Sen. Max Baucus, D-Mont., knows how to look out for his constituents’ interests, at least their short-term ones, but his explanation of his dissent from the Simpson-Bowles deficit reduction commission exposes one of the great ironies of U.S. fiscal policy. Most of the regions where rhetoric is strongest against government spending and entitlement programs are precisely the ones where payments under such programs constitute disproportionate shares of the local economy and household incomes.
Baucus said the commission’s recommendations that include increases in motor fuel taxes and cuts in farm subsidies and Social Security benefits “paint a big red target on rural America.”
His rhetoric is a bit excessive, but he is correct in that these measures would have greater negative effects on many rural areas than on the nation as a whole. He did not, however, mention the obvious fact that this is true because of high rural dependence on federal spending.
People have long recognized that Red States that tend to vote Republican and where anti-government-spending sentiment is strongest are generally those where federal spending compared to federal taxes paid is highest. The Blue States that tend to vote Democratic and where smaller government rhetoric gains less traction usually get less back in federal spending than they pay in taxes.
Some of this broad disparity is driven by factors like defense spending that have nothing to do with entitlement programs. The red states are dominated by the South and by the Intermountain West and Northern Great Plains. The latter areas include many sparsely populated states that cover large geographical areas, so any spending on defense installations is high on a per-capita basis. Air bases like Ellsworth in South Dakota, Warren in Wyoming or Malmstrom in Montana have a bigger per capita impact in these states with populations of fewer than a million than Scott AFB does for Illinois’ 13 million.
The commission recommended several changes that, while small individually and phased in over time, eventually would reduce benefits. This would hit rural states like Montana and rural areas of Minnesota harder than the national average for the simple reason that higher proportions of rural populations receive Social Security and the benefits are higher relative to average incomes than for the general population.
Social Security’s formal title is Old Age, Survivors and Disability Insurance. All three of these components are disproportionately important in rural counties.
The major factor is that rural populations are older than the national average and are aging more rapidly. High school graduates have moved away from rural counties in large numbers since 1920. The number of farming, forestry and mining workers has shrunk with technological change. As successive cohorts of such workers retire into small towns, fewer people take their places, and the proportion of retirees grows. Thus, while the proportion of the total U.S. population aged 65 and older is about 13 percent, it approaches 20 percent in many rural counties. So retirement benefits from Social Security are more important in overall household incomes in such places.
Wages and salaries in such counties also are below levels for the whole country or for urban counties in otherwise rural states. But because of the progressivity of the benefit formula for Social Security that gives 90 percent of the first $761 of “average indexed monthly earnings,” 32 percent from there through $4,586, and very little above that, low-income beneficiaries common in rural areas get benefits that are higher relative to earnings than the overall national average or in urban areas.
Social Security disability benefits also are more important in rural areas because they are much more commonly awarded to workers who have done dangerous or demanding physical labor than to office or retail workers. Farming, mining, lumbering and construction are among the most dangerous occupational categories in the country and they are the most important ones in rural areas.
Finally, while social norms are changing rapidly in rural areas, just as in cities, traditional family patterns of couples marrying and having children while relatively young remain more common in rural areas. This means survivorship benefits from Social Security are of greater relative importance than in urban areas, where people marry and have children later and have smaller families.
Baucus is correct that any deficit reduction package that includes entitlement reform probably will hit rural America harder than urban areas. Yet, public sentiment in rural areas strongly favors lower taxes and lower deficits. That inevitably means cuts in some categories of federal spending that are so big in rural economies. Rural voters will have to decide what they really want.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.