The indestructible welfare state

By Robert Samuelson

 

It seems unavoidable. Like it or not, the U.S. welfare system is bound to play a big role in the 2020 election. The recent Democratic debate on health care is just a prelude to a broader discussion.

The battle lines are clearly drawn. Democrats deplore rising inequality. They see a revitalized welfare state — with universal health coverage and more college subsidies — as making the system fairer. By contrast, President Trump favors more tax cuts, which, he argues, would accelerate economic growth and increase jobs.

Who’s right? Is anyone? The unfolding campaign is an obvious opportunity to examine the state of economic inequality and the condition of the welfare state. Fortunately, the Congressional Budget Office (CBO) has just issued a report that tackles both subjects.

Let’s start with income inequality. There’s lots of it, and there’s little doubt that it’s gotten significantly worse over the past three or four decades. Just why is unclear. There is no consensus among economists. Explanations include rapid technological changes, the decline of well-paid manufacturing jobs, and globalization.

On the other hand, the CBO analysis (and other studies as well) doesn’t justify the popular view that, except for the 1% and some others in the richest quintile, hardly anyone has gotten ahead.

Here are some numbers from the CBO. From 1979 to 2016, the average income of the poorest fifth of Americans based on wages, salaries, dividends and Social Security benefits grew only 33%, less than 1% annually. The middle three-fifths of Americans by income had similarly scanty gains.

Meanwhile, the average incomes of the richest fifth of Americans — the upper-middle class and the wealthy — increased 99% over the same years. That’s a doubling. These figures seem to vindicate the stagnation theory. For millions of Americans, living standards have stopped growing. Or so it seems.

The reality is more complicated. When the CBO adjusts these raw figures for taxes and “means-tested” programs — that is, benefits for the poor whose eligibility is determined by income limits — the picture changes. Instead of rising only 33% from 1979 to 2016, the income of the poorest fifth of Americans increases 85%, though it is still low in 2016 at $35,000.

Look at the table below. It shows the difference in average household incomes on a before-taxes-and-transfers basis and on an after-tax-and-transfers basis. (Note that the latest figures are for 2016 and, therefore, do not include the effects of Trump’s 2017 tax cut or his other policies. Each quintile represents a fifth of the population.)

Americans dislike the concept of the welfare state. That’s for Europeans. We prefer the “safety net.” But as the table suggests, we are deluding ourselves. Our safety net is their welfare state; the differences are those of detail, not fundamental principle.

The table shows that there are routinely massive transfers of income, mainly from the richest quintile to the poorest. About 40% of the income of the poorest fifth of Americans comes in these government transfers: Medicaid, CHIP (Children’s Health Insurance Program), food stamps, housing subsidies and Supplemental Security Income (SSI).

These programs have grown rapidly. From 1979 to 2016, the number of Medicaid and CHIP recipients quintupled to 101.8 million, up from 20 million. The wealthiest Americans pay most of the resulting taxes. In 2016, the richest quintile received 54% of the income and paid 69% of federal taxes. As for the top 1%, its income was 16% of the total, and they paid 25% of federal taxes.

The conclusions from this morass of numbers are familiar, yet daunting. Despite significant anti-poverty spending, somewhere between a quarter and a third of Americans — roughly speaking — are struggling economically. It’s true that the poor are getting richer along with the rich, but they are doing so at a slower rate.

So the gaps have grown over time and, what’s worse, there seem to be few fresh ideas as to how to reverse course. The proffered solutions have been tried for years without, it seems, notable success. The Democrats are practiced in spending more money on education and health care, while the Republicans are wedded to tax cuts.

Surely these ongoing efforts have done some good, but not enough to make the bottom third of the economic distribution a much better place to be.

 

(c) 2019, The Washington Post Writers Group