Transfer Payments and Touching the 'Third Rail'

Most of the federal government’s spending is for programs lumped together under the term “transfer payments.” Nowadays, that term seems to be preferred to that of “entitlements,” which comes bogged down with theory. But regardless of whether they’ve been earned or are strictly welfare, the main thing about transfer payments is that they require most of the funds coming into the federal government to be immediately sent right back out as benefits to individuals.

Transfer payments make up the so-called third rail of politics. Politicians will not go near transfer payments for fear that voters will electorally electrocute them out of office. So programs in dire need of reform or which suffer billions of dollars in fraud continue on their merry way unchanged. What should concern Americans is how huge this aspect of the federal government is becoming.

In 2014, Investor’s Business Daily ran “70% Of U.S. Spending Is Writing Checks To Individuals” by John Merline, who wrote (italics added):

In effect, the government has become primarily a massive money-transfer machine, taking $2.6 trillion from some and handing it back out to others. … What's more, the cost of these direct payments is exploding. Even after adjusting for inflation, they've shot up 29% under Obama. … This massive shift in federal spending toward direct payments to individuals not only balloons the size of the federal government, it makes cutting the budget all the harder, since any meaningful spending reductions will invariably mean cutting back on some of these check-writing programs.

In July of 2018, the Concord Coalition published “A Troubling Trend in Federal Investment Spending” which contrasted the continuing rise of transfer payments with the downward spiral in investments. In 2017, transfer payments totaled $2.87T, eating up 72 percent of all federal spending. The section “Federal Transfer Spending” listed the main transfer payment programs in 2017:

  1. Social Security: $939 billion
  2. Medicare: $591 billion
  3. Medicaid: $365 billion
  4. Student assistance: $88 billion
  5. Civil service retirement: $84 billion
  6. Veterans’ compensation: $79 billion
  7. Supplemental Nutrition Assistance Program (SNAP): $70 billion
  8. Hospital and medical care for veterans: $68 billion

In October of 2018, the Fiscal Times ran “Transfer Payments Hit $3 Trillion Annual Pace,” reporting that: “Total government transfers reached $3 trillion on an annualized basis for the first time in September, according to data released by the Bureau of Economic Analysis.” To appreciate how huge transfer payments have become, look at the chart put out by the St. Louis Fed.

On February 27, Fox Business ran an interview of Bob Grady, former Deputy Director of OMB, that’s worth watching, (the video takes about five minutes). Grady contends that the meteoric growth in entitlements “is reducing our ability to invest in things like research and development, and our great universities, in highways and electric power, you talk about crumbling bridges and broadband that’ll make us competitive, and importantly in national defense.”

One reason one might be so tacky as to bring up the subject of money going to other Americans is the federal debt -- Congress seems to have no control over its spending. If we were to balance the budget this afternoon through spending cuts alone while leaving transfer payments untouched, it would require that Congress eliminate all federal spending other than transfer payments. That would include the military, interest payments on the debt, and Congress itself. If Congress is ever to get control over its spending, cuts in transfer payments must be made.

But who’s talking about cutting entitlements? The Democratic candidates for president are all bloviating about adding new transfer programs: Medicare-for-all, reparations for slavery (as though they haven’t already been paid), free college, student loan debt forgiveness, free sex changes operations for felons in prison whether they need them or not, you name it. And that’s on top of all their other insane new spending, like the Green New Deal.

Rather than instituting new transfer payments, what Congress should be trying to do is to “rationalize” the entitlements we already have. At a minimum, that means keeping them from getting any larger as a share of total spending.

It’s long past the time when politicians could credibly talk of paying off the national debt. Even paying down the debt is fanciful; it’s just too enormous. But politicians can talk about freezing the debt, keeping it from getting bigger, by broaching the unfashionable subject of balancing the budget.

In June, the current economic expansion will tie the record for the longest in postwar history; it’ll be 120 months old. It’s doubtful that the business cycle has been nullified, so the world is still vulnerable to recessions and worse. So, how can we keep our very mature expansion chugging along? President Trump is doing his damnedest to keep the economy expanding, but what the heck is Congress doing? I suggest that one of the main things Congress could do to keep the good times rolling is to balance the budget. Balancing the budget would reassure credit rating agencies and the markets.

During recessions, some economists advocate “priming the pump,” which can involve deficit spending. But even J.M. Keynes himself (may have) held that government should “balance the budget over the business cycle.” In other words, you stop deficit spending during good times. The economy is strong, so now is time to balance the budget. But Congress primes the pump during both good times and bad. The longer Congress postpones addressing our budget imbalance and our huge deficits, the more painful will be the eventual reckoning.

In his State of Union address this year, President Trump urged America to “choose greatness.” If one likes the idea of America doing great things, transfer payments are in the way. As a share of total federal spending, transfer payments are 2-3 times larger than they were when America put Neil Armstrong and Buzz Aldrin on the Moon. Real Americans want to go back to the Moon. Having to hitch a ride with the Russians to get to the International Space Station is mortifying to real Americans. Let’s develop a real spaceplane that can take off like an airplane and then go to the Moon and get back to Earth in time for the Super Bowl. We might call our new spaceplane the “Millennium Falcon.”

Real Americans will accept a cut in their transfer payments if it’s for the good of America. To make real spending cuts and balance the budget so that America can again do great things, Congress must touch the third rail.

The third rail brings to mind Mr. Blue, the British thief played by Robert Shaw in the original The Taking of Pelham One Two Three (1974). Mr. Blue had an elegant method for committing suicide. When apprehended in the NYC subway, he asks the officer, “Excuse me. Do you people still execute in this state?” The officer answers in the negative, to which Mr. Blue replies “Pity.”

Mr. Blue then slides his foot against the subway’s third rail, (promo photo from Getty Images). If you must see the scene, this clip will take about 40 seconds out of your life, but it’s rather dark, so blow it up to full-size. Here’s the irony: If Congress doesn’t touch the third rail, we’ll all end up like Mr. Blue.

Jon N. Hall of ULTRACON OPINION is a programmer from Kansas City.

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