“Income redistribution” is more popular than many think.
Just as for “entitlement,” the term “income redistribution” has taken on a pejorative meaning. But both entitlements and income redistribution are popular with most people, as long as they themselves are the beneficiaries and no one uses those specific terms. There either is a great deal of hypocrisy in our nation, or people simply don’t understand the terms. So a brief exploration of common income-redistribution programs is useful.
Farm crop subsidies, in one form or another, are perhaps the oldest explicit income-redistribution program run by the federal government. They date to the Agricultural Adjustment Act of 1933. It was passed at the worst phase of the Great Depression and in an era when more than a third of the U.S. population was engaged in agriculture. More importantly, average incomes for farmers were well below those of nonfarmers.
The intent was clear. Alleviate poverty by taking money from relatively richer taxpayers and give it to relatively poorer farmers. In the first 25 or so years of farm subsidies, this probably was the result.
Agriculture changed, however, and in recent decades crop subsidies take money from poorer people and give it to richer ones. The subsidies are highly skewed. A large number of farmers get relatively small amounts, and a small number of very large farmers get the bulk of the money. These recipients have incomes well above the national average and average net worth many times that of other households.
However, Republican critics of redistribution programs are correct that such income transfer programs can create both a “culture of dependence” and political pressures for perpetuation of the government benefits in question. Profits from crop farming are very high right now, driving land prices through the roof, but neither political party is willing to come out in favor of shutting off the tap.
Part of that is due to political symbiosis between farm subsidies and another large income-redistribution program, the Supplemental Nutrition Assistance Program, the current name for food stamps.
These have their roots in experimental efforts at the end of the 1930s but really took off in 1964. They now cost more than $75 billion a year, compared with the $15 billion to $20 billion for farm subsidies.
Once again, the intent was to redistribute money from relatively rich taxpayers to poor people. So food stamps are “means tested.” That is, one can get them only if one’s income and net value of certain assets fall below specified limits. In the past 15 years, this means test has been made less stringent, contributing to high levels of use since the financial crisis began to unfold five years ago. There is substantial turnover in beneficiaries, so the number of people who receive benefits at some point in a calendar year is greater than the 45 million to 50 million recipients in any given month.
Farm subsidies and food stamps are both administered by the U.S. Department of Agriculture, and money for both is appropriated in the same bill. Hence the symbiotic political relationship. Senators and representatives from farm states support food stamps in return for votes from urban lawmakers for farm subsidies.
If you take the cynical view that neither program would exist without the other, the richer-to-poorer redistribution of food stamps more than offsets the poorer-to-richer income transfer of crop subsidies. The overall effect is to slightly reduce income inequality.
In addition to being redistribution programs, both farm subsidies and food stamps are entitlements in that there is an open-ended commitment to provide benefits to everyone who meets specified criteria. The same is true for Social Security and Medicare.
On their face, social insurance programs like Social Security need not involve income redistribution. To get benefits, one needs to have paid in. Each age cohort could get out exactly the value of what they paid in.
However, there are some features of the program that result in redistribution. One is that benefit formulas provide a much higher “replacement ratio” of benefits versus lifetime earnings for lower-income people than for those with high income. The effect is that there is some redistribution from richer to poorer.
Moreover, for many decades, benefits to any given cohort of retirees were well above the value of contributions paid by that group of people while working. There were plenty of current workers, so cash flow was available. The result was a redistribution of income from younger people to older people.
Medicare similarly need not involve redistribution, if people pay in enough during their working lives to equal the value of the benefits they get later. That’s not the case. The average beneficiary now gets two to three times the value of what they paid in.
The result is that Medicare is by far the largest income-redistribution program we have today. With total outlays near $500 billion per year, the fraction that is money taken from younger people and given to older people is 15 to 20 times as great as the $18 billion spent on the program most people know as “welfare.”
In contrast to the past, people older than 65 now have higher average incomes than the national average. Some argue that Medicare thus redistributes from poorer to richer.
But income and wealth among the elderly are highly skewed and the median income of Medicare beneficiaries is well below the median income of taxpayers.
There are myriad other ways federal programs redistribute income, overtly or covertly, including many features of the tax code. But these are the subject of another column.