Living a Life of Entitlement, for Now

Sara Murray (Wall Street Journal) has an interesting piece, “Obstacle to Deficit Cutting: A Nation on Entitlements.” The lead paragraphs lay out the problem:

Efforts to tame America’s ballooning budget deficit could soon confront a daunting reality: Nearly half of all Americans live in a household in which someone receives government benefits, more than at any time in history.

At the same time, the fraction of American households not paying federal income taxes has also grown—to an estimated 45% in 2010, from 39% five years ago, according to the Tax Policy Center, a nonpartisan research organization.

This should come as no surprise. We are in a deep and prolonged recession and one would expect a greater reliance on unemployment, Medicaid, TANF, and food stamps. But there is also a long-term trend in entitlements that is being driven by demographics and changes in policy (e.g., the recently passed healthcare reforms that will extend subsidies to another 19 million Americans by 2019).  As Murray correctly notes: “despite occasional bouts of belt-tightening in Washington and bursts of discussion about restraining big government, the trend toward more Americans receiving government benefits of one sort or another has continued for more than 70 years—and shows no sign of abating.”

Payments to individuals—a budget category that includes all federal benefit programs plus retirement benefits for federal workers—will cost $2.4 trillion this year, up 79%, adjusted for inflation, from a decade earlier when the economy was stronger. That represents 64.3% of all federal outlays, the highest percentage in the 70 years the government has been measuring it. The figure was 46.7% in 1990 and 26.2% in 1960.

Data presented in the article reveals that US households claim a far smaller share of their after-tax income from government (9.4 percent) than do other nations (e.g., the OECD average appears to be around 20 percent). Obviously, demand for government services varies widely across nations and nations with different levels of social provision do just fine. The real problem seems to be that the US has developed a greater demand for entitlements while retaining its historical aversion to taxation.

There were times in the recent past when elected officials could paper over this demand for high levels of spending and low levels of taxation by simply claiming, in the words of Dick Cheney, that “deficits don’t matter.” But after almost two years of the Obama administration, the GOP is stepping into the 2010 midterms and the 2012 presidential election with a different message: deficits and debt do, in fact, matter.

After the polls close, one wonders whether elected officials will have the will to follow through in reducing spending and/or increasing revenues to prove that fiscal responsibility is more than a convenient campaign theme. Regardless of the technical justification, the political electoral costs could be significant. I could issue my own predictions (and who would be surprised).

Regardless, the Murray piece is worth your time.

2 thoughts on “Living a Life of Entitlement, for Now

  1. I’ve read the Murray piece and it is one more confirmation why it was a good thing to cancel my WSJ subscription. Propaganda by definition should be free to access. I’m happy with my subscription.

    The only sane person in the story is Ms. Mueller-Holden: “Quite frankly, I don’t care about the deficit,” How true. Unfortunately most economists are intellectually not able or willing to grasp this economic wisdom.

    The US government is the monopoly issuer of its FIAT currency, which is non-convertible and FX free-floating. It is by definition not revenue-constrained. Its only worry is inflation. But in the presence of capacity under-utilization (75%) and unemployment (10%) inflation is a worry for the next day. The government can and should support a Ms. Mueller-Holden. And it should have announced yesterday either a Job Guarantee for everyone who wants a job or a Universal Basic Income (More to the liking of Jason Sorens?) to prop up aggregate demand. After all the job of the federal government is to promote The People in their pursuit of happiness.

    I would like to conclude my rant against the deficit hysteria with a quote from nobel laureate William Vickrey:

    “The ‘deficit’ is not an economic sin but an economic necessity. Its most important function is to be the means whereby purchasing power not spent on consumption, nor recycled into income by the private creation of net capital, is recycled into purchasing power by government borrowing and spending. Purchasing power not so recycled becomes non-purchase, non-sales, non-production, and unemployment.”

  2. The statement “the fraction of American households not paying federal income taxes has also grown—to an estimated 45% in 2010” is one of the great lies of our time.

    Social security taxes, while not considered income tax, are paid by one hundred percent of households, even the very poorest households. On the other hand, the very richest households are exempt from social security tax on their highest levels of income. This is a very regressive tax structure. The interesting thing about Social Security taxes is that they provide more than half of all federal revenues. So what is really going on when you peal back all the layers is that more than half of government revenues are funded by a highly regressive tax structure.

    The half of households receiving benefits are either receiving social security benefits, members of the military or civilian contractors to the government and farmers. The working poor who are squarely burdened with Social Security taxes are funding the half getting the benefits. The working poor, on the other hand, actually get very few benefits from the federal government unless they happen to fall into one of the aforementioned categories, which they usually do not.

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