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The 4 big worries facing the U.S. economy

We’re in the midst of one of the most critical presidential and congressional elections in recent history — certainly the most important since 1980.

Of course, we have heard and will continue to hear a great deal about the importance of this year’s vote from those actually running for office. But it’s always crucial to sort out reality from the political spin.

Four big worries face this country, threatening our economy and global leadership.

First is the number of people receiving government support. According to the most recent data from the U.S. Census Bureau (numbers for the second quarter of 2011 released in early August 2012), 49 percent of Americans receive benefits from one or more government programs. That includes 26.4 percent on Medicaid.

While the nation’s population grew by 2 percent from 2008 to 2011, the number of people receiving government benefits expanded by 13 percent.

That includes a 63 percent increase in the number of food stamp recipients, a 77 percent jump in the number getting unemployment compensation, and a 13 percent increase in those on Medicaid.

Having half of the U.S. population receiving some kind of payment or support from the government is a troubling development. It creates a massive interest group set on maintaining or expanding the size of government, which drains the private sector of resources needed for economic growth, innovation and job creation.

Second is a declining level of entrepreneurship. Specifically, the number of self-employed in the U.S. has dropped notably in recent years.

Incorporated self-employed fell from 5.78 million in 2008 to 5.12 million in 2011.

Meanwhile, the number of unincorporated self-employed declined from 10.59 million in 2006 to 9.45 million in 2011. While incorporated data only go back to 2000, unincorporated self-employed numbers date back decades. The 2011 number actually was the lowest in a quarter century.

Declining entrepreneurship is a serious danger for the present and future economy, as such risk taking drives growth. Also, keep in mind that key competitive advantages for the U.S. in the global economy are our entrepreneurial skills and tendencies. If entrepreneurship does not bounce back, that’s a huge disadvantage for us on the international stage.

It should be obvious that a rising number of people receiving government payments, and a declining level of entrepreneurship do not exactly make for an ideal combination for an economy.

Third is the problem of the vast size of government in the U.S., given its recent unprecedented expansion. In 2009, federal government expenditures as a share of GDP topped 25 percent of GDP. That was the first time that happened since World War II. Spending has remained above 24 percent in each of the subsequent budget years. Again, that’s not occurred since World War II.

Factor in states and localities, and total government spending hit 37.1 percent of GDP in 2009, and has stayed above 35 percent since.

Again, nothing like this has ever happened in peacetime.

There are real and significant consequences to having such a significant amount of resources being drained from the private sector in order to be doled out according to politics. Just look at the mess in Europe.

And speaking of Europe, U.S. federal debt levels have jumped with this leap in spending. In 2011, gross federal debt outstanding equaled 98.7 percent of GDP, and is scheduled to come in at 105 percent of GDP this year. That’s up from 64 percent in 2006.

Again, one has to go back to World War II to see such levels.

This combination of unprecedented government spending and debt levels means that tax increases now and in the future further threaten our economy by diminishing incentives for investing, entrepreneurship and hiring in the U.S.

Fourth is the threat of regulation. The size of government is not just measured in terms of spending and taxes, but also by regulation.

Unfortunately, the average person does not see the costs of regulation directly. But that does not make those costs any less real. Business owners, executives and investors understand the harsh realities of regulation, as they must wrestle directly with the costs.

According to a 2010 study from the U.S. Small Business Administration’s Office of Advocacy, “The annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008.” Given the hyper-regulatory activity of the Obama administration, that cost number has only grown over the past four years. But even if we use the 2008 estimate, regulatory costs equaled 76 percent of federal revenues in 2011, or 49 percent of federal spending.

In the end, regulation amounts to a massive hidden tax imposed on U.S. entrepreneurs, businesses, investors, workers and consumers. Again, this hidden tax serves as a major drag on growth, and unless the policy direction changes, will do so even more in the future.

These four big worries, of course, tie together. Government is expanding the number of people being supported or subsidized by taxpayers, while imposing regulatory, tax and spending policies that drain resources away from and punish the risk takers who generate businesses, jobs and tax revenues. That’s a recipe for economic disaster.

The big question about these big worries: Will anything change after the November elections?

— Raymond J. Keating, chief economist, Small Business & Entrepreneurship Council.

One comment

  1. I predict nothing will be done until wedefault on our debt. We are a nation of avoiders.

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