Published April 20, 2011
U.S. households are now getting more in cash handouts from the government than they are paying in taxes for the first time since the Great Depression.
Households received $2.3 trillion in some kind of government support in 2010. That includes expanded unemployment benefits, as well as payments for Social Security, Medicare, Medicaid, and stimulus spending, among other things.
Also, an estimated 59% of the 308.7 million Americans in this country get at least one federal benefit, according to the Census Bureau, based on 2009 data. An estimated 46.5 million get Social Security; 42.6 million get Medicare; 42.4 million get Medicaid; 36.1 million get food stamps; 12.4 million get housing subsidies; and 3.2 million get Veterans' benefits.
And the handouts from the government have been growing. Government cash handouts account for a whopping 79% of household growth since 2007, even as household tax payments--for things like the income and payroll tax, among other taxes--have fallen by $312 billion.
That is a tough feeding trough to take away from voters.
One of the recurring themes FOX Business has been covering is “how the world has been turned upside down – well, the business world at least,” notes FOX Director of Business News, Ray Hennessey. “In a free market, profit is generated by hard work and enterprise," Hennessey notes, adding: “Because of the labor of the worker, companies generally have the ability to prosper and make more money, both for their employees and their owners," which in turn creates tax revenues.
Seems like common sense, right? That’s because it is. But not in our country today. Somehow the DNA of our country is changing. Wealth creation is coming from DC, not from America’s entrepreneurs.
In short, Americans have the government, not private enterprise, to thank for their wealth growth.
Obviously, there are big implications to this.
For instance, Hennessey asks, if indeed more households have the government to thank for their wealth, does that mean those households are more inclined to re-elect politicians who are pushing for more government handouts?
Does the workforce erode because it is easier to collect a check than answer to an alarm clock each morning?
Is our competitiveness as a nation hurt because profit is generated not by American capitalism but by European-style socialism? Can we, as taxpayers, afford to carry the burden of government-sponsored wealth creation?
All this comes at a time when a growing number of Wall Street houses, including JPMorgan Chase (JPM) and Barclays Capital (BCS), Bank of America (NYSE: BAC) and Morgan Stanley (NYSE: MS) are cutting their U.S. GDP growth forecasts by as much as a percentage point or more.
It also comes as President Barack Obama is already in re-election mode, as he bets his massive spending will woo independents. It also comes as Standard & Poor’s has joined the International Monetary Fund and Pimco, which runs the world’s biggest bond fund, in downgrading their outlook on US debt.
The negative outlook comes as the government has added the equivalent of Germany and Russia combined in spending from the time Democrat Rep. Nancy Pelosi gaveled in as House Speaker in January 2007. The government, like never before, has put the thumb on the scale as it picks winners and losers.
Yes, the dollar rallied and Treasuries bounced higher after the news that S&P had issued a negative outlook on the U.S. debt picture. Some argued that happened because eventual austerity would slow growth, which is deflationary and in turn good for bonds.
But that ignores the flight away from rocky overseas markets toward the Treasury's safe haven status, which drives yields down. Potential sovereign debt defaults are a huge problem in the Eurozone, particularly in Greece, where yields rocketed above 13% earlier this week.
The bullish view about U.S. bond prices also ignores the fact that the Federal Reserve has been buying Treasury bonds and notes, $600 billion so far this year, more than half of the Treasury Dept.'s issuance. That keeps a lid on bond yields. When bond prices rise, the government doesn't have to lure investors with higher yields. When bond prices fall, the government offers higher yields to reel investors in.
The bullish view about U.S. bond prices also ignores the negative trend in the dollar, which has been weakening.
And it ignores the bond market’s brutal reaction to spending under President Bill Clinton, where yields spiked several percentage points higher beginning in 1994, rising from around 5% before topping out above 8%, before then-Treasury Secretary Robert Rubin forced austerity, leading to welfare reform.
Republicans now want to shrink the U.S. government, but Democrats want to stymie their efforts. This, after the President touted $38 billion in spending cuts as the largest in our nation’s history, just four months or so after touting the massive spending increase pushed through in the lame duck Congressional session.
And after the White House shelved the Bowles-Simpson debt commission report, a panel which the President asked for, endorsed and then ignored, hoping such hard decisions might be delayed until after the election.
President Obama had asked for the debt commission to "address the long-term quandary of a government that continually and extravagantly spends more than it takes in," only to initially set aside the commission's recommendations.
And earlier this year the White House first introduced a budget that would have added $6.7 trillion more in deficit spending over the next 10 years, yanking the national debt higher to more than 75% of gross domestic product, according to the Congressional Budget Office. That, until GOP Rep. Paul Ryan offered his $4.4 trillion in spending cuts over ten years, causing the President to offer $4 trillion in cuts over 12 years.
The Fiscal Times reports that “the only other time government income support exceeded taxes paid was from 1931 to 1936.” The Times notes that “government transfers of income to households started to overtake personal taxes at the start of 2008, and the gap has been widening.”
The difference between what households received and what they paid in taxes is about $125 billion, equal to a little more than “three times the amount Republicans and Democrats agreed to cut from government spending through Sept. 30,” the Fiscal Times said. Typically, the gap between government transfers and taxes runs the other way, the Times reports.
“In normal times the household sector gives about eight percentage points more of its income in taxes than it receives in direct transfers,” the Times quotes J.P. Morgan economist Michael Feroli as saying, adding that a return to normalcy, or this eight-percentage-point spread, is equal to about $1.2 trillion in income.
So the question is: What government policies will bring the U.S. labor market back to robust health, enough to drive economic growth, consumer spending -- and higher tax revenues?
When will the U.S. government pull back from its intervention into the U.S. economy, so the economy can try to stand on its own?