Understanding government spending

What is it about?

Most U.S. municipalities hold substantial reserves. Moreover, their reserves tend to reflect their operating environments. Consequently, many, if not most, jurisdictions possess the wherewithal to smooth spending over time. They do not. Despite extensive reserves, U.S. municipalities are characterized by excess spending volatility. More generally, the U.S. municipalities tend to grow spending too much (on average) when revenue inflows are high (exceed trend) and tend to cut spending excessively when low (below trend), which is almost always wasteful and often injurious. Indeed, the U.S. municipalities do not seem to add to or use reserves in any consistent manner whatsoever. Rather, the main determinant of municipal cash holdings appears to be the state in which the jurisdiction is located, not financial, nor even broader economic, fundamentals.
These finding probably apply to other kinds of governmental entities, and not only to U.S. municipalities.

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Why is it important?

Governments have the wherewithal to substantially reduce spending and service volatility over time but fail to do so.

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