Economix: The Dependence Economy

Over the weekend I attended a talk by Credit Suisse’s chief economist, Neal Soss, on the structural and cyclical challenges facing the economy. The cheekily titled chart below — showing how much more dependent Americans have become on government money, including in many cases Tea Partiers — is taken from his presentation:

Source: Bureau of Economic Analysis, Credit Suisse

The red line shows what share of personal income comes from wages — that is, what Americans earn from working. The blue line shows what share comes from transfer payments, which are made to individuals, usually by the federal government, through social benefit programs like unemployment insurance, disability insurance and Social Security. (Note that the two lines use different scales, shown on the vertical axes, and that the scale for wages does not start at zero.)

As you can see, the share of income that Americans earn by working has been falling, from more than two-thirds of their income in the mid-1950s to just over half of their income today. Meanwhile, they have been growing more and more dependent on money from social benefits programs, growing from about 4 percent in the mid-’50s to about 18 percent in February 2011.

Certainly part of the reason Americans have been getting more dependent on government money is that the job market is so poor. Unable to find work, many Americans are getting most, if not all, of their income from unemployment benefits.

But the lousy job market accounts only for the spike at the end of the blue line (and likewise the steep slide at the end of the red line), where the numbers correspond with the Great Recession and its aftermath. The chart shows that the overall trends long predate the financial crisis.

These underlying trends are partly because of demographic changes; an aging populace means that an ever-smaller share of Americans are working, and so a larger share are receiving Social Security benefits and Medicare, which is also getting more expensive. Policy changes, more Americans’ going on disability and growing inequality, which in some cases may be leaving more Americans on the dole, are also likely contributing to the growing Dependence Economy.

Whatever the causes, these  trends are not infinitely sustainable. The money for transfer payments has to be transferred from somewhere, after all — and if not from other people’s wages, then from China and other foreign creditors. But foreign creditors won’t foot the bill forever without an exit strategy.

Article source: http://feeds.nytimes.com/click.phdo?i=7ec3135d0a87534948f24991d64066fa