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State and local governments do about 10 percent of the final spending in the national economy, employ one of every 12 workers and build 20 percent of all the structures. That's big business, and it means that the state and local government sector has pervasive effects on employment, income, prices and interest rates nationally.

Therefore, when things start to slide, as is now the case, the subject of how state and local governments are faring becomes more than academic. Specifically, are the decisions being made by these governments helping to buoy a sagging economy or are they making things worse?It is worth taking a close look at some history. The Great Depression of the 1930s was fed, to a major extent, by the behavior of state and local governments which, faced with diminishing tax revenues as incomes and property values plummeted, had to reduce spending sharply. The cutbacks were particularly detrimental to the poor, since local governments were universally the providers of relief. Things got so bad that there were widespread defaults on indebtedness by local governments, although most proved to be temporary.

Economists reviewing the behavior of state and local governments concluded that it had intensified upswings and downswings in the '30s instead of offsetting them.

As has been documented by Robert W. Rafuse Jr. of the Advisory Commission on Intergovernmental Relations, that pattern of fiscal perversity did not extend into the postwar years.

To the contrary, state and local government spending and revenues entered a period of sustained growth, seemingly impervious to the economic squalls that passed over the horizon.

In the 1980s, that pattern changed. The recession of 1981-82, the deepest since the Great Depression, took its toll on states and localities, which were already on short rations because of taxpayer revolts and cutbacks in federal assistance. By the time the economy hit bottom in late 1982, employment in state and local government had been reduced by 185,000 from the 1980 level, and capital spending, already in a decline, dropped off by about 10 percent in real terms.

State and local governments rebounded in the mid-1980s but have found their fiscal condition steadily deteriorating over the past three years.

Nonetheless, there are some positive aspects to the situation and some steps officials can take during the downturn.

For one thing, debt burdens are not excessive for the majority of state and local governments, and conditions in the tax-exempt bond market should be excellent for borrowers with acceptable credit ratings.

In fact, favorable interest rates, construction costs and land acquisition prices strongly suggest that now is the time to borrow and build.

This is not to be seen as an open invitation to profligacy. Rather, the point is that with slack in the economy, with both workers and capital underemployed, and land prices soft, it makes sense for those who have the means to reap the curious rewards offered by hard times.

And how much better it would be if state and local governments, rather than stepping on the spending accelerator when the economy is racing and slamming on the brakes when it is laboring, would smooth out the ride.

Capital spending (either new construction or refurbishing) is well suited for that smoothing function because, if plans are readily at hand, it masses the spending in a short time and typically does not saddle future operating budgets with a legacy of ongoing services.

Furthermore, capital expenditure can be financed by long-term borrowing, whereas operating expenditures cannot, and borrowing during times of economic retrenchment by those with acceptable credit can be done on favorable terms.

Of course, going to the voters, when that is necessary, is not perceived as very attractive in times of economic distress. But the public may be susceptible to the argument that it is better to conserve present revenues to meet immediate spending needs and to take advantage of favorable market conditions to make improvements that will be paid for from future revenues when times are better.

There might even be some voter appeal in the paradox that capital investment during a recession by governments with a solid credit standing is not merely a wise move for those governments but a plus for the national economy.

(John E. Petersen is senior director of the Government Finance Research Center.)