The New Government Normal

In 1960, social benefits accounted for 21.5 percent of total federal government spending. In 2019 that share had grown to 49.3 percent.

These benefits, which include Social Security, the Earned Income Tax Credit and a list of other entitlements, are the core of the American welfare state. There is more spending that counts toward the welfare state, such as education spending and the funds that the federal government ship to the states. All in all, two thirds of all federal spending and more than half of state and local-government outlays, are for the welfare state.

Over the course of the past half century, we have rewritten the ideological purpose of the American government:

  • from a socially conservative institution protecting life, liberty and property, and providing a limited, last-resort safety net;
  • to a socialist welfare state the purpose of which is to redistribute income, consumption and wealth.

This overtly ideological role has been accentuated in 2020. The massive spending on stimulus programs has grown and entrenched the welfare-state role of our government. Entitlements and subsidies (which is one of the categories often referred to as “corporate welfare”) have increased from half the federal budget in 2019 to two thirds in the second and third quarters of 2020. Table 1 reports the latest numbers:

Table 1: Federal spending, $bn quarterly, current prices

Total spending1,171.71,185.71,198.91,201.81,228.62,278.71,801.6
Transfer payments580.6585.2589.0592.6612.51,211.8880.2
Federal aid to states149.3154.9151.5152.4158.1350.8180.5
Interest payments143.6145.9146.0146.1145.4139.8136.6
Source: Bureau of Economic Analysis

Total federal spending in 2019 was $4,758 billion. Already in the three first quarters of 2020, that spending had increased to $5,309 billion. If the fourth quarter follows the same path as the second and third quarters, we can expect total spending for 2020 to land in the vicinity of $6.7 trillion.

In the meantime, the budget deficit has expanded to frightening proportions. In all of 2019 the U.S. Treasury borrowed $1,047 billion to cover the gap left by $3,711 billion in tax revenue. Over the first three quarters of 2020, the same deficit has exploded to $2,592 billion.

So far this year, the federal government has taken in $2,717 billion in tax revenue. This means that the budget deficit pays for 49 percent of all federal spending.

It remains to be seen what Q4 of 2020 will look like, but if total spending rings in at $6.7 trillion, the total deficit for this calendar year will exceed $3.2 trillion.

The driving force in this deficit spree is the stimulus spending madness. Since this spending drives up the deficit, and since the deficit adds to the interest payments on the federal debt, it is reasonable to include those interest payments in an assessment of the purpose of the federal government. In other words, Table 2a reports the share of the federal budget that goes toward social benefits, interest payments on the federal debt, and subsidies. The deficit share of total spending is included for comparison:

Table 2a: Financial transactions in the federal budget; deficit; shares of total outlays

Financial transactions63.3%62.9%63.0%63.1%63.2%71.2%73.3%
Source: Bureau of Economic Analysis

Table 2b reports the same variables in dollars and cents:

Table 2b: Financial transactions in the federal budget; deficit; $bn, quarterly spending, current prices

Financial transactions741.9746.2755.3758.8776.51,623.11,320.0
Source: Bureau of Economic Analysis

There is one interesting component in the “financial transactions” variable that deserves mention: interest payments. As Table 1 reports, they have actually declined during the time that Congress has spent exorbitant amounts of money on its stimulus packages – and funded it with deficits. This means only one thing: massive deficit monetization by the Federal Reserve.

This, of course, is significant, for two reasons:

  1. We have established the Federal Reserve as a de facto permanent funding source for government spending.
  2. We are injecting money into the economy in a way that opens a dangerous, macroeconomic monetization gap. This is how we start hyperinflation.

As I have explained in earlier articles, the threat of high, monetized inflation is alive and well today in the U.S. economy. It is being vastly under-estimated by every commentator and analyst out there.

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