Government Spending on the Rich Versus Government Spending on Kids

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Written by Dean Baker   
Sunday, 14 April 2013 04:59

One of the best guilt trip tactics of the gang trying to cut Social Security and Medicare is to compare government spending on these programs, which primarily benefit the elderly, to government spending on children. By showing that the former is much higher than the latter, those of us old-timers or soon to be old-timers are supposed to feel guilty and willingly agree to surrender our Social Security and Medicare for the good of the children.

There are many serious problems with these sorts of calculations, but let’s play along for a while. If it’s interesting to compare what we spend on each senior to what we spend on each kid then it should also be interesting to compare what we spend on each rich person to each kid.

The basis for this comparison would be the amount of money that the government spends on the fastest growing entitlement: interest on the debt. This is projected to grow from $224 billion (1.4 percent of GDP in 2013) to $857 billion (3.3 percent of GDP in 2023). The main reason for this projected growth is not the larger debt burden. Rather the main reason is the Congressional Budget Office’s projection that as the economy recovers interest rates will rise substantially from the current near record low levels.

We can get a ballpark measure of how much of this interest will go to the rich by simply assuming that their share of the government debt is proportionate to the share of all wealth in the country. According to a recent paper by Ed Wolff, the richest one percent in the United States own 42 percent of non-housing wealth.

If we apply this number to interest paid on the debt, it means that 94.1 billion will be paid as interest to the wealthy in 2013. Dividing that by the 3.16 million people in the richest one percent gives us $29,800 per rich person. That compares to $12,300 per kid according to the Urban Institute.

Assuming the distribution of wealth does not change over the course of the decade, the government will be spending $107,300 per rich person in 2023. If we adjust this number for inflation and the growth of the economy, we would be spending $70,400 per rich person in 2023, as shown below. Perhaps we should be asking why we place so much more priority on helping the rich than helping our kids.

baker-2013-04-15

Source: Urban Institute, Wolff 2012, and author's calculations.

At this point all the Washington elite types are jumping up and down screaming that the rich people are getting interest because they paid for government bonds. This is an excellent point, but they seem perfectly willing to ignore such details when discussing Social Security and Medicare. After all, people pay designated Social Security and Medicare taxes during their working lifetimes. The former is intended to and does cover the cost of the program. The Medicare tax does cover the largest part of the program (Part A), however the Supplemental Insurance (Part B) and the prescription drug benefit (part D) were designed to be financed largely from general revenue.

However even here there is a huge complicating factor. The main reason the value of Medicare benefits exceeds what workers pay into the program through the designated Medicare tax is that we pay way more for our health care than any other country in the world. The issue is not that we get more or better care, we don’t, rather we pay way more money for the same care.

Per person spending on health care in the United States is more than twice as much as the average in other wealthy countries. If we paid as much per person as people in Germany, Canada, or the United Kingdom, nearly all of the gap between the value of Medicare benefits and the designated tax would disappear.

Rather than representing a handout to seniors, this gap between Medicare benefits and Medicare taxes can be seen as a handout to the wealthy. We pay almost twice as much for our prescription drugs as people in other wealthy countries. The same is the case for medical equipment and supplies. And our doctors get paid roughly twice as much as doctors in other wealthy countries.

In Washington game playing we can count these excess payments to health care providers as benefits to seniors, but in the real world these would be recognized as handouts to the providers. A disproportionate share of this haul goes to the richest one percent. (That is where we find most doctors.)

This raises the obvious point that much of the money that the government directs towards the rich does not take the form of direct government payments, but rather how it structures markets. For example, we can look at the too big to fail subsidy for large banks that Bloomberg calculated at $83 billion a year. If the benefits from this subsidy is assumed to go the rich then it would amount to another $26,300 per person to this group.

In the same vein the benefits of government granted patent and copyright monopolies go overwhelmingly to the wealthy. The rents in the case of prescription drugs alone are close to $250 billion a year.

And we have a trade policy that has been deliberately designed to benefit the wealthy. We have depressed the wages of the bulk of the workforce by putting them in direct competition with low-paid workers in the developing world. By contrast, we have retained professional and licensing barriers that largely protect our most highly paid professionals (doctors, dentists, lawyers) from facing the same sort of competition from their counterparts in the developing world.

The list can go one (see The End of Loser Liberalism: Making Markets Progressive [free download available]), but the point should be clear. The amount of money that the government steers to the rich dwarfs the amount that either our kids or our seniors get. (It is probably also worth noting in the rich versus everyone else context that the countries that give higher benefits to their seniors also tend to be countries that give higher benefits to children.)

Given the huge share of national income that has been diverted to the wealthy in the last three decades, it seems absurd that anyone would imply that the money going to seniors is in some way the limit on how much help we provide our children. It is understandable that the politicians who see the rich as their primary constituency would frame the issue this way, but what excuse do the economists, columnists, and reporters have?