In the debate over the federal stimulus package, one basic fact is being ignored: Only the private sector can create new wealth and income, and government can only spend what it first takes from the private sector. Government gets its money by either taxing the private sector or borrowing from the private sector. In extreme cases, the government can print more money and spend it, but let's hope it does not come to that.

Because of how it's funded, increased government spending crowds out private sector spending. The so-called stimulus package is thus really just a shift in the economy away from the private sector and toward the public sector.

Of course, this is not a new phenomenon. Based on data from the U.S. Department of Commerce's Bureau of Economic Analysis; in 1929 (the first year of available data), Maryland's private sector accounted for 90.3 percent of all personal income earned in the state. By 2007, the private sector share had fallen by 19.7 percent to 72.5 percent of personal income.

In the long run, the private sector share of income matters a great deal. States with larger private sectors grow faster over time than states with smaller private sectors. Connecticut currently has the largest private sector share, at 79.3 percent, and its residents have a per-capita personal income of $54,117, while West Virginia has the smallest private sector share, at 59.1 percent, and its residents have a per capita personal income of only $29,537. Connecticut's per capita personal income is 83 percent larger than West Virginia's.

This suggests that if we want a stimulus package at all, we should be very careful in how it is designed. There are two different ways in which government can inject money relatively quickly into the economy: Tax rebates or spending.

One benefit of tax rebates is that the crowding out of the private sector is temporary. Once the rebate works through the economy, there are fewer long-term side effects. This is clearly illustrated by the 2008 stimulus package enacted under President Bush. The stimulus consisted of a tax rebate that ranged from $300 to $600 for single filers, or $600 to $1,200 for married filers, and included $300 per dependent. The rebate disbursements started in May 2008 and continued through the end of the year.

Between the first and second quarters of 2008, Maryland's private sector share dropped from 72.12 to 71.43 percent, as the tax rebate checks hit taxpayers' mailboxes. However, as the tax rebate disbursements wound down, the private sector share began to rebound in the third quarter of 2008 to 71.63 percent.

Unlike Bush's tax rebates, President Obama's stimulus package is based on a massive increase in government spending. Increases in government spending do not go away; instead they accumulate. Sen. Tom Coburn (R-Okla.) put it succinctly in a recent op-ed in the Wall Street Journal (Feb. 4, 2009): "Ninety percent of the bill represents one of the most egregious acts of generational theft in our nation's history, with taxpayer money going to special-interest earmarks, an ill-conceived bailout to the states, and permanent spending increases that expand government's reach in areas like health care and education. Moreover, one in five [jobs created] will be a government job."

The most recent estimates show that Maryland will receive approximately $3 billion over the next two years from the stimulus package. In particular, much of the new money will be used to bail out Medicaid and expand its coverage. Since Medicaid's creation in 1965, it has been a major driver of the crowding out of the private sector. BEA data show that Maryland's health care spending (mostly Medicaid) grew from $12 million in 1965 to $5.6 billion in 2007.

The federal stimulus package is bad news for America's and Maryland's private sector. The legislation will accelerate the arrival of the day that the private sector's share of personal income dips below 50 percent. Unfortunately, the price we will all pay for this affliction will be lower incomes and higher taxes.

J. Scott Moody and Wendy P. Warcholik are visiting fellows with the Maryland Public Policy Institute.