About The Authors

Monday, October 30, 2017

Graph(s) of the Day: Govt Transfer Programs

Mike Smitka

Ten days since the last graph ... time to add another. Here are the largest transfer programs in the US as a "stacked graph." These include those not only of the Federal government but also much smaller state and local programs. I've not included private transfers. Those aren't large, or more precisely are no longer large, in an era when few companies provide employer-funded defined-benefit pensions.

First, you can see the magnitude of government transfer programs. In our $20 trillion economy, they come to $2,700 billion or about 14% of GDP. (Remember, transfers don't show up directly in GDP, they are personal income and enter the economy only when someone spends the money.) However, the graph is not particularly helpful, because this is nominal GDP, which reflects not just "real" growth but also inflation. To better convey the magnitude, you should divide each of these series by nominal GDP. Rather than ask you to do that – it is straightforward task in FRED – here's the graph for the total divided by nominal GDP. You can see that there was a big increase with the Great Recession, but that the amount is slowly decreasing. I expect that is muted because of the retirement of the Baby Boomers, and not just by the still partial recovery during which 2% of prime-aged workers have yet to re-enter the labor force. But admit that I have not dug in deeper.

We can also look at the composition. In the early 1950s there were few retirees as a share of the population, and many of those retired did not qualify for social security. That changed as more and more workers were "vested" in the program (which was enacted only in 1937). As a share unemployment was much higher, but that's as part of a very small total. The catch-all other category looms large as a share of transfers, but small as a share of GDP. Neither Medicare nor Medicaid existed until 1966. Today retirement programs predominate: social security and medicare together are $1.6 trillion. State-level healthcare programs (Medicare) adds another $560 billion. The remainder includes miscellaneous small items such as veteran's benefits ($90 billion), food stamps (or formally SNAP, at $65 billion), and tax rebates, such as the $7,500 that a well-heeled American gets back from the purchase of a Tesla Model S but also the much more substantial earned income credits that help a low-income individual offset various taxes. In other words, what we would commonly refer to as "welfare" is too small relative to our $20 trillion economy for FRED to break them out as separate line items. [For much, much more detail see Table 3.12 Government Social Benefits in the National Income and Product Accounts.]

All of this provides an anchor to the economy: these flows continue even if we enter into a recession. That's important, because when someone loses a job, the impact spills over to local retailers and others, and leads to additional job losses, the "multiplier" of Economics 102. Now as you can see from the data, unemployment benefits are generally trivial, and they are also time-limited (24 weeks or roughly 6 months). But they increase sharply during a recession, and act as another component of our "automatic stabilizer," allowing people to cut consumption less and thereby partially offseting the spillover effects from the loss of a job. It's important not to overstate the cushion this provides, as it's hard to find a job during a recession. Benefits aren't very generous, either, averaging only about $300 per week – for many workers the replacement rate is only about 50%. Given the severity of the Great Recession, Congress did recognize the importance of even partially stemming the cascading effects of job losses; the ARRA temporarily increased the duration of unemployment insurance for up to 99 weeks. If you'd been earning $36,000 per year, however, and just barely making car and house payments, you couldn't make ends meet on $1,200 per month in unemployment checks. Goodbye house, but keep the car or you'd be unable to work even if a job became available.