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Nearly two years into recovery, American households are still leaning heavily on the crutch of government — more specifically, government borrowing.
That should be obvious based on this year's projected $1.5 trillion federal deficit, with tax revenues at their lowest level as a share of the economy since 1950 and outlays near their highest point since World War II.
But new personal income data from the Commerce Department, which include the impact of the recent 2-percentage-point payroll-tax cut, provide a window into the extraordinary support that the federal government is providing to consumers.
Three props to personal income — higher social insurance benefits, lower tax payments and higher government wages and benefits — are adding just shy of $1 trillion to personal income on an annualized basis relative to pre-recession levels.
It's All Government
Those government supports account for the entire $932 billion, or 8.7%, increase in personal disposable income — and then some — since the start of the recession. In other words, government income props, mostly deficit-financed, have paid for all the gains in personal spending and saving.
Consumer spending rose at a 4.1% annual rate in Q4, the best gain since the start of 2006 and accounting for nearly all of the overall economy's gain.
Economists with a Keynesian bent would contend that the consumer would be laid up in the intensive care unit without this trillion dollars in support. Taking away the government crutch too soon could hurt the still-sluggish recovery, some economists argue, especially with oil prices surging above $100 a barrel.
Tail Wind Or 'Head Wind'
But Mike Englund, chief economist at Action Economics, sees trillion-dollar deficits as "a huge head wind for the economy and one of the reasons we are growing so slowly."
Temporary gains in income don't provide people the confidence to spend, Englund said. On the other hand, a big reason businesses are holding $2 trillion in cash on the sidelines is because they expect high deficits to lead to higher taxes, he said.
In real terms, the impact of government supports to disposable income is even more dramatic. Adjusted for inflation, disposable income is up 4% since December 2007. But excluding these government supports, real disposable income would be 4.6% below the pre-recession peak. As it is, in part due to increased household saving, real personal spending is up just 1% in just over three years.
A big portion of this government support has nothing to do with stimulus, but simply reflects the automatic stabilizers that kick in during every cyclical downturn. Those include jobless benefits and food stamps, as well as lower tax receipts — apart from enacted tax cuts.
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Posted By: milbawapa(5) on 3/3/2011 | 10:14 PM ET
It's a no wonder were in the shape we are with economist writing garbage like this. The government support the people, we have gone off the deep end. The GOVERMENT caused this whole problem by relaxing the lending requirements. Just look at feddie and fanny may. Where does the goverment get its money from. We need to cut this goverment in half, then watch the economy take off.
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