Maine Earnings versus Transfer Payments

Maine Earnings versus Transfer Payments

November 17, 2008 Posted by J. Scott Moody - No Comments

In Sunday’s Portland Press Herald, economist Charles Lawton made some rather dubious claims about the economic impact of transfer payments.  He states: “In short, the reason for the rising share of transfer payments in Maine’s total personal income is not their rapid growth rate.  Rather it is the slower growth rate of earnings from employment.  In a word, it’s the jobs, stupid.  If the nation as a whole can grow employment earnings by nearly 150 percent over an 18-year period encompassing two recessions while more than doubling the volume of transfer payments, there is no reason Maine can’t do the same–at least no theoretically necessary reason to the detrimental effects of transfer payments.”

Whoa, hold on Tex.  I am not even sure where to begin on that one.  First, Dr. Lawton should read my study on “Why Taxes Matter.”  In fact, transfer payments do come at the expense of earning. Earnings,
government employment excluded, are generated by the private sector.
Transfer payments come from taxes which are paid from the private
sector. If transfer payments grow, then taxes to pay them must go up.
Throw in the deadweight losses from the higher taxes, and the private
sector–earnings and jobs growth–suffer.  There is one “theoretically necessary reason for detrimental effects.”  And empirical reasons as well.

Dr. Lawton also downplays the enormity of the transfer payment problem in Maine.  While he likes to talk about the national average, Mainers can only wish they were even close to the national average.  In my new study on Maine state government spending–“Maine Spends too Much . . . But Where?”  The study shows that Maine state government spending on “Public Welfare” (Medicaid, TANF, etc.) and “Health” (WIC, state clinics, etc.) rank the highest in the country as a percent of income.  In fact, Maine spends nearly double the national average on Public Welfare and more than three times the national average on Health.

One last point–though I’m sure there are others I am forgetting.  In another recent paper–“Maine’s Dwindling Private Sector Economy”–I show that there is a clear relationship between the size of a state’s private sector and its overall economic well-being.  Transfer payments crowd out the private sector to the detriment of all Mainers.  Of course, we don’t need complex graphs to tell us that.  Just look over the border.  New Hampshire has the 2nd largest private sector in the country and the 9th highest per capita personal income in the country.  Alas, Maine is the polar opposite.