The Role of "Entitlements" in the US Economy

 We have all heard that "entitlements" are a drain on the economy and that we would be better served to provide tax reductions that allow individuals and banks invest in the economy.

It probably is not a good time to discuss the economic topics of marginal propensity to save and the multiplier effect. But I think an understanding of how "entitlement" programs and subsidies affect the economy is important.


Individuals in the lower economic classes receive healthcare through medicaid, food through SNAP,  housing assistance and supplemental income through welfare payments and social security. This group represents about 11% of the US population.


Individuals in this group, which is considered poverty level, save very little and therefore spend all of the money they receive through "entitlements". This money is spent with companies that provide products and services. In 2025 the federal government is projected to spend $1.2 trillion on providing programs to those in poverty households.


Admittedly this is a huge government outlay but is is also income for those providing services. Thus this $1.2 trillion is reintroduced into the economy in the form of purchases that provide income for businesses and jobs for individuals. In other words, these payments actually act as an economic stimulus.
On the other hand there is the argument that lower taxes and cutting entitlement programs allows the private sector to make investments that create new business and new jobs. This males sense and fits with the reason the US economy is such a powerful engine.


With very low taxes the US economy thrived when there was no social security or "entitlement" programs.  In the late 19th century most of the wealth was held by a very small percentage of the population. The top 1% owned 51% of the wealth and the top 10% owned over 70% of the wealth. Between 30 and 40% lived in poverty.

Today the top 1% owns 30% and the top 10% own 67% of the wealth and 12% live in poverty. During the twentieth century. This suggests that the introduction of social security, medicare, medicaid and poverty assistance the wealth in the country was spread to more households. 
What has happened to the overall economy after the introduction of these "safety net" programs?

Adjusting for inflation highlights a significant difference between the US GDP in 1890 and 2024. While the nominal GDP in 1890 was $15.607 billion, its equivalent purchasing power in 2024 is approximately $537.67 billion. The nominal GDP in 2024 is $29.1849 trillion, demonstrating substantial economic growth in the United States over the past 134 years. An increase of over 5300%

What about household income?

When adjusted for inflation, the average household income in the United States has significantly increased between 1890 ($19,738) and 2024 ($80,610). This indicates a substantial improvement in the purchasing power and overall standard of living for the average American household over this period. 

This evidence would suggest that in an apples to apples comparison the economy and the 
households in the US have fared very well with the introduction of the "safety net" and
"entitlement" programs.

These programs seem to have assisted the normal investment programs of individuals and 
financial institutions.

The same principles hold true on most of the federal government programs. Those include
 infrastructure programs, defense spending, innovaton subsidy programs (NASA, wind and solar 
power,etc.) and so on.

Most of what I have described above fits with Keynesian economic theory and suggests that efforts
to restrict these programs would likely reduce economic growth, income equality and the ability of
all individuals to participate in the growth of the economy.


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