There's a sad story making the rounds which should be Front Page News in this great land of ours, but it has received scant attention. USA Today reports that Americans depend more on government aid than ever.
Americans depended more on government assistance in 2010 than at any other time in the nation's history, a USA TODAY analysis of federal data finds. The trend shows few signs of easing, even though the economic recovery is nearly 2 years old.
A record 18.3% of the nation's total personal income was a payment from the government for Social Security, Medicare, food stamps, unemployment benefits and other programs in 2010.
Wages accounted for the lowest share of income — 51.0% — since the government began keeping track in 1929...
From 1980 to 2000, government aid was roughly constant at 12.5%. The sharp increase since then — especially since the start of 2008 — reflects several changes: the expansion of health care and federal programs generally, the aging population and lingering economic problems.
Americans got an average of $7,427 in benefits each in 2010, up from an inflation-adjusted $4,763 in 2000 and $3,686 in 1990. The federal government pays about 90% of the benefits.
"What's frightening is the Baby Boomers haven't really started to retire," says University of Michigan economist Donald Grimes of the 77 million people born from 1946 through 1964 whose oldest wave turns 65 this year. "That's when the cost of Medicare will start to explode."
A radical change occurred in 2008. For the first time since 1936, government transfer payments exceeded taxes paid. Doug Hornig's First Time in 75 Years, Handouts Exceeding Taxes explains the crossover.
In raw numbers, in February of this year, households received $2.3 trillion in income support from unemployment benefits, Social Security, disability insurance, Medicare, Medicaid, veterans benefits, education assistance and other cash transfers of government funds to individuals.
The same month, households paid $2.2 trillion in income, payroll, and other taxes. The difference was nearly $100 billion, or around 1% of personal income.
If you want a rough guide as to where we stand in the playing out of this recession (assuming you don't concur with the government's declaration that it's over), this chart probably serves the purpose as well as anything.
Note that the red line was below the blue one for 1931-36. If a similar period is in store this time around, then we're only about two-fifths of the way into a five-year downturn.
This data tells the story of a failed society. The Great Depression was ended by World War II, as I explained in What Are The Lessons Of 1937? What will end our troubles this time? Nothing will.
In 2011, a new Austerity is coming. Government spending will be cut because interest rates on our debt will no doubt rise in the future if we don't cut spending voluntarily. Pay no attention to Paul Krugman when he says that our borrowing costs are low, so they will remain low forever. Pay no attention to those who say the United States is not broke because we will never default on our debt, because we can borrow or print whatever we need. Such talk is completely irresponsible. The United States is effectively broke.
So here is the situation: more Americans than ever before depend on government payments to make ends meet, but the United States must cut spending sometime before the interest on its debt becomes unmanageable. I explained in To Cut Or Not To Cut — That Is The Question? that there is only one possible outcome here. By 2020, America's long transformation will be complete, we will have become a Banana Republic. And as Donald Grimes notes in the USA Today story, what is really frightening is that the Baby Boomers haven't really started retiring yet.
There is no way out of this dilemma, pending World War III. The government will no longer be able to afford to pay out "$2.3 trillion in income support from unemployment benefits, Social Security, disability insurance, Medicare, Medicaid, veterans benefits, education assistance and other cash transfers of government funds to individuals," yet the benefits that should be paid out, according to current law, are set to rise steeply.
We have traveled far down the road to Perdition. Our squalid destination is now in sight. Many Americans are going to be pushed over a financial cliff in the next decade. And don't believe for a moment that tax cuts for the rich, accompanied by some fantasy about "trickle-down" economics, will create a boom in the private sector. Shrinking government expenditures will have predictable effects on standards of living, as the transfer/tax data shown above demonstrates. Taxes should be raised, whether there is the political "will" to do so or not. And don't hold your breath waiting for massive reductions in the Defense budget. That's the very last line item a dying Empire will cut.
This tragedy will occur for reasons that are completely independent of the favorite Doomer stories—dollar collapse and hyperinflation, massive deflation, end-of-the-world in July, another global financial crisis, peak oil, climate change, whatever—that DOTE readers are so fond of pointing out in comments on this blog and elsewhere. What is interesting to me is that DOTE is the only place (at least that I've seen) where this increasingly obvious scenario has been laid out.
Change is coming, and not for the better, regardless of whether any of the usual Doomer scenarios play out. Put that in your pipe and smoke it.