Growing Government Transfers

I’ve received several emails today about a story posted last night by USA Today.  The story points out that government transfers now make up more than one-sixth of American incomes, the highest ever.  Naturally, some observers welcome this development, while others denounce it.

I thought it would be useful to side-step that debate and instead provide some historical context.  To begin, the following chart shows the ratio of government transfers to personal income from January 1959 through April 2009 (the most recent data):

As the chart shows, USA Today is correct that transfers have grown faster than incomes, reaching almost 17% of personal income in April.  The recent growth reflects a combination of three factors:

1. The natural growth of government transfers in times of economic weakness.  Unemployment benefits, for example, have increased as the labor market has weakened and as policymakers have extended benefits.
2. Weakness in other types of income.  Over the past year, for example, private sources of income have declined.
3. The ongoing increase in entitlement programs.  Social Security payments continue to rise, for example, as the population ages.

As the chart illustrates, the growth in transfers is a long-run trend, with stronger upward movements during periods of economic weakness and slower growth, sometimes even relative declines, during periods of economic strength.

The following chart divides government transfers into their three main components: 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, the chart shows:

• Unemployment benefits have indeed grown rapidly in recent months, but remain small relative to other transfer programs.

• Other transfers spiked sharply in mid-2008.  That increase was driven by the tax rebates, a portion of which were classified 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 rapidly over the past few decades.

That last point is, of course, the most important one in the long-run.  As we budgeteers continually emphasize, spending on the major entitlement programs — Social Security, Medicare, and Medicaid — is on an unsustainable course.