Stimulus Lifts Government Transfers

by Donald Marron

Saturday, July 04, 2009 at 11:13 AM EDT

A few weeks ago, I posted some charts showing that Americans are increasingly reliant on government transfers as a source of income. Friday’s data on personal income for May confirmed that the trend is continuing. Government transfers made up a record 18% of personal income in May:

In interpreting this increase, it’s important to keep several points in mind:

• May’s increase was driven entirely by the recent stimulus act. The act provided for one-time payments of $250 to a range of Americans who are beneficiaries of various other programs, including Social Security, SSI, and veterans’ benefits. Those payments more than account for the increase in transfers from 16.9% of personal income in April to 18.0% in May.

• Since those payments were temporary, the ratio will likely decline in the future. That’s assuming, of course, that other economic changes don’t move it in the other direction.

• The increasing importance of transfers reflects both short-run developments and long-run trends. In the past year, the importance of transfers has grown because of (a) weakness in other forms of income, (b) the natural expansion of transfers due to economic weakness (e.g., increases in unemployment insurance payments), and (c) policies to expand benefits (e.g., as an attempt at stimulus). Over the longer run, however, the growth of transfers has been driven by the expansion of entitlement programs.

To get a handle on these different factors, it’s useful to distinguish three different types of transfer payments: Old-age, survivors, disability, and health insurance (which I have labeled Social Security and Health Insurance), unemployment benefits, and other (which includes food stamps, welfare, and other programs):

Among other things, this chart shows:

• Unemployment benefits have grown rapidly in recent months. They remain small, however, relative to other transfer programs.

• Other transfers spiked in May because of the special payments. A similar spike occurred in mid-2008 due to tax rebates from the first stimulus; a portion of those rebates were characterized as transfer payments (rather than tax reductions) because they went to individuals who didn’t have any tax liability.

• Transfer payments for Social Security and health insurance have grown the most over the past few decades.

That last factor is, of course, the reason that our long-run budget situation looks so grim.