In addition to earned income, another important source of purchasing power for consumers is government benefits. We can see this by subtracting US federal government spending on goods and services as reported in nominal GDP from total federal government spending as reported by the US Treasury. The difference is federal government spending on income redistribution through the various entitlement programs. Here are some observations:
(1) GDP vs. benefits spending. Federal government spending on goods and services as measured in the nominal GDP accounts has been essentially flat around $1.25 trillion (at an annualized rate) since 2010. Government spending on benefits to persons was relatively flat at a record high of about $2.25 trillion from 2009-2013. Over the past two years, it has risen 11.9% to a record $2.50 trillion.
(2) Benefits prevailing. Federal government spending on income redistribution has soared from just 10% of total federal spending right before President Johnson’s Great Society programs were passed (1964-1965) to 67% currently. This percentage includes so-called tax expenditures like the Earned Income Tax Credit (EITC), which is a refundable tax credit for low- to moderate-income working individuals and couples, particularly those with children.
The EITC is included in an outlays category called “Income Security” along with the Supplemental Nutrition Assistance Program, Supplemental Security Income, unemployment compensation, family support and foster care, and child nutrition.
(3) Impact on shopping. Of course, not all of the government benefits are paid in cash to beneficiaries. Medicaid and Medicare expenses are paid directly by the government to health care providers. However, this frees up income received by beneficiaries either from earnings or from cash benefits such as Social Security to spend on goods and services other than health care.
The sum of federal government outlays on income redistribution and labor compensation (wages, salaries, and supplements) rose to a record $12.4 trillion (at an annual rate) during Q1. That’s up 4.5% y/y.
The sum of the cash (or near-cash) benefits paid by Social Security and Income Security programs plus labor compensation rose to a record $11.3 trillion during Q1, up 4.1% y/y.
In other words, consumers have lots of purchasing power provided by earned income and by federal government income redistribution programs.
