Carpe Diem

Entitlement nation: The federal government has gradually turned into a gigantic wealth-transfer machine

outlays

Below are some selected excerpts from an excellent article in today’s Investor’s Business Daily by John Merline (“70% Of U.S. Spending Is Writing Checks To Individuals“):

Buried deep in a section of President Obama’s budget, released this week, is an eye-opening fact: This year, 70% of all the money the federal government spends will be in the form of direct payments to individuals, an all-time high (see chart above, data here in Table 6.1).

In effect, the government has become primarily a massive money-transfer machine, taking $2.6 trillion from some and handing it back out to others. These government transfers now account for 15% of GDP, another all-time high. In 1991, direct payments accounted for less than half the budget and 10% of GDP. What’s more, the cost of these direct payments is exploding. Even after adjusting for inflation, they’ve shot up 29% under Obama.

Where do these checks go? The biggest chunk, 38.6%, goes to pay health bills, either through Medicare, Medicaid or ObamaCare. A third goes out in the form of Social Security checks. Only 21% goes toward poverty programs — or “income security” as it’s labeled in the budget — and a mere 5% ends up in the hands of veterans.

Interestingly, despite Obama’s frequent pledges to reduce income inequality, the share of direct payments going toward “income security” has dropped from 25% in 2009 to 20% in 2014. (The average share from 1980 to 2008 was 25.4%.) Obama’s Fiscal Year 2015 budget calls for this share to drop to just 17% by 2019, as his programs devote more and more federal tax money to middle-class entitlement programs such as ObamaCare.

This massive shift in federal spending toward direct payments to individuals not only balloons the size of the federal government, it makes cutting the budget all the harder, since any meaningful spending reductions will invariably mean cutting back on some of these check-writing programs.

The Congressional Budget Office figures that, by 2038, Medicare and Social Security alone will eat up 42% of the budget. The explosive growth in these direct-payment programs is also squeezing traditional government functions, such as national defense, which Obama wants to sharply cut. His budget calls for Pentagon spending to drop from $623 billion in 2015 to $570 billion in 2017.

70 thoughts on “Entitlement nation: The federal government has gradually turned into a gigantic wealth-transfer machine

  1. I notice welfare for the 1%, such as lower capital gains taxes, ag subsidies, FDIC welfare check to Mitt Romney, etc., aren’t mentioned. Wonder why that is? And, as the recent IMF study by Ostry showed, nations that have acted to reduce inequality have more stable patterns of sustained economic growth than those that haven’t.

    The middle class is the new poor in the US. Obamacare will act to protect middle class income from the ‘business cycle’ excesses that we’ve seen in the last few years. And the reason Obama hasn’t been able to act is because conservatives don’t have much use for any govt program that doesn’t benefit economic elites.

      • robert-

        mitt pays more in taxes in one year than you will in your whole life and likely not by a small amount.

        and you call that “welfare”?

        you are either just a ridiculous troll and wind up artist or you have been truly brainwashed.

        • Folks get confused – they look at their top tax rate – say 28% and compare that to the 15% Romney pays. Of course they forget the standard deductions and exemptions and itemized deductions – And the 10% first tier tax rate which make their taxes much lower. I am in the 25% bracket and my taxes with a wife and 2 kids ends up being about 8% of my income.

          • marque-

            alas, 15% is a thing of the past.

            cap gains jumped to 20% and then got 4 more points tacked on for obamacare leading to an overall 60% increase in the effective cap gains tax rate.

      • As a percentage of income Romney pays about twice what I do. He pays about 16% as I recall and I pay about 8% federally. I am in the top 10% bracket income bracket in most years.

        I suspect if you were honest you would acknowledge Romney pays at least twice the rate you do as well.

    • welfare for the 1%, such as lower capital gains taxes

      This shows exactly the type of disgusting person you are. You equate “not stealing from others” with “providing them welfare”. I suppose you think a thief who only steals $50, rather than $100 from you “gave” you the remaining $50.

      And anyone who has even thought for two seconds about captial gains taxes knows people who pay capital gains pay higher taxes, both absolutely and percentage wise.

      The middle class is the new poor in the US.

      Of course, this is a bald faced lie, as those who are said to live in “poverty” in the US today live better material lives than the middle class in the 1970′s. Also, a quick look Census table 690 tells you why the middle class is “shrinking”: they’re getting richer and moving into the upper class.

        • robert-

          also, consider how ridiculous the claim you are making is.

          so, mitt makes money and pays taxes, then he invests that money in something risky and productive the generate economic growth and creates jobs and prosperity, and for that, you’d like to tax him again if he succeeds?

          cap gains are a form of double taxation.

          many countries do not tax them at all and even most who do in theory do not in practice as they do not tax offshore income so all one needs to do is shifts savings to switzerland or the caymans or some such and you pay zero cap gains tax.

          (we have a fair number of european investors in our cayman fund who do (perfectly legally) precisely this. in fact, it’s why we have a cayman fund.)

          so, double taxation = welfare.

          man, even orwell would have dropped that from 1984 as being too unbelievable even for the ministry of truth.

          you are a truly brainwashed leftist kleptocrat.

          • Speaking of Orwell and leftists, you might want to remember that Orwell was a socialist. I’m pretty sure that means Orwell would have been OK with taxing Mitt a little more whether or not you think that’s a good idea.

          • Greg

            Speaking of Orwell and leftists, you might want to remember that Orwell was a socialist. I’m pretty sure that means Orwell would have been OK with taxing Mitt a little more whether or not you think that’s a good idea.

            Yeah, but he wouldn’t call it”welfare for the 1%”. That’s too Orwellian even for Orwell.

          • “Speaking of Orwell and leftists, you might want to remember that Orwell was a socialist.”

            alas, today’s socialists, unlike orwell, lack his quite prescient views on the dangers of fascism.

            those who fail to learn from history are doomed to… what was it again? i forget.

    • Obamacare will act to protect middle class income

      This is a faith based assertion, as Obamacare is all ready responsible for millions of people losing their insurance after Obama blatantly lied to get this failure of a policy passed.

    • I am nowhere near the 1% and I get great benefits from cap gain reduce d taxes. Don’t you invest for your future? Or are you depending on some of these government handouts.

    • Your basic theme is correct. The total US taxation system is actually more progressive than the OECD average (largely because there is no federal consumption tax). However the US redistributes less than the OECD average. Most US Federal outlays go to old people, not poor people. And while there are some old & poor people, there is plenty of money going to old & not-poor people as well.

      • 1.

        the us tax system is not just more progressive than the average for the oecd, but the single most progressive tax system in the oecd. it is WAY above the average.

        can you provide some data on the us redistributing less than the oecd?

        i’d be interested to see where you got that/how you are measuring it.

    • If as a country we are about equality… Race, color, sexual orientation, physical capability… That everyone has to have equal opportunity and treatment then the current tax system is a form of inequality at its finest. Why discriminate one person who makes more pay more than another person? Imagine, no sir you cannot eat here because you don’t make enough money?

      Flat tax and/or national sales tax would generate more $ and treat people equally. You are taxed on consumption. Plus gather taxes from illegals, tourists and black market activities. Most importantly we could reduce the size of the IRS significantly and reduce a massive expense in the federal govt.

  2. Interesting. The comments here so far are mostly about whether the government should be making payments to this type of person or that type — rather than what, I think is the point of Dr. Perry’s post. As I look at the Constitution it is hard to make a case that the primary reason the states created a Federal government was so that it could make payments to people.

    • amen.

      you have absolutely nailed it.

      worse, redistributionist abilities are simply not compatible with democracy on a sustainable basis.

      tytler said it perfectly:

      “A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.

      The average age of the world’s greatest civilizations from the beginning of history has been about 200 years. During those 200 years, these nations always progressed through the following sequence: From bondage to spiritual faith; From spiritual faith to great courage; From courage to liberty; From liberty to abundance; From abundance to selfishness; From selfishness to complacency; From complacency to apathy; From apathy to dependence; From dependence back into bondage.”

      i do not like the spot we appear to currently occupy in that cycle.

    • If as a country we are about equality… Race, color, sexual orientation, physical capability… That everyone has to have equal opportunity and treatment then the current tax system is a form of inequality at its finest. Why discriminate one person who makes more pay more than another person? Imagine, no sir you cannot eat here because you don’t make enough money?

      Flat tax and/or national sales tax would generate more $ and treat people equally. You are taxed on consumption. Plus gather taxes from illegals, tourists and black market activities. Most importantly we could reduce the size of the IRS significantly and reduce a massive expense in the federal govt.

  3. The federal government has gradually turned into a gigantic wealth-transfer machine

    That’s one way to describe it. Another description is that the federal government is an insurance company with a wholly owned defence subsidiary.

    On the wealth transfer side, laissez-faire capitalism failed when AIG, the largest global private insurer, was bailed out in the 2008 financial crisis.

    Last time I went to accounting identity school, I thought that were receipts and outlays. Compare Table 2.2 (income) to Table 6.1 (expenses). What’s the issue?

    • On the wealth transfer side, laissez-faire capitalism failed when AIG, the largest global private insurer, was bailed out in the 2008 financial crisis.

      Judging by this sentence, you don’t know what “laissez-faire capitalism” means, do you?

      • Spare me your peach fuzz routine. Engage in an intellectual exercise. The federal government is the re-insurer of last resort.

        • I mean, it’s just you blame the problem on laizzes-faire capitalism and then you cite something that is decidedly not laissez-faire capitalism.

          It just makes me think you used a phase that you didn’t know what it meant.

          That’s all.

          • jon-

            well, let’s see.

            he’s described the us as being like an insurance company with an army, and then claims that AIG was the end of laissez faire capitalism.

            while not an example of LF capitalism to be sure, it does seem quite an arbitrary point to call and “end”.

            not the 30′s under FDR?

            not the first round of auto company bailouts?

            i mean, one could chose a great many far more egregious examples.

            so, to my mind, the question becomes “why would you listen to marico the babbling troll about anything?”

            he seems to have a very simply pattern.

            show up, say somehting absurd and baseless, pretend is is the height of brilliance, then, get REALLY angry and curse at people when they disagree with him because, unable to engage on the facts, he must accuse others of his own failings and be abusive to try to hide the fact that his comments did not make sense and that he cannot defend them.

            bitter, angry, and dumb is no way to go through life marmie.

        • Smarmy, you actually got something (partially) right – government introduces massive moral hazard, as they did with TARP and other bailouts, acting as lender of last resort.

          The chances of you extending that line of thinking back through your interventionist horseshit thinking are exactly zero.

        • Why is the government reinsurer of last resort? Is that in the constition or is it just something that progressives have put upon the government? Maybe it is to cover up government mistakes – as in AIG would never have gone bankrupt if confess had not meddled in the loan business and regulators had not insisted to count home loan debt as AAA bonds no matter the quality of the borrowers.

          • actually marque, that is not, strictly speaking, true.

            AIG was made insolvent by one gorup of traders in london who essentially were the entire CDS market for nearly 2 years.

            they had a model that was egregiously wrong and were writing bond insurance hand over fist at around 50bp. they were free to price CDS’s in any manner they wished and or to write them (or refuse to do so) on any underlysing security they wished.

            no one made them do any of it.

            in fact, they were doing something the rest of the street wouldn’t touch (or at least, doing it at prices no one else thought were viable).

            they built up a massive book of 200:1 leveraged derivative exposure based on bad models and worse assumptions about asset correlation and class cross correlation.

            playing with that sort of fire would have very likely wiped them out at some point anyhow.

            the mortgage bubble happened to be the thing that exposed their bad math, but had it not been that, it would have been somehting else.

    • That’s one way to describe it. Another description is that the federal government is an insurance company with a wholly owned defence subsidiary“…

      Way to go marmico don’t let the facts get in the way of a good rant…

      Consider the following by Sen. Inofe:

      Obama Wasted $120 Billion on Global Warming Which Could Buy 1400 F-35s

      Sen. James Inhofe (R-Okla.), ranking member of the Senate Armed Services Committee, said Wednesday at a hearing on the Defense Department’s Fiscal Year 2015 budget that President Barack Obama has wasted $120 billion on global warming over the past five years – money that would be better spent on the military.

      “I’ve been working on this for quite some time … In the last five years, between 2009 and 2014, the president has spent $120 billion on the environmental agenda, mostly global warming, climate and that type of thing,” said Inhofe. “And in that respect, if you’ll just take the amount that was not authorized by Congress — and I’m talking about the environmental agenda, you could actually buy 1,400 F-35s.”

      That’s right marmico your leftist Prez is busy wasting money on a fairy tale…

      • Inhofe is a bought and paid for oil and gas and military industrial complex pol.

        Question for you juandoze?

        Since you and I have been butting heads for ~7 years since the old days at Carpe Diem when there was a maximum 10 responses per blog post, why have the single, young, white, male libertarians invited you into their tent?

        • why have the single, young, white, male libertarianretards invited you into their tent?“…

          Ha! Ha! Ha! Ha! Ha! WTF is that?!?! Ha! Ha! Ha! Ha! Ha!

          Way to go tent boy, I’m sure that makes sense to someone…

          Seriously, what’s your question? I’ll try to help you out…

          Ha! Ha! Ha! Ha! Ha!

    • marmico

      Another description is that the federal government is an insurance company with a wholly owned defence subsidiary.

      Which would be a great idea if premiums were voluntary and competition allowed.

      • “That’s one way to describe it. Another description is that the federal government is an insurance company with a wholly owned defence subsidiary.”

        not even close.

        you have to pay premiums to get insurance, but not to to have the us government give you the wealth of others. in fact, the less you pay, the more you get.

        if you are aware of an insurance company that offers more coverage the less you pay, please pass their name on to me.

        those would be some guys worth talking to about a plan (assuming one believed they could stay solvent if you made a claim, which seems doubtful).

        • Judging by this comment, you don’t know anything about Somalia, do you?

          I mean, it’s just that Ron is talking about voluntary cooperation, and you cite Somalia which is decidedly not voluntary in any sense of the word.

          That is all.

          • Cit

            What do you mean by that?” [Somalia beckons]

            He doesn’t know. It’s just a phrase progressives throw out as an example of what they think is a free market, when in fact it’s nothing of the sort.

        • Somalia beckons!“…

          While you’re there you could probably get a hell of deal on an AK-47 (fully auto) and some extra banana mags at the Bakaara Market…

    • Another description is that the federal government is an insurance company

      I guess you can, so long as, you know, you don’t actually know the definition of insurance.

      laissez-faire capitalism failed when AIG, the largest global private insurer, was bailed out in the 2008 financial crisis

      How dishonest are you that you consider a bailout “laissez-faire capitalism”? How dishonest are you that you would even consider the most regulated industries, finance and mortgage, “laissez-faire capitalism”?

  4. To Seattle Sam’s point:

    When a government becomes a “massive money-transfer machine,” it is no surprise that people will want a piece of that action.

    This is a major reason why lobbying dollars keep pouring into Washington: everybody wants some of the goodies that the government is handing out. Does anyone seriously think it is a coincidence that lobbying dollars rise with government handout dollars?

    This sort of behavior by the government does several things:

    1) It corrupts the political process by strongly favoring those with money

    2) It encourages a self-destructive arms race, as groups try to outspend each other

    3) It distorts market signals by picking winners and losers

    4) Through organizations like the FEC, it can create a chilling effect on free speech

    As long as politicians can buy and sell favors, there will be folks looking to buy and sell.

    The way to eliminate this is simple: limit the power of the government.

    After all, if you don’t want the government to be taking lobbying dollars, stop rewarding them for it.

  5. Imagine for a moment a large company with many divisions, each of which is supposed to operate semi-autonomously to maximize return on investment. Corporate has relatively few functions — mostly treasury, legal and some oversight responsibilities. Things are working pretty well. Some divisions are doing better than others, but as a whole, the company is quite profitable.

    Now imagine Corporate stepped in and took over many of the operating functions of the divisions — deciding which products to pursue, at what price to sell them, how to manufacture them. It redistributes capital among the divisions based not on contribution to profit, but on which projects the Corporate officers especially favored. Maybe to favored friends in certain divisions. Maybe to projects they felt gave the company a favorable PR profile with the media. Maybe to divisions that have complained that previous allocations weren’t fair to them.

    Do you think the efficiency and profitability of this company would rise or fall? How do you think division managers would decide which new projects to pursue? Do you think they would report candidly on their successes and failures? Do you think they would take more or fewer risks?

    • Most CEOs or corporate boards would be tossed out of the airlock if they pursued pet projects. Many a company has died that way

  6. This entire thread is has been about responding to two morons, “Robert puharic” and “marmico”. Do you really believe that anything you say to these two clueless douchebags will change their minds?

    • Apparently there’s little disagreement without those two to correct, so without them there wouldn’t be any comments at all. It’s really hard to let ignorant shit go by without objecting.

  7. This graph almost makes me nostalgic for the days when we could spend more money on ways to kill people than on ways to help them.

    But then I remember the many posts on how we are living better than ever and my nostalgia fades.

    • It’s funny that you think the graph above shows a time when we spent “more money on ways to kill people than on ways to help them”. It’s funny for two reasons. The first is that the graph is in percent, not absolute dollars making the “spend more money” part false. The second is that you think welfare programs “help[s]” people. Take a look a the extreme decline of the black family from 1940 to today, as well as this and you’ll see that lower class white families aren’t being “help[ed]” either.

      What is happening is that a lot of politicians and cronies are getting incredibly rich because people like you think taking from one set of people to give to another, after taking a rather large fee for performing the taking then the giving, is “help”.

      • But Ken, look what the left has for done for the American Indians! Maybe their final solution is to get their base into reservations.

    • Actually I would agree with that. Once all the unnecessary programs are cut and others including Defense reduced, I would imagine about 70% of the federal budget would be for defense. What other expensive constitutional mandate is there?

  8. Money transfer? You mean a vote-buying machine cranking out $2.6 trillion per year. The republic has become simply a welfare state, fulfilling de Toqueville’s warning – “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”

  9. President WJ Clinton predicted as much in 1997. He was not so much concerned about the total amount as he was about how it restrained discretionary spending. Fortunately, the Fed has stepped up and allowed “borrow and spend” to surplant “tax and spend”

  10. I think entitlement and defense spending should be whacked in half.

    That said, this article is misleading. The bulge in transfer payments is largely due to changing composition of federal taxes.

    Social Security and Medicare are financed through payroll taxes. People pay into those programs and then later get their money back. These are gigantic programs, but not financed by income and capital gains taxes.

    If you look at income and capital gains taxes, the vast bulk is consumed by DoD, DHS, VA, national intelligence, rural subsidies and debt.

    Another thing: When you pay your FICA taxes, you know there is a chance you will benefit. When you pay income or capital gains taxes, the money goes into the black-craphole that is Washington DC, and you never see your money again. It is eaten by the bureaucracy and lobby groups.

    Here is where your income and capital gains taxes go:

    Federal Employment By Agency

    Defense (civilian) 772,601
    Defense (uniformed) 1, 429,995
    Defense (reserves) 850,880
    VA 304,665
    VA (receiving monthly disability) 3,700,000
    Homeland Security 183,455
    Justice 117,916
    Treasury 110,099
    USDA 106,867
    Interior 70,231
    H&HS 69,839
    Transportation 57,972
    Commerce 56,856
    State 39,016
    Labor 17,592
    HUD 9585
    Education 4452

    • People pay into those programs and then later get their money back.

      Laughably false. Rates of return on the money paid into spent immediately by greedy politicians, have been negative for quite sometime.

      Also, your insistence that payroll taxes are somehow different from an income tax is an accounting fiction, with no meaning in the real world. They mean the exact same thing to the taxpayer: reduced take home pay because greedy politicians think they are more deserving of your hard earned money.

    • Social Security and Medicare are financed through payroll taxes. People pay into those programs and then later get their money back. These are gigantic programs, but not financed by income and capital gains taxes.

      This is so stupid and warped, it requires a response.

      People do not “get their money back.” Because Socialist Insecurity is pay-as-you-go (with a “trust fund” filled with intragovernmental debt), the ability of the program to pay out benefits is determined by 1) how much taxation occurs/revenue collection, and 2) how much the “trust fund” has left in it.

      Because the boomer retirement generation is so large, not enough was “saved” in the trust fund to account for sustained benefit payouts. Once the trust fund goes dry, benefits will automatically revert to whatever the funding rate is at the time (payroll taxes). Holding current rates constant, that will amount to a dropoff of about 1.5% – 3% of GDP, sometime around or after 2020. We will already be heavily in debt by then, and may have a worldwide crisis far worse than 2007-8 to deal with simultaneously.

      Failing that, taxes will have to rise to fund the additional payouts, again at a time of severe indebtedness and likely crisis. That is a terrible combination.

      The window to avoid this coming disaster has already closed. And anyone following the boomer generation will not “get their money back.”

  11. Benji writes:

    “Social Security and Medicare are financed through payroll taxes. People pay into those programs and then later get their money back.”

    Benji, have you ever been an employer?

    If yes, then maybe you should have realized employers pay HALF of payroll taxes and that you were being misleading.

    Are the employers getting their money back from paying an equal amount for their employees social security and medicare? Nope, nope and more nope.

  12. Citizen Buddy:

    Yes, I once had a payroll of eight employees at the top, and paid FICA and workers comp too. And that was my business, I owned it.

    As I said, I would whack entitlements in half. And defense spending too, although maybe even more.

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