1.3. We noted that "government purchases" don't include all government spending. A big part of what the U.S. government does is transfer money from one person to another. Social Security (payments to retirees), and Medicare and Medicaid (paying for medical care for the elderly and the poor) make up most of these

"government transfers." We'll look into this in more detail in Chapter 17, but right now, let's see how big "government transfers" are and how fast they've grown in the federal government's budget. The figures in this table are all in noninflation-adjusted dollars.

Complete the table.

Year 1950 2000 Growth Rate in%:

Total Federal Total Federal Transfers

$13.6 billion

$1,057 billion Spending

$42.5 billion

$1,788 billi on Source: Budget of the United States Government: Historical Tables, Fiscal Year 2003. Washington, D.C.: U.S. Government Printing Office.

easily pay someone else to do: In other words, from the looking-in-the-window perspective, a business owner looks like a worker, and workers earn wages. But since the owner gets to keep all the profits that are left over after paying off the other workers and the bank, it looks like the money that he or she earns should count as profit.

What to do? The best solution is to calculate the "opportunity cost" of the business owner's time: In other words, estimate roughly how much the business owner would get paid if he or she were working as an employee. It tells us how much of the business owner's income is truly wage income.

The second best solution, which we'll use in this question, is to just guess that one-third, one-half, or two-thirds of the business owner's income is really wages, and the rest is profit. As so often in economics, we make some assumptions;

Let's see if that changes our view of the economy.

Using this measure, let's see what has happened to the slice of the pie going to workers:

Wages (including Year 1959 salaries and bonuses)

62% of national income Transfers as Percent of Spending 2003 64% of national income Business Owner's Income 11% of national income 9% of national income Source: Survey of Current Business. Bureau of Economic Analysis, March 2004.

Using the data above, complete the following table:

Year