A Re - examination of Wagner ’ s Law Based on Disaggregated U . S . State - Local Government Expenditure

We tested the validity of the “Law of Increasing State Activities” or Wagner’s Law using time series for the U.S. state-local government (SLG) real expenditure over the period 1957-2006. This period was characterized by rising SLG total expenditure and several of its sub-categories both in absolute terms and relative to state personal income. Cointegration tests of Johansen (1991) and Pesaran, Shin, and Smith (2001) yielded results suggesting that, with the exception of insurance trust benefits (ins) and social services and income maintenance (ssim) ratios, no other nonstationary expenditure sub-category was cointegrated with state real per capita personal income (pcpi) and error-corrected over time. Both ins and ssim were found to be income elastic. The Toda-Yamamoto (1995) methodology that allows for estimating level relationships without pre-testing for unit roots further suggested that ins and ssim were driven by pcpi consistent with a Wagnerian causal ordering. JEL classification: H7; C22.