Robert Hall makes a telling point in Jon Hilsenrath’s article today examining the effect of the stimulus program:

Robert Hall, a Stanford University professor, says there hasn’t actually been that much extra government spending overall, because the increased federal spending has been largely offset by a large contraction in state and local government outlays. By the third quarter of 2009, he notes, federal government spending added $66 billion to economic output, less than 0.5% of total output, offset by a $43.1 billion contraction in state and local government spending, he says.

Another way of saying this is that without the stimulus, overall government spending would have dropped sharply because state and local spending was dropping sharply. One way to see this is to look back to the early months of 2009. At the time, the tax money flowing into state and local governments was falling rapidly, as was their spending. In the spring — shortly after the passage of the stimulus, as state and local officials were finding out roughly how much federal money they would be receiving — tax revenue continued to drop, but spending jumped.

There is, of course, a strong connection between spending by state and local government and the number of people that state and local governments employ. Without money, they have to lay off police officers, teachers, firefighters, emergency medical technicians, clerical workers and others. That is what many governments are starting to do now that the federal stimulus money is running out.

The fact that state and local governments didn’t have to make drastic cuts at the nadir of the Great Recession is one more sign that the stimulus, despite its imperfections, has worked. And it helps explain why all of the non-ideological analyses of the program — by the Congressional Budget Office, by Macroeconomic Advisers, by IHS Global Insight, by Moody’s Analytics — suggest the stimulus is responsible for something like 2.5 million jobs that would not otherwise exist today.