Thursday, March 04, 2010

The Massive Shift Towards Government Dependence

How much would the income of US households have dropped without being propped up by government benefits, welfare, and tax cuts last year? According to Patrice Hill of the Washington Times, it would have been a breathtaking $723 billion. This amount is more than five times the record $167 billion drop reported last month by the Commerce Department.

Most of the dependence is linked to the huge number of job losses in the last year. A major priority of government should be to eliminate the barriers between people and jobs. This should be done, not only in order to improve the situation of those who are unemployed, but to help provide relief for a government that finds itself supporting such people. The impact of unemployment is devastating in a way not found by other economic problems. The economists are claiming that we are in a recovery, but explain that to the close to ten percent of the population that has yet to find a job.

Hill cites the reports of economic analysts who find that:

  • While wages and other job-related income fell by a record $206 billion last year to $7.84 trillion, government transfer payments (such as unemployment checks and Social Security) grew by $231 billion to $2.1 trillion.
  • Wages have plunged at unprecedented levels, down to $256 billion in private wages, which was more than forty times larger than the last wage drop, during the recession of 2001.
  • Unemployment not only means more money going from the government to individuals, but a significant drop of income going to the government (this seems obvious, but many policy makers do not seem to understand it). As a result, the amount of taxes paid by individuals dropped by $325 billion to $2.1 trillion due to middle-class tax cuts (which have none of the revenue generating effects of a supply-side tax cut across all income groups) and the fact that there are 6 million people who lost their jobs and are no longer paying payroll taxes.
Many in the Obama Administration believed that there would be a revival in consumer spending in the latter part of 2009. This would have led to more tax revenues and job growth, we were told. Instead, virtually all new spending was done by government and dollars that went to consumers were used to pay off debt, rather than jump start the economy.

The prospects do not look good in the immediate future, because virtually all opportunities for new spending appear to be on the government, rather than on the consumer, side. Such government funding cannot be sustained without continually raising taxes and will, at best, only produce temporary and expensive jobs.

If the administration is serious about reducing unemployment, it will have to be aggressive in its approach. Steps should include a dramatic reduction in capital gains and business taxes, making the minimum wage a state (rather than federal) issue so they can set such according to the unemployment situations in their particular areas, and curtailing ambitious programs (such as cap and trade, health care reform, and other major initiatives) that create an unpredictable environment for jobs to be created.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is also host of the Price of Business (M-F at 11 AM on CNN 650). Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

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