Government Transfers as a Share of Personal Income Hits 18% 21 comments
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A few weeks ago, I posted some charts showing that Americans are increasingly reliant on government transfers as a source of income. Friday’s data on personal income for May confirmed that the trend is continuing. Government transfers made up a record 18% of personal income in May:
In interpreting this increase, it’s important to keep several points in mind:
- May’s increase was driven entirely by the recent stimulus act. The act provided for one-time payments of $250 to a range of Americans who are beneficiaries of various other programs, including Social Security, SSI, and veterans’ benefits. Those payments more than account for the increase in transfers from 16.9% of personal income in April to 18.0% in May.
- Since those payments were temporary, the ratio will likely decline in the future. That’s assuming, of course, that other economic changes don’t move it in the other direction.
- The increasing importance of transfers reflects both short-run developments and long-run trends. In the past year, the importance of transfers has grown because of (a) weakness in other forms of income, (b) the natural expansion of transfers due to economic weakness (e.g., increases in unemployment insurance payments), and (c) policies to expand benefits (e.g., as an attempt at stimulus). Over the longer run, however, the growth of transfers has been driven by the expansion of entitlement programs.
To get a handle on these different factors, it’s useful to distinguish three different types of transfer payments: Old-age, survivors, disability, and health insurance (which I have labeled Social Security and Health Insurance), unemployment benefits, and other (which includes food stamps, welfare, and other programs):
Among other things, this chart shows:
- Unemployment benefits have grown rapidly in recent months. They remain small, however, relative to other transfer programs.
- Other transfers spiked in May because of the special payments. A similar spike occurred in mid-2008 due to tax rebates from the first stimulus; a portion of those rebates were characterized as transfer payments (rather than tax reductions) because they went to individuals who didn’t have any tax liability.
- Transfer payments for Social Security and health insurance have grown the most over the past few decades.
That last factor is, of course, the reason that our long-run budget situation looks so grim.
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This article has 21 comments:
At the same time that Americans become increasingly dependent on government assistance, it must be noted that U.S. baby-boomers are now about to start making HUGE claims (i.e. TRILLIONS per year) on the U.S.'s "unfunded liabilities" - as that mind-boggling total approaches $100 TRILLION.
This will put the U.S. government in EXACTLY the same position as California in less than 5 years: dramatically slash benefits or default on debt.
And yet, the nation continues to vote to increase the morass of entitlement spending coming out of Washington DC year after year. There are times when I think of our faltering republic in terms of a drug addict.
We know the habit will kill us, but drying out takes hard work while a quick fix feels so good.......
But that isn't happening. The elected Beltway bandits continue to bloat government, both thru regulation and overspending. Both parties are to blame, but BHO was elected promising change; instead, the transfer payments will only increase without measurable pause.
I am waiting to see if the Senate can stop the madness; if not, in a few years the world we know will be different, and not for the better.
You got your history wrong. Herbert Hoover initiated many of the initiatives that his predecessor FDR followed. Hoover was responsible for make work programs, Smoot-Hawley Protectionist Act, and price and wage controls. These initiatives were than magnified by FDR. The result of this poor governance, was the Great Depression. Remember Hoover/FDR prolonged the Depression by several years.
You may be thinking of Warren Harding. He approached his recession laissez-fare. The result was a deep but short recession.
> How about this idea? I spent the evening with Dr. Robert Frank, professor
> at the Cornell University School of Management, and author of The
> Economic Naturalist’s Field Guide. US Consumption peaked at $10 trillion,
> or 73% of GDP in 2000, and in the new world of falling incomes and
> enforced savings rates, it will take many years to come back. The
> current disaster was a guaranteed outcome, because while incomes
> stagnated over the last 30 years, the median home size jumped 50%
> to 2,600 square feet. California is in a real pickle, because governor
> Arnold Schwarzenegger is forced to act as Herbert Hoover did by balancing
> a budget on the way into a Depression. Deregulation poured gasoline
> on the fire, enabling an unsustainable culture of leverage. Dr. Frank
> argues that we should use this economic crisis to fundamentally remake
> the US tax system. The current system taxes savings on multiple levels,
> but spending is tax free. We need to scrap the income tax (three
> cheers), and implement a steeply progressive consumption tax. We
> need to tax pollution the same way. Dr. Frank, who co-authored a
> previous book with Fed governor Ben Bernanke, offers radical solutions.
> It seems that desperate times require desperate measures.
Stop trying to fool people into accepting the idea that the government doesn't have enough money to pay social security or other social obligations. Social Security and Medicare are NOT government hand-outs! I've paid a ton of money into both, and so have you, and we deserve to get that money back in the form of benefits. It's a social contract and it has to be honored. Bailout money for Goldman Sachs and Citibank and AIG -- THAT's a HANDOUT, pure and simple. Why didn't you say that BANKS (instead of BOOMERS) are making HUGE claims on government money"? Or was it not clear to you who's being fleeced and who's doing the fleecing?
On Jun 29 01:02 PM Jeff Nielson wrote:
> A very good commentary which highlights how totally deceitful it
> was to label a one-time increase in cash-on-hand as an "income gain".
>
>
> At the same time that Americans become increasingly dependent on
> government assistance, it must be noted that U.S. baby-boomers are
> now about to start making HUGE claims (i.e. TRILLIONS per year) on
> the U.S.'s "unfunded liabilities" - as that mind-boggling total approaches
> $100 TRILLION.
>
> This will put the U.S. government in EXACTLY the same position as
> California in less than 5 years: dramatically slash benefits or default
> on debt.
Also our health care system is broken. We pay into it but get nothing out. A nationalized system is better. We may not get our money's worth but that's better than hard working people paying for it and getting absolutely nothing and then having to fill in tons of paperwork when we claim for insurance for a treatment to prove that we get nothing from the government in order to get paid by our insurance.
There have always been instiutionalized and large income transfers in all real civilizations( indeed a civilization without income transfers is not worthy of the name) but mostly they have been voluntary, personal and private based on treating human beings as people . Government, by establishing itself as a vast and bullying intermediary, greatly diminishes not only the highly important sense of personal obligations and duties but creates resentments and envy. It corrodes both society and bonds/obligations of family and local community.
Coerced , massive, dehumanized , incompetent and high overhead income trasers is how the government turns citizens into captives and clients. The plantation increases, the people diminish. When the process can no longer be reversed, entitlements consume the substance of a nation and resentments the goodness of a society.
When voluntary exchange is forcibly replaced by coerced giving and regimented and depersonalized receiving,both giver and receiver are diminished. To the giver the transfer is no longer a joyful personal act of participation but yet another form of government control and repression and the receiver is just another statistic. To the receiver the transfer becomes yet another entitlement and a healthy gratitude is replaced by an unhealthy dependence and a sullen resentment that the transfer is never enough. The very basis of a good civil society is destroyed.
The politicians and financiers have promised to the average worker a standard of living than cannot be afforded unless through the generosity of foreign creditors. It is clear that budgets cannot be balanced with current or even optimistically projected tax receipts alone, so we need spending cuts and tax increases, i.e. there needs to be wealth distribution. The question is whether those with wealth prefer to keep as much as possible but live in a Mad Max style future or live in a more caring, safer world with less discretionary spending. Of course, the problem is half want the former seeing the alternative as communism.
But in a simpler note, the costs of healthcare in America could be significantly reduced by educating people to eat healthier food and do more exercise, but then gluttony is part of the American dream...
As a live resource, they occasionally need a little supplemental feeding.
.
I would suggest that you take a second look at the first chart above. The first major tax cut on capital in 1982 did not effect transfer payments/personal income at all while an increase on taxes on capital in 1993 seemed to have very positive results....how about 2001? I don't think you can make as definitive a statement on taxes on capital as you have. There seems to be an obvious inverse relationship of taxes on capital and welfare payments as a function of income. Here is some interesting stats...from 200-2007 the S&P 500 earnings were 2.4T...1.7T went to stock buybacks (a great way to trigger executive option packages) and .9T went to dividends(why Buffet's effective rate is lower than mine)..net,net...zero went to R&D, product development or cap ex. These companies, in aggregate
funded operations on cheap debt. Maybe we should concentrate our tax cuts on R&D (investment) and not cap gains or dividends (distribution).
On Jun 29 01:08 PM WS1835 wrote:
> Unfortunately modern politics and the short-sightedness of the average
> voter always seems to trump basic economic sense. We know taxes on
> capital kill business. We know that welfare and entitlement spending
> are economy killers. We know that income taxes destroy incentive
> to save and invest.
>
> And yet, the nation continues to vote to increase the morass of entitlement
> spending coming out of Washington DC year after year. There are times
> when I think of our faltering republic in terms of a drug addict.
>
>
> We know the habit will kill us, but drying out takes hard work while
> a quick fix feels so good.......
The government needs to do LESS, not more. It doesn't do anything well. It's pure overhead. The government is non-productive, and indeed is often the enemy of production. What better example than public education? I've never understood why so many people are worried about finding new tax revenues for the government, when they should be more interested in how to force it to get along with less, and free the wasted resources for use in the real economy where they can do some good. When the government is running deficits, then it should spend less and balance the budget. If anyone thinks that the funds it gets are not well above what is needed to do it's real job (roads, military, courts, etc) they're dreaming. The government is a fat greedy pig, eating up our substance as fast as it can. More government is not the solution to any problem.
On Jun 30 06:57 AM nobby73 wrote:
> Frankly, I think the US economy is now in a feedback loop and whatever
> changes are attempted to rectify the situation will not be able to
> halt the decline. Any stimulus plan will only work when you have
> strong balance of trade and a positive current account. People bang
> on about what Herbert Hoover did or FDR did with stimulus, but the
> truth is, it was the external demand for goods created by WWII that
> brought the US out of the 30s recession. Over the long term, if an
> economy is a net importer and increases external borrowing each year,
> then a day of reckoning will come sooner or later.
>
> The politicians and financiers have promised to the average worker
> a standard of living than cannot be afforded unless through the generosity
> of foreign creditors. It is clear that budgets cannot be balanced
> with current or even optimistically projected tax receipts alone,
> so we need spending cuts and tax increases, i.e. there needs to be
> wealth distribution. The question is whether those with wealth prefer
> to keep as much as possible but live in a Mad Max style future or
> live in a more caring, safer world with less discretionary spending.
> Of course, the problem is half want the former seeing the alternative
> as communism.
>
> But in a simpler note, the costs of healthcare in America could be
> significantly reduced by educating people to eat healthier food and
> do more exercise, but then gluttony is part of the American dream...
Also, when more money is taken from me and transfered to welfare recipients, am I more or less willing to give voluntarily to charity? Well, I have less money so, no, of course not. I will give less, as well as have the attitude "let the gov't take care of it, since they take my money anyways." But if there were no safety net, I would give more to charity, knowing that I might need that charity one day from my church, etc.
BTW, an interesting essay on the effect of welfare state on community is the following:
www.american.com/archi...
On Jun 30 06:34 AM User 353732 wrote:
> . Increasingly the ideological motive impelling these income transfers
> is to replace private compassion and sense of personal responsibility
> towards fellow Americans with public envy and the depersonalization
> of social relationships.
> There have always been instiutionalized and large income transfers
> in all real civilizations( indeed a civilization without income transfers
> is not worthy of the name) but mostly they have been voluntary, personal
> and private based on treating human beings as people . Government,
> by establishing itself as a vast and bullying intermediary, greatly
> diminishes not only the highly important sense of personal obligations
> and duties but creates resentments and envy. It corrodes both society
> and bonds/obligations of family and local community.
> Coerced , massive, dehumanized , incompetent and high overhead income
> trasers is how the government turns citizens into captives and clients.
> The plantation increases, the people diminish. When the process can
> no longer be reversed, entitlements consume the substance of a nation
> and resentments the goodness of a society.
>
> When voluntary exchange is forcibly replaced by coerced giving and
> regimented and depersonalized receiving,both giver and receiver are
> diminished. To the giver the transfer is no longer a joyful personal
> act of participation but yet another form of government control and
> repression and the receiver is just another statistic. To the receiver
> the transfer becomes yet another entitlement and a healthy gratitude
> is replaced by an unhealthy dependence and a sullen resentment that
> the transfer is never enough. The very basis of a good civil society
> is destroyed.
"Transfer payments for Social Security and health insurance have grown the most over the past few decades."
This is consistent with an aging population and a healthcare system that provides poor value for dollars spent. These payments will continue to grow . . . 'cuz old people get sick.
All the griping about "entitlements" misses the point: the baby boom is aging, and their medical care is extremely expensive. This dynamic is demographically inexorable, and its why getting healthcare on a more efficient footing is a national economic priority.
Saty: Regarding your note below, Social Security and Medicare are Ponzi schemes. I agree they are advertised as social contracts, but a contract is only as good as its counterparty and in this case your counterparty is broke. Be prepared to handle your own needs in terms of retirement income and retirement health care.
On Jun 29 11:30 PM Saty13 wrote:
> Stop trying to fool people into accepting the idea that the government doesn't have enough money to pay social security or other social obligations. Social Security and Medicare are NOT government hand-outs! I've paid a ton of money into both, and so have you, and we deserve to get that money back in the form of benefits. It's a social contract and it has to be honored.