Federal Share of Economy to Hit 25%; Highest Since WWII

The Federal share of the economy, that is government spending as a percent of GDP, will go over 25% next year, the highest level since WWII. Spending on TARP, other bank rescue packages, the auto bailout, and who knows what other bailouts and problems will push government spending to over $3.5 trillion dollars in a $14.4 trillion economy. During the Second World War, goverment spending as a percent of GDP peaked at 43.6% in 1943 and 1944.

The spending may be necessary but it is a mortgage on our future prosperity. The spending will increase the deficit to over $1 trillion over the next couple of years and some analysts see trillion dollar deficits stretching over the next 10 years. When you add the fact that baby boomers are retiring and will require more social security and medicare funds, the budget situation looks even bleaker.

The other negative from this spending is that capital that could have gone into the private sector is now being sucked up by the government. Instead of putting money into corporations, start-ups, and other fast growth, productive industries, money is flowing into government debt. We are trading safety for growth. That makes sense but we should understand that the longer-term ramifications of this are going to be slower growth.

Brian Riedl of the conservative Heritage Foundation says that:

"Excess government spending has been shown to reduce economic growth. 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."

The only consolation at the moment is that the government has been able to sell debt at 0% interest. Governments, institutions, and individuals are willing to buy government debt at very low rates for a variety of reasons.