have resources to pay their rent, buy food and go to the doctor, their spending supports local businesses and jobs.

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