Half of U.S. Households Took Government Benefits in 2010

Is this statistic a watershed mark of our decline into socialism, a totally reasonable outcome from the Great Recession, or, somehow, both things at the same time?

Ecotrust

A record-high 49% of the population lived in a household receiving some type of government benefit in the second quarter of 2010, according to Census data reported by the Wall Street Journal. Most of this group received so-called "means tested" benefits like food stamps, subsidized housing or Medicaid. Many are also benefiting from unemployment insurance spending, which has quadrupled since the downturn.

This is the sort of figure I call a Rorschach Statistic, because (a) it's guaranteed to provoke a passionate reaction and (b) that reaction will say a lot about your politics. Liberals are more likely to see this as a symptom of a very sick labor force begging for help. Conservatives are more likely to see it as a symptom of a very sick government that is drowning in bloat and addicted to redistribution.

Both sides have a case. The labor force is indeed quite sick, with a dismal share of working-age adults participating in the economy. But even most liberals would agree that the projected growth of Medicare and Medicaid scream out for a major reform, or at least a tax hike, in the next few years.

Check out this graph showing the huge rise in households receiving government benefits over the last few decades (This does not include EITC or other benefits that flow through the tax code):

A quick glance at this graph might leave you with the impression that Washington has created huge new welfare programs in the last 30 years. But that's not the case.

Of the 20 largest welfare programs considered by WSJ in its analysis, only four of those laws were passed since 1980: The tiny low income home energy assistance program (1981), the TANF program created by welfare's overhaul in the mid-1990s, and the Obama administration's stimulus (which expanded unemployment insurance and food stamps) and health care laws.

Most of this new spending comes from old laws. The most important welfare programs were created in the 1930s (Social Security) and 1960s (Social Security disability expansion, food stamps, Medicare/Medicaid). Most of the increase in government support over the last 30 years has come from demographic changes and economic changes, not from new programs. So it's not that the net is dramatically expanding as much as more people are falling into a net that was already there.

A statistic involving "half of U.S. households" might remind you of another Rorschach statistic: That half of U.S. taxpayers owe no federal income tax. Put both of these facts together, and you get a story of the 20th century that goes like this: Between 1935 and 1965, we spent 30 years expanding welfare options to American households, and between 1980 and 2010, we spent another 30 years cutting taxes to those same households. Our projected deficits aren't much of a surprise when you see the last 80 years as a multi-generational project of cutting taxes to "pay for" increasingly expensive promises.

There is a robust debate today about whether the U.S is slip-sliding toward democratic socialism or lurching into uber-capitalism. One answer is that we've moving in both directions at the same time. Income inequality is rising, and so are transfer payments. Taxes on the rich are falling to generational lows, while a record share of the country is free from federal income tax. Regulations on financial companies fell, while households on the government dole grew.

If it's unhealthy for an economy to rely on so much government support as a matter of habit, it's also the case that federal support for households is exactly what's supposed to happen when economic calamities befall us.