ABC News' Amy Bingham reports:
Open your wallet. If you have a $10 bill inside you can thank the government for $2 of those dollars.
Government benefits like Social Security, Medicaid, and unemployment insurance accounted for nearly 20 percent of Americans’ income in the first quarter of 2011, according to Moody’s analysis of the Bureau of Economic Analysis’ statistics.
Some of the money from those benefits, though, will soon dry up as the stimulus funds that were pumped into federal and state programs in 2009 start to expire and deficit-reduction measures begin going into effect.
“Things like the Recovery Act and employment benefits are having huge beneficial impacts that a lot of people don’t realize,” said Ethan Pollack, a senior policy analyst at the Economic Policy Institute. “When those programs end people will realize just how dependent they were on them.”
Pollack said the unemployment rate will likely spike in response to the reduced government funding because it will take money out of people’s pockets, causing a drop in spending and forcing more lay-offs.
With the latest figures showing 9.2 percent unemployment, an uptick in the number of people out of work could mean bad news for the economy and for President Obama’s re-election.
But Brad Kemp, the director of economic research at Beacon Economics, argues the month-to-month rates are not as important as the overall trend.
“A single month‘s number does not a trend make,” Kemp said. “And that trend is going to continue to fall, but it is not going to be a smooth ride.”
Kemp pointed out that having 20 percent of disposable income coming from government benefits is still a small segment and while losing some of that money because of dried up stimulus funds would be detrimental in the short-term, it would not have severe widespread consequences in the long term.
“It is significant and important,” Kemp said. “But is it such a huge thing that it is considered a major driver of the overall economy? Absolutely not.”
Since the recession began in 2008 government spending on social benefits programs has increased by $581 billion according to BEA statistics. At the end of 2007, before the recession started, only $1.60 of your $10 bill would have been from the government.
Kemp said when stimulus money expires or debt-reduction measures go into effect there will “devastation to the individual, not to the society.”
“These are the people who want jobs that don’t have them and to those individuals it will be crushing,” Kemp said. “But does that mean the majority of society is going to fail? Does it mean it could slow an already slowly recovering economy? No.”
For example, the Supplemental Nutrition Assistance Program, or food stamps, used American Recovery and Reinvestment Act funds in April 2009 to increase benefits for a family of four by $80 per month. When the stimulus money runs out in October of 2013, families will see their benefits instantly decrease by $61.
“When there was an economic downturn there was more of a need for this program, but it was always known to be a temporary program,” said USDA press secretary Courtney Rowe.
Pollack said the stimulus money should continue until the economy has fully recovered, which will not be until at least 2016.
“I think the economy is far from having been recovered enough,” Pollack said. “We think there should be six months of six percent unemployment. Then we should start deficit reduction.”
Pollack said it will be a “very huge hit to economic growth” if many of the proposed budget cuts took effect immediately.
“If you were to design a perfect plan it would reduce the deficit over the next 10 to 20 years but would invest over the next two to three,” Pollack said.
UPDATE: Due to a miscommunication Brad Kemp's comments were based off of 2 percent of disposable income coming from government benefits, not 20 percent. Also, his correct title should be the director of regional research at Beacon Economics.