How the U.S. Government Is Swallowing the Economy

You know about the bailouts, the stimulus plan, cash for clunkers, and moola for mansions. But for all the anxiety they've caused, those government giveaways are just a tiny part of a mushrooming problem.

By one measure, the government already plays an outsize role in our so-called free-market economy—and it has little to do with the recession. Economist Gary Shilling has calculated that 58 percent of the population is dependent on the government for "major parts of their income" including teachers, soldiers, bureaucrats, and other government employees; welfare and Social Security recipients; government pensioners; public housing beneficiaries; and people who work for government contractors. By 2018, Shilling estimates, an astounding 67 percent of Americans could be dependent on the government for their livelihood. The implications aren't comforting.

Tea-party ranters might cite this as evidence of liberal policies run amok, but the growing-government phenomenon transcends party politics. In 1950, the starting point for Shilling's analysis, just 29 percent of the nation depended on government for its income. By 1980, that had risen to 61 percent—higher than it is today—thanks to demographic factors and the needs of a changing nation. The military got larger and defense spending grew as America took up its role as a superpower. Baby boomer kids required many more schoolteachers. The number of Americans receiving payouts from Social Security, enacted in 1935, increased 10-fold. Food stamps and other safety-net programs of the 1960s and '70s began to reach millions of Americans.

From 1980 to 2000, Americans became less dependent on government. California and other states cut their budgets and reduced spending. The military got smaller after the Cold War ended. Welfare reform in the 1990s kicked many people off the dole. And the private sector boomed during those two decades, accounting for a larger share of the labor force. By 2000, the portion of the population dependent on government had drifted down to 54 percent.

But it reversed course after that, and it seems poised to keep going up. The size of government has generally held steady since 2000, but globalization, technology, and other factors have led to weak private-sector job creation over the past decade. And that was before the recession destroyed more than 8 million jobs. So the government has employed an increased share of Americans. The other big change since 2000 has been a near tripling of food-stamp recipients, as low earners got left out of the housing and stock-market booms and then suffered worse during the recession.

The next big shift will come as baby boomers begin to retire, boosting the number of Social Security recipients 27 percent by 2018 and threatening the solvency of the program. Shilling has another dire prediction: Economic growth will be so weak for the next several years that without government support, the unemployment rate will rise to 23 percent in 2018. Since that's politically intolerable, government will continue to spend money to create jobs, he predicts, with nearly 25 million additional Americans employed as a direct outcome of government spending by 2018.

If that happens, more than two thirds of the nation will owe their livelihood to the government, which is unsustainable for a number of reasons. It will require federal deficits far larger than the $1.4 trillion bogy we've got now, which is already alarmingly high. If irate voters don't rein in America's debt binge, market forces will, perhaps because foreigners will stop lending us the money or the rates they demand will rise and effectively bankrupt the country. Higher taxes would help solve the problem—and are probably inevitable—but enacting them on rich people alone won't be enough. At some point not too far off, the U.S. government will have to close the vast gap between its income and its spending, and the pain will be widespread.

Some economists are more optimistic than Shilling, with stronger projections for economic growth that might eliminate the government's need to create 25 million new jobs. But rosier scenarios are taking their time to materialize. The unemployment rate has soared to 10.2 percent, a 26-year high, with no indication that companies will start hiring again anytime soon. So instead of restraint by government, Congress and President Obama have extended housing subsidies and unemployment insurance, cut taxes on struggling companies, and even made plans to send a $250 check to every senior citizen, just as a nice gesture. Americans who can get in on this bonanza should get theirs while they can. Sooner or later, the door is going to slam shut.

Disclosure: no positions

Comments

[Monty Pelerin:]

Bigger government means poorer people. The government arguably produces no goods and few services. If it represents 25% of the economy, it means that only 75% are producing and supporting the others. When you get up to the 50% and higher ranges, then you have less than half the people supporting the others. Anyone that thinks an economy imbalanced in this fashion can grow or grow at reasonably fast rates should look at the sclerotic economies of Old Europe.

Monty Pelerin economicnoise.com

Nov 09 09:45 PM

[The Geoffster:]

"...[T]the growing-government phenomenon transcends party politics."
I couldn't agree more. Virtually all politicians are corrupted by the process. Elections require money. Donors expect a return on their investment. Very few people can wield power without becoming corrupted. It has always been thus, and thus it shall always be. We can wait in vain for the virtuous or we can demand virtuousness of ourselves by changing our dirty linen.
“This country, with its institutions, belongs to the people who inhabit it. Whenever they shall grow weary of the existing government, they can exercise their constitutional right of amending it, or exercise their revolutionary right to overthrow it.”

- Abraham Lincoln

Nov 09 09:48 PM

[Denis Gould:]

Governments don't spend money efficiently because they have no incentive to do so, in many cases the reverse is true. So a larger share of the economy accounted for by government means less economic efficiency, lower growth and lower tax revenues. The slumping growth needs support from government spending (see Nomura Chief Economist Richard Koo's recent presentation to the Center for Strategic and International Studies). Increased government spending plus lower tax revenues equals larger and larger budget deficits. And outsize budget deficits imply decades of austerity as authorities try to get public finances back on track.

There is no way out of this trap, as Japan has illustrated for almost two decades.

Nov 09 10:22 PM

[MarkitWacha:]

see usdebtclock.org

The elections in 2010 are the best hope for change. The 1990s were characterized by gridlock in Washington. THAT was the BEST thing that could happen.

Long: TBT, DBC

I intend to try and make a few billion dollars from shorting the US 30-yr bond, and then I'll buy a few politicians.

Nov 09 10:51 PM

[JudeJin:]

china's fx reserve is enough to buy out thirty years' world production of gold.

currently, china and india alone consume almost 1/2 of world's production of gold.

when the european, the japanese, the american wake up and start to accumulate gold, gold will be out of reach for most of the poor people in the world.

Nov 09 10:53 PM

[bearfund:]

On Nov 09 10:51 PM MarkitWacha wrote:

> Long: TBT, DBC
>
> I intend to try and make a few billion dollars from shorting the
> US 30-yr bond, and then I'll buy a few politicians.

Every time you execute a winning trade, someone at Goldman executed the same trade, 10000 times larger. How exactly do you plan to compete with them in the market for politicians? Moreover, if you really do make billions shorting Treasuries, those billions might buy you the steak and egg special at a Vegas casino, but not much more because the dollar will be worthless.

Nov 09 11:06 PM

[Dave Wrixon:]

If China starts buying Gold at that kind of level, the biggest beneficiary would be the FED. I think China will buy but only within a certain target range, which is almost certainly not set in dollars but some other criteria. It may be against the Euro or even against a basket of commodities.


On Nov 09 07:24 PM Mad Hedge Fund Trader wrote:

> chp Paul Tudor Jones nicely summed up the fundamental argument in
> favor of gold in his recent letter to investors. The yellow metal
> is accumulated, and not consumed, and is the ultimate store of value.
> Gold does particularly well during times of excessive monetization,
> inflation, and instability of the banking system, as we are seeing
> now. Central banks, which have been consistent sellers for the last
> 20 years, are about to flip to net buyers. If non G7 central banks,
> like China, want to increase their gold holdings from the current
> 20% of reserves to the 35% weighting now owned by the G7, it will
> require 1.3 billion ounces of new purchases, or 20% of the total
> world supply. Certainly they are getting fed up with their ever depreciating
> dollar holdings. Witness last week’s Bank of India purchase of 200
> metric tonnes. ETF’s now own $50 billion worth of the barbaric relic,
> about 3% of the world total, making them the sixth largest holder
> in the world, and retail demand for these gold proxies is expected
> to explode in coming years. Private investors, mutual funds, and
> pension funds are all underweight gold. This is all happening in
> the face of declining production from traditional gold suppliers
> like South Africa. It all adds up to a whole lot of new gold buyers
> and a shrinking body of sellers. Paul didn’t give any specific price
> targets other than “up.” Long time readers of this letter know I
> have been banging the table about gold all year. Time to salt away
> more American eagles for those college funds and grandkids . For
> those who prefer holding the barbaric relic of the physical kind,
> visit the tightest spreads in town on American Eagles and bullion
> at www.millenniummetals.net/ . And while you’re there, sign
> up for their free research product on precious metals.

Nov 10 03:18 AM

[Dave Wrixon:]

America has decided that she is too big to fail. She thinks the World is going to pick up the tab for her failures. She probably ought to rework that calculation.

Nov 10 03:20 AM