If we’re so rich, why aren’t we better off?

Thanksgiving weekend seems like a good time to ponder the big picture.

Here are a couple of potentially helpful articles. From Newsweek:

The United States has spent nearly $6 trillion on wars that directly contributed to the deaths of around 500,000 people since the 9/11 attacks of 2001.

Brown University’s Watson Institute for International and Public Affairs published its annual “Costs of War” report Wednesday, taking into consideration the Pentagon’s spending and its Overseas Contingency Operations account, as well as “war-related spending by the Department of State, past and obligated spending for war veterans’ care, interest on the debt incurred to pay for the wars, and the prevention of and response to terrorism by the Department of Homeland Security.”

The final count revealed, “The United States has appropriated and is obligated to spend an estimated $5.9 trillion (in current dollars) on the war on terror through Fiscal Year 2019, including direct war and war-related spending and obligations for future spending on post 9/11 war veterans.”

This could explain why many Americans aren’t all that thankful. The economy has grown, but $6 trillion of the growth has been spent on something that does not make us better off.

“Taxpayers Cannot Afford More Subsidies For The Middle-Class” (Forbes):

The federal government spends about $4 trillion per year. Of that, somewhere around $3 trillion is what economists call transfer payments. A transfer payment is when the government just takes money from one person (through taxes or borrowing) and gives it to somebody else. Social security, Medicare, Medicaid, welfare payments, farm programs, corporate welfare, and the like are all transfer payments which simply redistribute money.

Middle-class benefits are an entirely different story, however. The bottom 75% of households by income pay only about 13% of all income taxes. If we define the middle-class as the 70% of households below the top 10% and above the bottom 20% of households by income, the middle-class only pays about 29% of all income taxes, according to IRS data.

Because the middle-class doesn’t pay much in taxes and because they are the largest in number, there is no way to pay for generous benefits for that many people. Today, the middle-class is collecting around $2 trillion per year in federal transfer payments. Yet, even accounting for payroll taxes, they are only paying taxes of $1 or $1.1 trillion per year (29% of all individual income taxes and about 50% of all payroll taxes). Thus, the rich are already fully paying for all the benefits to themselves and to the poor, plus around half of the benefits to the middle-class.

Another reason why we might not be thankful is that many of us expect more than is theoretically possible given the size of our economy. Also, a huge amount of these transfer payments is devoted to subsidizing an inefficient health care industry. So beneficiaries of Medicaid, Medicare, and Obamacare subsidies are not actually benefitting as much as we might expect given the spending levels.

6 thoughts on “If we’re so rich, why aren’t we better off?

  1. We don’t know whether the military spending was money well spent because like any historical event we don’t know the counterfactual. Historically periods of low military preparedness such as before WW II have encouraged others to take advantage of that and therefore resulted in much higher military spending later on. Also during the period highlighted in the Newsweek article no one has flown an airplane into a large Manhattan office building or tried to fly a plane into the pentagon. Whether this is because of the increased military spending is hard to know. Also the premise of the Newsweek article seems naive — that military spending could be cut substantially and that money would go to reduce taxes or buy goodies for all of us or whatever. The so called “peace dividend” would most likely be dissipated while encouraging others to engage in mischief against America or her allies. There is historical precedent for that scenario.

  2. Jack- We can evaluate whether the money was well spent, because we can quantify the damages. We know the new world trade towers cost about $8 billion to build–of course the replacement buildings are more modern and useful than the 28 year old structures they replaced so those numbers are higher than the actual damages. Still, $6 trillion minus $8 billion is only 5.92 trillion to go! You’ve come up far short and that doesn’t even account for the interest on that borrowed money. Also, we know that 2,996 people died as a result of the 9/11 attacks. About 6,800 US soldiers and 7,000 contractors have died in the American wars since, plus almost 1 million disability claims. Doubling down on a losing hand. Lose money on every sale, but make it up in volume?

    What prevented more aircraft from flying into buildings? Probably has nothing to do with starting wars in countries which had little to do with the 9/11 attacks(most of the terrorists were Saudi Arabian and none of them were from Iraq or Afghanistan!) and everything to do with heightened security including airport and hardened pilot doors. You also conflate military preparedness with going to war. The US spends about as much on military than the next 15 countries combined. How were we able to goto war in Iraq and Afghanistan? Because we were well prepared.

  3. The U. S. says it is a capitalist economy, but behind the curtain it seems more like Modern Monetary Theory:
    which supports the idea that a sovereign government, especially one with a reserve currency, can never run out of money. If it were possible for the U. S. to go broke, it would have happened already. Deficit hawks are actors in the pageant, just like Keynesians.

  4. Forbes does some creative accounting.

    1) there is no ‘bottom 75%’. 75% of any distribution is 3/4th of it, and it is misleading to describe it as ‘bottom’. Bottom 20%? maybe. Bottom 5%? sure. Bottom 75%? fake news. Since the 75% number is not used to then define middle class is a throwaway, bullshit, decoy.

    2) 13% of all income tax comes from people whose wage is at or below the 75th quantile. If we define middle class as people with income within the bracket of the 20th and 90th quantile, said middle class pays 29% of income tax. Assuming people under the 20th quantile are too poor to pay income tax, this just simply means that the US has an extreme skew in salaries, with the the richest 10% taking home most of the dough.

    This phenomenon is well known and understood. The definition of middle class based on earning is pure unadulterated bullshit — the social well accepted definition is based on *spending power*. Thus we can simply say, the vast majority of people in the US are poor and need handouts.

    This state of affairs is what it is. Whether the good folks in the US want to keep handing out free cash to the majority, or wants to change the distribution of cash is some other way is for them to decide. As long as a good proportion of handouts recipients owns firearms I would consider prudent not pissing them off too much.

  5. Federico –
    If it is well known that what matters is spending power, not income, then why is there no well-known fuss about a gender-spending-gap, but instead a well-known gender-pay-gap?

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