Stopping Government's Growth Will Be Tough

09/14/2009 12:00 pm EST

Focus: MARKETS

Gary Shilling

Columnist, Forbes

Gary Shilling, editor of INSIGHT, says more and more Americans have become dependent on government—even before the Baby Boomers retire.

In 2008, federal spending equaled 21% of GDP, outdistancing the 17.7% from revenues. The gap is leaping this year with the fiscal 2009 budget calling for $4 trillion in outlays, up from $3 trillion last year, while revenues slip to $2.2 trillion from $2.5 trillion.

[But] so many Americans rely on federal, state, and local governments for meaningful portions of their incomes that significant cuts in total government spending are extremely difficult, even without the pressure for more spending to create unemployment-combating jobs. In 1979 [we] found that about half of Americans are government beneficiaries. In 2007, the number reached 58.2%.

The share of government budgets for employee compensation (and the government employee headcount portion of the population) have been about flat in the last several decades. But the share of government spending spent on transfers has been rising.

This trend is ominous, because it’s only a taste of what lies ahead when the postwar babies retire and move heavily into Social Security, Medicare, and Medicaid. The first wave of boomers will turn 65 in 2011 (the last reach retirement age in 2029), and so far, Washington appears mostly unwilling to address the issue.

The government projects that total mandatory outlays will more than double between 2005 and 2016. It expects the annual growth in Medicare costs to reach 9.8% in 2018, up from 7.4% in 2008. Medicaid is forecast to rise 7.9% per year in the next decade while Social Security outlays rise 6.8% annually in 2018 vs. 4.8% in 2008.

The government estimates that Social Security pension and disability payments will rise from 51.7 million this year to 67.4 million in 2018. The increase in Social Security benefit payments and the ongoing drift towards a greater share of the population being dependent on the government for meaningful financial support is peanuts compared to the number for which Washington is likely to create jobs in the next decade to prevent skyrocketing unemployment.

Our forecast of 2% annual real GDP growth over the next decade and the 10.7% annual rise in the unemployment rate it implies would push the unemployment rate from our 9.3% average monthly forecast for this year to 23.2% in 2018—clearly a politically unacceptable level!

This increase, together with the rise in Social Security beneficiaries and the underlying upward shift, puts the number of Americans who depend significantly on government for financial support at 67.3% in 2018—over two thirds!

Let’s hope that by then, more rapid economic growth has resumed and reduced the pressure for government job creation, and that serious restraint on Social Security and Medicare benefits will be enacted. Otherwise, the percentage that depend on government will rise even further as more postwar babies retire and sign up for Social Security. Furthermore, the threat of high and chronically rising unemployment will keep up the pressure for government spending and job creation.

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