Month: April 2026

Imagine that instead of dividing up US spending by program, you instead divide it up by what age group the money is spent upon. Kent Smetters takes this approach in “How Federal Spending is Distributed by Age” (Penn Wharton Budget Model, April 1, 2026). The results are perhaps unsurprising in general, but still eye-opening in their specifics.

The US government spent $7 trillion in 2025. In these calculations, $2.6 trillion of the spending can’t be easily assigned to a certain age group. As Smetters writes: “The largest items in the residual are net interest ($970 billion) and national defense ($917 billion). Transportation ($146 billion), natural resources and environment ($88 billion), administration of justice ($85 billion), community and regional development ($85 billion), and several other functions also remain in the all-ages category. These programs finance public goods, broad administration, place-based investment, or mixed services for households of all ages — they are not programs where recipient age is the central organizing concept.”

As one would expect, much of Social Security and Medicare can be assigned to the elderly, although these programs also cover a certain number of disabled persons who are not over the age of 65. Smetters writes: “Social Security directs $1.3 trillion to retirees, and Medicare sends $835 billion. Together they account for 80 percent of all age-assignable spending on older adults. But the retiree total extends beyond these two entitlements. Federal employee retirement benefits ($169 billion), housing assistance for older households, Medicaid long-term-care spending, and VA medical care all contribute, making the federal budget more retiree-focused than a Social Security–only lens would suggest.” Smetters finds that $2.7 trillion in federal spending goes to the elderly.

For federal spending on working-age adults, ” Medicaid directs $357 billion to working-age adults — more than to any other age bucket. Social Security also sends a substantial amount to working-age adults through disability and survivor pathways, contributing $216 billion. Beyond these two programs, Medicare for disabled beneficiaries under 65 ($159 billion), VA compensation and medical care ($202 billion combined), unemployment compensation ($40 billion), housing assistance ($44 billion), and Marketplace subsidies ($90 billion) all add materially.” Total federal spending directed to this group is $1.2 trillion.

Smetters combines federal spending on children and young adults under the age of 26 into a single group. “For people under age 26, Medicaid is the largest program, contributing $144 billion. SNAP follows at $44 billion, then child nutrition programs ($34 billion), Marketplace subsidies for younger enrollees ($29 billion), higher education support ($26 billion), elementary and secondary education ($24 billion), child care assistance ($21 billion), CHIP ($20 billion), TANF and family support ($18 billion), SSI for children ($15 billion), and foster care and adoption assistance ($11 billion). This is a different mix from the one that drives retiree spending: it is more fragmented and more dependent on means-tested programs.” Total spending here is $448 billion.

Put it together, and here’s a summary table. The punchline is in the final column. US spending on the elderly averaged $43,700 per person in 2025. In comparison, the average was $7,300 on the average working-age adult and $4,300 for the average child.

As I noted at the beginning, the overall pattern here is in unsurprising. Anyone who pays attention knows that federal spending on the elderly via Social Security and Medicare is huge. But of course, the elderly paid payroll taxes during their working lives to support others in these programs, and now it’s their turn to benefit from taxes paid by current workers. The amount directed to working-age people, as well as children, would be higher if one took into account federal benefits delivered through refundable tax credits like the earned income tax credit and the child tax credit, rather than focusing only on spending. Also, in the US system of government, a large portion of spending on children and young adults–like most of education spending and a substantial portion of Medicaid spending–happens at the state and local level, not the federal level.

Smetters, of course, is well aware of all of these issues. He is offering an intentionally blunt comparison to make a point. It’s pretty much always politically popular to offer higher benefits to the elderly, and to push back hard against proposals that seek to hold down the long-term rate of growth in these programs.

But about one-sixth of all US children live in families below the poverty line. If you look at families with income at or below twice the poverty line, which is often used as a measure of “near” poverty, then about two-fifths of US children live in such households. If you look at education as measured by the National Assessment of Educational Progress (often called the “Nation’s Report Card”), about 40% of fourth-graders test below the “basic” level of reading and 69% test below the “proficient” level.” In math, 24% of fourth-graders test below the “basic” level and 61% are below the “proficient” level. In short, the seeds of future inequality and poverty are happening with today’s children, right now. That per person federal spending gap between the elderly and the children/young adults group looks awfully large.

A year and a day ago, President Trump announced that he would enact, without a vote of Congress, higher tariffs across a wide range of countries. I had been thinking about compiling a range of evidence on what has happened, but was delighted to find that Scott Lincicome,  Alfredo Carrillo Obregon, and Chad Smitson have done it for me in “One Year After `Liberation Day’: Here’s What We Know and What We Don’t” (Cato at Liberty blog, April 2, 2026). For example:

“The `reciprocal” tariffs were explicitly imposed to reduce the US trade deficit, but it reached an all-time high (in real terms) last year.” As I wrote a couple of months ago, “Trump’s Tariffs Have Not Shifted the Trade Deficit.”

“Manufacturing jobs did not boom and, in fact, kept declining. Manufacturers reported throughout 2025 that tariff-induced cost pressures and uncertainty hampered economic activity in the sector, and employment data suggest that this also contributed to a slowdown in hiring.” As I’ve tried to point out in the past, many US companies are “The Import-So-That-They-Can-Export Firms”–thus, when tariffs make imports more expensive, a number of US companies that rely on imported inputs find it more difficult to compete in world markets.

“Foreign investment did not boom. Despite the president’s Liberation Day prediction of a boom in foreign direct investment (FDI), quarterly FDI has fallen since April 2025, with the US registering $72.49 billion in FDI in Q4 (Figure 9). Total FDI in 2025 was $288.4 billion, lower than the annual totals from 2021 through 2024, and far short of the rate needed to reach the president’s lofty goal of $18 trillion in investment. New FDI last year was even lower. Several firms and countries have pledged to increase their investments in the US, but such pledges do not show up in data.” Lots of countries have promised to make big investments in the US economy–indeed, they have often promised to make investments much larger than their existing total current investment in the US. Such promises are cheaply made. It is of course unsurprising that imposing tariffs on needed inputs and erratically changing the tariff schedules for different countries and goods is not a way to make the US economy appear like a favorable destination for foreign investment.

“Tariffs raised prices.” The Cato authors link to a number of studies. The actual effective tariffs have turned out to be about 10% on average for imports as a whole, and imports are about 14% of the US economy. The result has been a real if modest boost in prices, as I tried to point out in “Tariffs and Inflation: Where Are We?”

“Contrary to the president’s early claims that there would be no exemptions from his global tariff regime, numerous  product exemptions were issued throughout 2025. … Moreover, 43 percent of US imports avoided all tariffs imposed in 2025, including the reciprocal tariffs. As many as 64 percent of US imports (based on 2025 values) are now exempt from the replacement Section 122 tariffs, which retain most of the reciprocal tariffs’ exemptions. Most notable among the exemptions is, as economist Joey Politano first noticed last year, semiconductors, computers, and related goods that the booming US artificial intelligence industry needs. The loopholes help to explain why the tariffs were not as costly as many experts feared in April 2025.”

With tariffs being announced and unannounced, coming and going, and exemptions openig and closing, “tariff-related lobbying activity—driven by the chance to win an exemption or new restrictions on overseas competitors’ goods—reached levels not seen in years, if not decades. The number of registered clients for tariff-related lobbying increased by 218 percent in 2025 with respect to the previous year, the biggest year-on-year change since Trump’s first term in 2018. Meanwhile, trade-related lobbying expenditures reached more than $900 million in the first half of 2025 alone and were 28 percent higher than in the first half of 2024.” Meanwhile, many firms are filing lawsuits to recover the tariffs they already paid, now that the US Supreme Court has ruled that President Trump lacked legal authority to impose many of them.

As the US has opted out of world trade markets, other countries are building trade ties with each other. The US is not involved in these trade talks, and thus has no influence over how they evolve, or how the trade talks might be shaped for the benefit of US exporters. The authors write: “The US has not negotiated any free trade agreements (FTAs) since 2020, and since then, other countries—including some of America’s largest trading partners and long-standing allies—have negotiated and entered into many such deals . In just the last few months, for example, the EU has inked traditional trade deals with MERCOSUR, India, and Australia; Canada has launched negotiations with Thailand and the Philippines and is working on an FTA with ASEAN; China inked agreements with ASEAN and Congo, and is updating its FTA with South Korea; and even India, which had long been skeptic of FTAs, reached agreements with the United Kingdom and New Zealand.”

Given that the US has surrendered any pretense of global leadership on trade policy, and that the US economy has not in fact been transformed in the past year, some defenders of the tariffs now claim that everyone knew all along that the real and benefits of tariffs would take years to emerge. Maybe they will eventually turn out to be correct. Next year, or the year after, or the year after, we will se. But pointing to expanding US industries like semiconductor manufacturing that are propped up by government subsidies and using inputs that are exempt from US tariffs is hardly evidence that the tariffs are having beneficial effects. The boom in US investment in data centers is not because of tariffs, either. In terms of expecations how quickly tariffs would benefit the US economy, worth remembering what President Trump actually said when announcing the tariffs a year ago:

My fellow Americans, this is “liberation day.” Been waiting a long time. April 2, 2025, will forever be remembered as the day American industry was reborn, the day America’s destiny was reclaimed, and the day that we began to make America wealthy again. Going to make it wealthy-good and wealthy. For decades, our country has been looted, pillaged, raped, and plundered by nations near and far, both friend and foe alike. … Our country and its taxpayers have been ripped off for more than 50 years, but it is not going to happen anymore. It’s not going to happen.In a few moments, I will sign a historic Executive order instituting reciprocal tariffs on countries throughout the world. … This is one of the most important days, in my opinion, in American history. It’s our declaration of economic independence.For years, hard-working American citizens were forced to sit on the sidelines as other nations got rich and powerful, much of it at our expense. But now it’s our turn to prosper and, in so doing, use trillions and trillions of dollars to reduce our taxes and pay down our national debt. And it will all happen very quickly.With today’s action, we are finally going to be able to make America great again, greater than ever before. Jobs and factories will come roaring back into our country, and you it happening already.We will supercharge our domestic industrial base. We will pry open foreign markets and break down foreign trade barriers. And ultimately, more production at home will mean stronger competition and lower prices for consumers. This will be, indeed, the golden age of America.

In short, if you wish to argue that critics are unrealistic in expecting Trump’s tariffs to have large effects “very quickly,” so that “jobs and factories would come roaring back into our country,” you might remember who took the lead in setting such unrealistic expectations.

Each year, India’s Department of Finance published a top-to-bottom overview of the countries economic situation. As I paged through the Economic Survey 2025-26, I was especially struck by some of the comments about the role of the service sector in India’s economy, and the role of India’s service sector in the world economy.

As background, it’s perhaps useful to know that economic development around the world has broadly followed a similar pattern. In a low-income country, most of the workers are in subsistence agriculture. Next comes a push-pull effect: higher productivity in agriculture means that not as many workers are needed on the farm, and available jobs in low-wage manufacturing (textiles is a common example) offer an option for those workers. However, workers and products become more sophisticated. High-wage skilled manufuring develops, which often uses high levels of capital investment, and workers shift over to service industries. There is some argument that a next step may be “information” industries, although this category often overlaps with services.

But in some areas of India, a high-skill service sector has unexpectedly sprinted ahead–it has arrived early in the process of economic development. But can economic development be based on the service sector? Can the service sector provide widespread jobs across the economy? Or is it a useful and positive but ultimately niche industry–such that India should be focusing on the conventional path of building up low-wage manufacturing and agricultural productivity? The Economic Survey offers some background and thoughts on these issues.

(In the shade of this parenthesis, I was amused that the report includes near the start an 18-page list of acronyms: everything from AAGR Average Annual Growth Rate, AAI Airports Authority of India, and AAM Advanced Air Mobility, to XV-FC Fifteenth Finance Commission, YES-TECH Yield Estimation System based on Technology, and YoY Year-on-Year. And yes, before you ask, I do amuse easily.)

Here’s how V. Anantha Nageswaran, the Chief Economic Advisor for the Government of India, expressed concerns about the role of India’s service industry in development in his “Preface” to the report:

India’s export performance since the start of the millennium tells its own story. In general, services exports have outpaced goods exports. In particular, over the five years since 2020, the compounded annual growth rate of total exports has been 9.4%, while that of merchandise exports has been only 6.4%. Services have done much of the heavy lifting, creditable and macro-stabilising, but not a substitute for the goods-based export ecosystems that ultimately underpin durable external and currency stability.

The Information Technology-Enabled Services Sector has been India’s mainstay for growth and exports since the dawn of the millennium. International experience indicates that while service exports are economically valuable, they do not systematically compel broad upgrades in state capacity, as successful firms can bypass weak institutions, relocate easily, and generate limited economy-wide pressure on governments to reform. Unlike manufacturing exports, they do not impose hard fiscal, employment, or logistical constraints on the State, allowing institutional weakness to persist even alongside globally competitive firms. So, manufacturing matters.

In this view, a key role of manufacturing is that it imposes constraints on the government, pressuring the government to overcome its institutional weaknesses. The later chapters of the report on India’s services and manufacturing industries provide more detail. The report notes:

Notably, while global goods trade has stagnated, services trade has continued to expand, reinforcing its role as a critical buffer against external shocks and volatility. The rapid expansion of digitally and remotely deliverable services has allowed the services sector to scale swiftly by transcending traditional geographical and operational constraints. This has enabled new forms of value creation, particularly in knowledge-intensive and technology-enabled activities, helping even smaller economies leave a global imprint. In contrast to the typical manufacturing-led growth paths followed by other countries at a comparable stage of development, India has experienced service-led growth at a significantly lower level of per capita income.

Currently, India’s services sector contributes more than half of the Gross Value Added and serves as a major driver of exports and employment in the country. Not only does it continue to underpin domestic growth, but services have also emerged as the most stable and resilient component of GDP, acting as a high-growth, low-volatility anchor, as is the case across the globe. The sector has recorded average annual growth of around 7-8 per cent year after year, in sharp contrast to the more pronounced cyclical fluctuations observed in agriculture and industry.2 India is the world’s seventh-largest exporter of services, with its share in global services trade more than doubling from 2 per cent in 2005 to 4.3 per cent in 20243, and the sector continues to be the largest recipient of foreign direct investment inflows.

Like the US economy, India consistently runs a trade deficit in goods, but a trade surplus in services. Here’s an illustration of India’s trade surplus in services–which is heavily focused on business and software services.

Finally, it’s useful to remember–whether in India or the United States–that the services economy is close intertwined with manufacturing of higher-value goods, to the benefit of both. In the case of India’s economy, the report introduced me to my ugly word of the day, “servicification”:

[S]ervices are increasingly integrated into manufacturing through activities such as design, R&D, logistics, software development, and professional services, reflecting the growing “servicification” of production systems. This is evident in products such as smart devices, whose value is driven by software ecosystems; medical equipment/wearables bundled with diagnostic and remote-monitoring services; and automobiles, which are increasingly described as “software on wheels”. As manufacturing becomes increasingly technology and data-intensive, services such as ICT, finance, compliance, and after-sales support account for a growing share of value creation. International experience suggests that this integration is a crucial channel for enhancing value addition, export competitiveness, and employment.