The government’s spending surge to ease the financial crisis and a worsening recession is increasing the federal share of the nation’s economic activity close to $1 out of every $4, the highest level since World War II, an analysis of current and projected payments shows.
Emergency rescue plans for financial institutions and increased benefits for needy individuals are mounting, as Congress considers President-elect Barack Obama’s call for a massive public works program that could exceed $500 billion and a $14 billion bailout of the auto industry.
All that spending will push the federal share of the nation’s $14.4 trillion economy to 25 percent or more – past the post-World War II record of 23.5 percent set in 1983, at the end of what was then the worst recession since the Depression.
Economists warn that the fast pace of government spending could spell trouble in the future: slower economic growth, higher interest rates, and the likelihood that tax increases or spending cuts will be needed to tame a budget deficit headed toward a record $1 trillion. The government reported Wednesday that the deficit for the first two months of the 2009 fiscal year was more than $400 billion.
“That’s the opposite of what we’re trying to do to the economy,” says Maya MacGuineas, president of the non-partisan Committee for a Responsible Federal Budget. The government should boost spending, but “we have to do it really carefully,” she says.
Federal spending as a share of the economy peaked at nearly 44 percent in 1943 and 1944, when spending for World War II soared. Since then, it has hovered at near a fifth of the U.S. economic output.
The government’s growing share of the economy is driven so far by the bailouts for banks and financial institutions. More than $200 billion has been used from the $700 billion Troubled Assets Relief Program, and $13 billion was used to buy stock in Freddie Mac, the housing corporation.
Other payments are likely to bring the total figure to more than $350 billion for the 2009 fiscal year that began in October, say budget analysts such as Brian Riedl of the conservative Heritage Foundation. That will bring federal spending to about $3.5 trillion.
“Excess government spending has been shown to reduce economic growth,” Riedl says. “The more money spent by politicians in government, the less spending is available for the private sector, which is the sector that usually creates more productivity.”
Plans being considered by Obama and Democrats in Congress to jump-start the economy would raise federal spending much further. Even if only $150 billion in stimulus gets spent in 2009 while the rest is spent in 2010 or thereafter, it would push the federal share of the economy past 25 percent.
If the Obama administration, as expected, treats the bank bailouts as credit rather than cash, they would not count toward the deficit. But they will still drive up the $10.6 trillion national debt, because the government must borrow the money.
“We’re going to have to borrow these funds overwhelmingly from foreign investors,” ex-U.S. comptroller general David Walker says. “In addition to having a budget deficit, we have a savings deficit.”
The debt could rise “by more than $1 trillion a year virtually every year for the next 10 years,” says Senate Budget Committee Chairman Kent Conrad, D-N.D. “And that’s before any policy changes.”