What is behind the rise of the Welfare State?

Submitted by Lance Roberts of Street Talk Live blog

It is interesting to note that while the unemployment rate has been falling, currently at 7.3%, it has not been because of a strongly increasing workforce.  Rather it has been a function of people leaving the workforce.  This, of course, brings up the obvious question of how these people are live if they aren't working.  A recent trip to Walmart answered that question. 

As I was standing in line, with an assortment of items on my "back to school" shopping list, there was a Hispanic gentleman in front of me with two shopping carts full of groceries and other items.  The cashier deftly handled the scanning and quoted the final price to the gentleman who reached into his pocket and pulled out his wallet.  What caught my attention was that his wallet was literally about to explode from the amount of cash that was stuffed into it.  My first thought was "Wow, this guy is doing alright for himself."  However, my moment of admiration quickly turned to admonishment as instead of using some of his hoard of cash - he whipped out his supplemental nutrition assistance card.  I literally watched in amazement as the cashier rang up the purchase, handed him the receipt and thanked him for his patronage.  Really?  This guy just loaded up on groceries using my tax dollars and he gets thanked for "his" patronage.  He should be turning around and thanking me instead.

For me, I was stunned.  My first thought was to follow the gentleman out into the parking lot and mug him to get my tax dollars back.  However, quickly realizing my first option was unrealistic and illegal, I turned to the cashier and asked a simple question.  "How often do you see people using food stamps to buy groceries?"   The answer:  "Just about every other person."

Welcome to 'Merica, The Welfare State.

This experience came to mind when I read a great article by Diana Furchtgott-Roth at E21 entitled "When It Pays Not To Work."  In this article she cites some alarming statistics:

"Lawrence Lindsey, president and chief executive officer of The Lindsey Group, estimates that if the labor force participation rate were the same today as it was before the recession began, the unemployment rate would be 11.2 percent, rather than 7.3 percent.

One reason for this continuing trend is the panoply of government benefits, including unemployment insurance, now available up to 73 weeks, depending on the state. On average, unemployed Americans can receive 53 weeks of unemployment insurance, up from 26 weeks before the recession.

Over 8.9 million adults received disability insurance from the Social Security Administration in July 2013, the latest data available.  The number of people receiving benefits is 23 percent higher compared to  five years earlier and 55 percent higher than 2003. Benefits are higher, too.  Recipients get an average of $1,129 monthly, 12 percent more than in 2008 and 35 percent more than in 2003.

Over 47 million Americans receive benefits from the Supplemental Nutrition Assistance Program (formerly food stamps), Other elements of the federal safety net include mortgage relief, and Temporary Assistance to Needy Families.  The provision of subsidized health care for those earning below 400 percent of the poverty line under the Affordable Care Act, beginning in 2014, will exacerbate this.

These programs have expanded in two ways. Eligibility has increased, and the programs have become more generous."

The chart below shows the rise in social benefits as a percentage of real disposable income which is currently near the highest level on record.

The next chart shows the current number of food stamp participants through June of 2013 at 47.8 million with an estimate of cots that will likely exceed $81 billion.

The reality is that when an individual can make more living on welfare than working it is quite easy for a mass number of individuals to simply disappear from the work force.  The problem is that such a structural transformation of the workforce is economically damaging long term.

Diana summed the problem up well.

"The shrinkage of the labor force has profound implications for future economic performance.  Reduced economic growth will lead to steadily higher tax burdens on existing workers, which will in turn discourage labor force participation. This race to the bottom needs to be stopped."

She is absolutely correct.  As I showed in my recent missive on long term economic growth we are already experiencing the lowest rate of annualized economic growth in history.  With an aging population rapidly moving towards retirement; the structural employment imbalance will lead to far more economic ills in the not so distant future as the drain on welfare programs intensifies as people continue to leave the workforce.   As Diana correctly stated "The race to the bottom has to stop."   

However, as long as the current administration continues to push more support programs, bailouts and extensions of benefits; it simply makes it more profitable to stay at home and live off "government cheese."