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Government: The Next Bubble to Burst

By Newt Gingrich, Dan Varroney
Investor's Business Daily
Friday, May 21, 2010

The economic collapse of Greece is a wake-up call. The unsustainable combination of a bloated public bureaucracy, high deficit spending and unfunded pension obligations busted Greece's government bubble. Now the birthplace of modern democracy is on the brink of becoming a failed state.

The Bank of England recently warned that the U.S. is on the road to the same fiscal failure as Greece, and the Obama administration's insistence on massive public spending and increasing deficits is the reason.  At this rate, the U.S. government will be the next economic bubble to burst. We've seen similar downturns: the information technology bubble in 2000, housing in 2007 and Wall Street in 2008. If unchecked, America's government bubble will depress our economy with higher interest rates and defaulting state and local governments.

The way to stop the government bubble from bursting is through strict fiscal discipline and empowering the private sector with tax relief.  Federal spending alone this year accounts for 25% of our nation's gross domestic product. If you add state and local spending, the number is closer to 50%. No economy can thrive when nearly half of all economic output is directed by politicians rather than entrepreneurs and small businesses.

After big government spending, government employee unions pose a serious threat to America's fiscal health. Over the past 30 years, union membership has declined significantly, from 23% of all workers in 1980 to about 12% today. But the percentage of union members working for government has soared: Over 50% of all union workers in the U.S. are employed by the government compared with only 17% in 1980.

In addition, government workers make about $10 per hour more than the average private sector worker.  And when they retire, taxpayers are on the hook to pay for lucrative pensions promised by a generation of politicians trying to win the next election. America's small-business owners could only dream of providing the type of pensions that government workers take for granted.

The way to stop the government bubble from bursting is through strict fiscal discipline and empowering the private sector with tax relief. Reducing federal spending is an urgent priority.  The engine of the American economy is small business, not government.  If the size of government continues to grow, there will be less of free enterprise and less creation of new wealth and new jobs. The American government will primarily function to spread the wealth.   Like in Greece, the economy here will fail.

Congress will not make the tough decisions necessary to reduce spending unless we force its hand. When we balanced the budget in the 1990s, we did it with strong controls on spending, real reform of welfare and Medicare, and tax cuts to increase economic growth. This led to four straight years of balanced budgets for the first time since the 1920s.

Newt Gingrich is a senior fellow at AEI. Dan Varroney is Chief Operating Officer at American Solutions.
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