The American Addiction to Transfer Payments

by
Jane L. Johnson
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There is plenty of commentary today about continuing large annual US federal budget deficits and the large federal debt that keeps mounting as a result of these relentless deficits. The budget deficit for federal fiscal year 2024 clocked in at $1.8 trillion, representing about 5 percent of US GDP, and the federal debt is now $35.5 trillion, approximately 100 percent of GDP.

The Congressional Budget Office projects that annual budget deficits and the outstanding debt are on a trajectory to rise further into the indefinite future at current taxation and spending levels. The US Congress has the “power of the purse,” representing its constituents and designated by the Constitution as the body responsible for legislation governing federal taxation and spending.

Americans’ Dependence on Transfer Payments 

Less remarked upon than these deficit and debt figures—but equally significant—is the inordinately large number of Americans dependent on federal transfer payments for their very livelihood. Many are not aware that these entitlements—particularly Social Security benefits, Medicare, and Medicaid—comprise fully two-thirds of federal expenditures. Instead, many mistakenly believe that defense expenditures are the largest single federal expenditure when, in fact, defense comprises only about 13 percent of the federal budget.

A recent report from Economic Innovation Group (EIG), a 501(c)4 non-profit organization, reveals some startling facts about Americans’ dependence on transfer payments. This report, based on county-level data from regional economic account files maintained by the US Department of Commerce’s Bureau of Economic Analysis (BEA), includes the following findings:

• Not long ago, money from government programs like Social Security, Medicare, Medicaid, food stamps, Section 8 housing subsidies, and many others transfers featured minimally in Americans’ personal income;
• Only people in a handful of areas of traditionally chronic economic distress depended on transfers for significant shares of their income in the 1970s;
• By the 2000s, transfer income featured more prominently in local economies;
• By 2024, the majority of US counties rely on federal transfers for 25 percent or more of their income, while counties with little dependency on transfer payments have gone from the norm to nearly extinct. Today’s vast transfer-dependent regions include most of New England, parts of upstate New York, parts of the upper Midwest (Minnesota, Wisconsin, Michigan), other Midwest states (Kansas, Missouri, Oklahoma), all states in the Southeast, nearly all of New Mexico, parts of Arizona, Colorado, and Nevada, all California counties north of the San Francisco Bay area, much of West (portions of Oregon and Washington, Idaho, Montana, Wyoming). Counties in Alaska and Hawaii also show reliance on federal transfers of 25 percent or more of personal income;
• In 2022, Americans received $3.8 trillion in transfer income from the government. If that amount were averaged across the entire US population of 331 million, it would be about $11,500 per person;
• Transfers now account for almost 18 percent of total personal income in the United States, up from 8 percent in 1970;
• Three trends are fueling this growth in transfer payments: an aging population, rapidly rising healthcare costs, and growth in other earnings (wages and investment income) that haven’t kept up with the growth in transfer payments;
• Underlying these demographic, population-wide changes is the increase in transfer-payment programs that were first put in motion by the FDR New Deal of the 1930s and the LBJ Great Society of the 1960s. Virtually no transfer payments in the US existed before the 20th century;
• Social Security—the granddaddy of all transfer programs that currently benefits 67 million Americans (about 20 percent of the entire US population)—dates from the New Deal. Programs that date from the Great Society include Medicare (67.5 million beneficiaries), Medicaid (80 million), and federal higher education student financial aid. Some may not consider student financial aid as transfer payments, but both student grants and loans may be used to pay living expenses as well as tuition, and federal student loans are evolving into outright grants with promises of loan “forgiveness” replacing repayment obligations. Student financial aid benefits over 12 percent of Americans in any given year;
• Concomitant with Americans’ increasing dependence on transfer payments has been large increases in government employment at federal, state, and local levels. Some of these employees are, of course, the managers and staff that administer the transfer payments. 

Note that these findings ignore “tax expenditures,” defined as special provisions in the US tax code such as tax exclusions, deductions, deferrals, and tax credits that benefit specific activities or groups of taxpayers. Examples include exclusion from taxable income any employer-provided healthcare fringe benefits; exclusion of employee and employer contributions to retirement plans; tax credits for electric vehicle purchase; earned income credit; child tax credit; and child daycare credit. Some of the tax credits are “refundable,” meaning that even taxpayers who owe no income tax can receive the credits in the form of an IRS tax refund check. Including tax expenditures with transfer payments would reveal even more dependence on government.

The Ramifications of Transfer Payment Dependence

In Misesian thinking, only negative outcomes can ever result from dependence on government transfers. In the words of Murray Rothbard,

The greater the extent of government subsidy in the economy, the more the market is prevented from working, and the more inefficient will the market be in catering to consumer wants. Hence, the greater the government subsidy, the lower will be the standard of living of everyone, of all the consumers.

Dependent Americans who benefit from transfer programs are, however, happy to accept governmental largess to pay their living expenses, believing that their other income—from wages and investments—has not kept up with living costs. No American wants to be looked upon as a moocher, but he will happily vote for a politician who promises to increase transfer payments. And politicians have endless proposals for new types of direct transfers (and tax expenditures as well) during every election season.

At the same time, politicians understandably hesitate to mention the extent of Americans’ dependence on transfer payments, or imply that voters may be uncouth deadbeats, especially after presidential candidates such as Obama in 2008, Romney in 2012, and Clinton in 2016 alienated many with their disparaging views of certain segments of the electorate.

Few can forget Obama’s revealing comments about white working-class voters “bitterly clinging to their guns or religion,” or Romney’s “47 percent who are dependent upon government, believe that they are victims, believe the government has a responsibility to care for them...these are people who pay no income tax,” or Hillary Clinton’s “half of Trump’s supporters belong in a basket of deplorables” characterized by racist, sexist, homophobic, xenophobic, Islamophobic views. Those phrases remain part of the political rhetoric to this day.

Thus, the transfer payments continue to flow, with little discussion of them within the larger context of the proper relationship between government and its individual citizens. The reality, in a nutshell, is that Americans appear unwilling to tax themselves sufficiently to support the federal spending levels—especially transfer payments—that they have come to expect.

The magnitude of these payments has, in effect, shifted the Overton Window far enough to accommodate them as politically and socially acceptable to taxpayers, beneficiaries, elected officials, the media, and the bureaucrats who administer the transfer programs. 

The extraordinary growth of the programs that distribute these transfer payments has, nonetheless, led to what has arguably become a US fiscal crisis without precedent and with no end in sight. It is, moreover, challenging to envision any scenario in which elected officials might be able to rein in these transfer payments (and tax expenditures), or in which Americans might be able to overcome their dependence on transfer payments. One can only speculate about the denouement of this dependency phenomenon in the larger narrative of the American story.