By a host of measurements, the dependence of Americans on the largesse of the Federal government is growing at a rapid rate. This dependence is worrisome because it poses two dangers — to American economic stability and to the fabric of civil society. The economic danger has captured the news in the current election cycle, with both candidates trying to show how their respective plans are a way out of the closing debt and deficit trap. Total Federal debt is on course to reach 100 percent of GDP in two years, and historical analysis shows such debt levels as a tipping point at which economic negatives worsen dramatically.
While most agree that government support programs can provide good services to the truly needy, what has been less discussed is the extent to which the deficit and the debt are driven by spending on programs which increase the dependence of citizens on the Federal government. The particular danger here is that the growing reliance on Federal spending will crowd out and compromise the healthier forms of reliance that are the glue of civil society — individual, family, community, and local self-reliance.
Each year, the Heritage Foundation publishes its Index of Dependence on Government, which highlights the trend. Heritage, of course, has a point of view which it marshals data to support; it's been a prominent conservative think tank since the Reagan era. That orientation shows in some of the assumptions of this annual Index, as we'll note below. It is not our intention to advocate either Republican or Democratic points of view in this letter. Our focus is to communicate data which identifies a major theme of society. The broad picture should give pause to people of any political persuasion who are concerned about the viability of American civil society, economic health, and democratic values. The usefulness of the Index is simply that, like any other index (the CPI, for example); it makes a welter of data appear as a coherent trend.
Heritage breaks down government spending into five broad categories, adjusts for inflation, and assigns weights to each: rural and agricultural services, housing, health and welfare, retirement, and higher education. (Defense spending isn't included — which skews the numbers, given the extent to which defense functions as a pork barrel from which politicians can take a feast of Federal dollars for their constituencies.) We'll discuss the numbers in a moment.
First, though, it's important to note the context of this growing spending—a long-term decline in the proportion of Americans who help to fund that spending through their taxes. With all the talk about taxes flying around, it's easy to miss a crucial fact: the proportion of Americans who pay any income tax at all has declined dramatically over the past 40 years. In 1969, we reached a high point: 88 percent of Americans were represented on a taxable return. By 2009, this had fallen to just over 50 percent.
What this means is that as the dependence of Americans on Federal programs has grown, and as the outlay on those programs has taken us into more and more unsustainable debt, the proportion of Americans funding those programs has been declining sharply. Thus, increasingly, a significant portion of the population benefits from Federal spending without contributing to that spending. This creates a moral hazard, in that the politicians beholden to their voting constituents are less likely to rock the boat and reduce spending. Some 70 percent of Federal spending is now devoted to "dependence-creating" programs, a steady rise from 28 percent in 1962.
Farm Subsidies, and Other Corporate Welfare - Of all the many forms of corporate welfare, spending on farm subsidies is one of the most egregious, since only 20 percent of the benefits go to the bottom 80 percent of farmers. Since benefits are directed almost exclusively to farmers of particular crops, and are dependent on how much of those crops are planted, this means that the system serves to privilege corporate farming interests above the family farmers, which many imagine to be the beneficiaries. So even while farming income climbed above the national average in the 1990s, farming subsidies continued to increase dramatically. This particular case is a concise depiction of corporate welfare as a whole — the distortion of the market towards the privileging of large interests who engage in rent-seeking behavior rather than productive entrepreneurial activity.
Housing - Since the creation of the Department of Housing and Urban Development (HUD) in 1965, the bulk of its funding has been directed to providing "project-based" housing for low-income families. Adjusted for inflation, HUD spending has climbed steadily since the department's creation. On top of this is the now-overwhelming presence of the Federal government in the provision of home mortgages, through its 2008 bailout of Fannie Mae and Freddie Mac. More than 90 percent of single-family residential mortgage credit is now provided by these two quasi-governmental organizations whose huge operating losses have been backstopped by taxpayers.
Health Care - As we've noted previously in comments about the ongoing demographic shifts and aging of the U.S. population, the overwhelming reality here is the incipient retirement of baby boomers and the dangerous downward trend in the dependency ratio (which we'll discuss under "Retirement" below).
Medicare was another program established in the mid 1960s which has grown dramatically. Already, by 2010, the population of those eligible for Medicare was about a fifth of the non-elderly population. The Congressional Budget Office (CBO) projects that by 2035, the proportion will be more than a third. By midcentury, Medicare is anticipated to be consuming more than 10 percent of GDP. Many Medicare benefits have expanded over the past 10 years, notably Part D, the prescription drug benefit—another unfunded liability of the Bush years.
Most significantly, Medicare is already running yearly deficits—to be covered by those Americans who actually pay taxes. The effects of the Affordable Care Act remain to be seen, the CBO estimates that by 2019, almost 20 million individuals will be receiving subsidized coverage through the exchanges established by the Act.
Welfare - Bill Clinton's 1996 welfare reform was a landmark piece of legislation and one of his signature achievements. Between 1996 and 2010, welfare caseloads declined by more than 50 percent.
On the other hand, due to the bad economy, other forms of welfare dependency are rising. From 2008 to 2011, outlays on SNAP (food stamps) almost doubled, from about $39 billion to more than $75 billion. 15 percent of all Americans are now receiving assistance through SNAP.
Retirement - Half of American workers are employed by companies that do not offer pension plans. Right off the bat, this means that for more and more people, one of the traditional "three supports" of retirement is non-existent—the other two being Social Security and personal savings. Those without pensions and without significant personal savings will be facing a retirement dependent on Social Security, at a time when the system will be under mounting fiscal strain.
Here is where the dependency ratio comes in. To break even, Social Security needs to have 2.9 workers paying in for each worker who's retired and drawing benefits. The current ratio is 3.3, and by 2030, the increasing influx of retiring Boomers into the system will drive that down to 2, well into deficit territory. For many years, there was a surplus, but it was used to finance other government spending; in return the "trust fund" received Treasury bonds. Now that they will be redeemed, the ballooning cost will be borne, once again, by the taxpayers.
Disability claims have been growing rapidly as well — during the recession, many who could claim eligibility have done so, when under better employment conditions, they would have instead found work.
Higher Education - There is no question that the cost of higher education has risen rapidly. Many argue that the availability of a great deal of student loans and subsidies has driven up the costs of education, since the relatively easy money makes consumers initially less sensitive to the cost of what they're buying. Since 1982, the cost of a college degree has gone up at four times the rate of inflation. The government subsidized loans have ballooned, and again the taxpayers will pay the bill.
To sum up, then, the situation faced by Americans is one in which a growing proportion of the population (soon an outright majority) contributes nothing in income taxes towards ballooning Federal outlays on housing, health, education, retirement, and corporate welfare.
From 1962 until now, the proportion of Americans receiving these direct benefits has doubled, from about 10 percent to about 20 percent; and the per capita funds received by this population has increased more than fourfold, from about $7,000 to about $32,000. Today, the average per capita spending on dependents exceeds overall median income. This presents a dangerous situation, as the dependent majority will have more and more power to elect and keep in office politicians who won't give them painful medicine. Politicians will say "yes" to the demands of the dependent majority to keep the benefits flowing, even if it means funding them through deficits and debt. Ultimately, of course, reality wins, lenders will not continue to lend to a country where debt and deficits are rising too fast and income sources are uncertain or already heavily taxed. In the final analysis, the biggest victims of the breakdown of an unsustainable system will be those who depend on it.
Source: Guild Global Market Commentary
