The $3.5 trillion in reconciliation legislation now under consideration by the White House and Congress would transform the economic relationship between American citizens and the government. This much is conventional wisdom. Even the New York Times calls it a “vast expansion of the social safety net.” Though not wrong, they miss the forest for the trees. The reliance of American individuals on government transfers has already trended upward, and at times even suddenly jumped, over the past two decades. The legislation, then, would not amount to a revolution so much as a codification of one that is already well underway.
The chart above shows per capita government transfers as a share of the median personal income between 1974 and 2021. As you can see, until the 21st century, this measure of individual reliance on government economic support fluctuated within a range of roughly 10 to 15 percent. When Congress passed the Bipartisan Welfare Reform Act of 1996 in response to public support for limiting the scope of federal financial assistance, government transfers per person were 14.3 percent of the median personal income. Following the passage of welfare reform, it then trended downwards (as intended) to a trough of 12.7 percent in 2000. After 2000, however, it picked up before accelerating in the wake of the 2008 financial crisis. Though this growth went into partial reversal during the recovery, partial is the operative word here. And it was from this new plateau (or something approaching a plateau) that it leaped up further, to the whopping 29 percent it reached in 2020 – more than double what it was in 1996, when Congress and a Democratic White House enacted legislation to do basically the opposite of what is now proposed.
As the chart shows, if enacted, the legislation would likely result in an America in which government transfers per capita are 23 percent of its median personal income. The calculation for 2021’s estimate assumes that median personal income grows in 2021 by the 6 percent that the OECD now estimates U.S. GDP will grow this year. It also assumes that transfers in 2021 would revert to pre-COVID 2019 levels in the absence of the legislation; if they would have increased even without the legislation, then the estimate shown for 2021 would be too low. The chart assumes that the legislation will be passed. The effect on estimated contributions to 2021 transfers as shown in the chart are calculated by removing an estimated $619 billion in non-transfer spending on items like immigrant resettlement and “weatherization” from the $3.5 trillion reconciliation package. It also assumes that the $2.9 trillion in transfers is implemented evenly over five years, the timeframe now expected for many provisions of the legislation. To be sure, the likelihood that the bill will be passed late in the year, if at all, means that its effect on transfers in 2021 will be far less than I have shown. My estimate for 2021 is meant to illustrate the magnitude of the proposal. As you can see, the estimated 23 percent of median personal income in per capita transfers would exceed — during an economic expansion — the peak reached during the worst of the Great Recession in 2010.
To many of those pushing for this legislation, an increase in federal transfers of this historic size is the whole point: It would represent a great leap forward (to borrow a phrase) in their effort to transform the economic relationship between the American government and American citizens. Their critics will agree that it is certainly a leap. But they’d say the leap is over a cliff. If the legislation passes the U.S. will indeed come very close to becoming something akin to a European social democracy, a momentous change that warrants more discussion than a rush through the legislative process under the auspices of recovery from a pandemic would offer.