How the 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.

[See 4 problems that could sink America.]

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.

[See 9 signs of America in decline.]

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.

[See why stocks are surging as jobs disappear.]

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.

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