The Astonishing Growth of Government Spending on the Poor

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Screen Shot 2013-02-19 at 9.12.28 AM.pngHere's a graph of federal government spending on the low-income since 1972. It's one of those Rorschach graphs I pass along every so often. We call it a Rorschach because whether the graph makes you happy, sad, angry, or confused is mostly a measure of the opinions you bring to it.

Specifically, the programs counted include Medicaid, Medicare D, food stamps, Pell grants, and tax credits like the refundable portion of the earned income tax credit and the child tax credit. In 40 years, they've grown by a factor of ten. In another ten years, they are projected to grow by another 50 percent.

Where is all of this spending growth coming from? Three places, mostly: New programs, new people, and health care. First new programs: Half of the ten federal programs studied by the CBO for this report, such as the EITC and the child tax credit, didn't exist in 1972. Second, new people: the U.S. population has grown 50 percent since 1972 and lawmakers have expanded eligibility over that time to cover a higher share of the population. Since middle-class wages have been been so stagnant since the late 1970s, this is probably appropriate. Third health care: Half of the increase since 1972 has come from Medicaid and Medicare D.

Practically all of the increase in low-income spending until 2023 will come from Medicaid, Medicare, and new insurance exchange subsidies established under the Affordable Care Act.

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And that's where the Rorschach factor comes in. Somebody (a conservative, perhaps) might look at these numbers and point out that the U.S. government is diverting far too many tax dollars toward the poor and that this money would be better spent in the private sector or on "more productive" things like infrastructure or R&D. That might be right. But somebody else might look at these numbers and say that the government is merely helping low-income families who are missing out from growth.

Here's a prequel for that second story. This chart of income growth in America -- from the poorest 20% to the richest 5% between 1979 and 2007 -- shows how the poor would fare without government assistance. Market wages have declined for the poorest 40 percent of the country and more than 33% for the bottom fifth. Without means-tested government transfers, income inequality would be much, much worse. With means-tested government transfers (particularly for health care) income inequality is at least somewhat mitigated.

This CBO report is a good place to start when evaluating the new Simpson-Bowles plan to reduce the deficit in the next ten years, which comes out today. We'll hear a lot about spending trajectories, and tax levels, and it's true that government finances are big and complicated. But it's remarkable the degree to which every morality play in American politics is essentially a story about demographics and health care costs.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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