U.S. Spending Pile Up Will Lead to Crash

At the time, the United States most desperately needs to create new wealth, we're piling spending atop spending in ways not easily undone.

Wages down, government benefits up. Yesterday, USA Today published a troubling report on trends in American incomes. Of every $100 received by Americans, less than $42 is earned from private-sector wages -- the lowest level in recorded history. Of every $100 received by Americans, $18 was received from government programs -- a record high.

The Drudge Report gave this news an alarmist, anti-Obama headline: "Redistribution Victory: Private Pay Plummets, Government Handouts Soar." Being a savvy Marketplace listener, you're probably inclined to pooh-pooh this alarmism.

Of course, pay drops during a recession. Of course, unemployment benefits rise. You know -- that's the way the system is supposed to work. Government benefits are what economists call "automatic stabilizers." They cushion the pain of recession, or so the theory holds.

But this time, the theory isn't working the way it should. Private-sector wages did not suddenly plunge off the cliff in 2008 when the recession hit. Wages have been steadily dropping as a share of national income for a decade. Government transfers have risen almost equally consistently. Will the shift away from private wages continue even after the economy recovers? With the baby boomers retiring, how can we avoid it?

But if we don't avoid it, how are we to pay for it? Jobs and incomes are recovering sluggishly. The health care reform creates huge new entitlement programs. Large parts of the Obama stimulus have been made permanent, expanding federal spending into the indefinite future.

At the time, the United States most desperately needs to create new wealth, we're piling spending atop spending in ways not easily undone. The stabilizers aren't stabilizing. In fact, they're accelerating the whole craft dangerously toward a crash. It's like the design flaw of the Titanic -- the deeper it dipped into the sea, the faster it filled with water, thus pulling it deeper, thus filling it faster -- and we all know how that ended.

Originally broadcast on Marketplace.