The 47 percent

The US Presidential candidate Mitt Romney held a dinner for his donors from which a hidden camera revealed a statement which was frowned upon by most of the media lately:

"There are 47% of people who will vote for the President no matter what. Alright, there are 47% who are with him, who are dependent on the government, who believe that they are victims, who believe government has the responsibility to care for them, who believe they are entitled to healthcare, to food, to housing!"

Read the full transcript on the NY Times, or hear the video here.

Frankly, I don't know what all the fuss is about. Ok, perhaps there aren't so many Americans that are fully dependent on the government, but I can see what Mr Romney meant when he said that, by looking at either one of these two graphs: 

Source: Wall Street Journal, Nicholas Eberstadt: "Are Entitlements Corrupting Us? Yes, American Character is at Stake" August 31st 2012.

I however doubt that he had this in mind, which is probably what got some lefties disturbed (and rightly so if I may add):

Source: NPR, "The 47 percent, in one graphic"

This is only one part of the whole story, the other is the total amount of welfare recipients, something I touched upon about a month ago. Not only those in the lowest income groups receive welfare benefits (Btw, if it were up to me, I would significantly increase the threshold of those on lower incomes who aren't paying taxes, making this relative percentage even higher), but many in the upper income levels receive them as well.

What Romney and his campaign really wanted to emphasize, I think, is that dependency has increased during the current administration (I would say even before this one, as this is a generational switch that cannot occur during one President's term - in fact this is what the above graphs point out), and that America has lost the edge it used to have on upward mobility and meritocracy. This is a big problem indeed, particularly for a country that was proud of its independence from big government and which was founded on different historical and cultural principles than the ones in Europe. This is something that has been emphasized by the Occupy movement as well, although from a somewhat different perspective.

The issue is the change in mentality and attitude towards living off benefits. This affects the incentives for upward mobility where the people are changing their attitude towards work and success, thinking that success can only come if you belong to the higher classes. It sets many in a permanent poverty and entitlement trap. Who's fault was that? It's hard to point a finger at anyone in specific, as the change in mentality, or the change of informal institutions is a gradual process which is ignited by the change in formal institutions. It can be inferred from this that the creation of the modern welfare state in America gradually changed the people's mentality and culture, i.e. it changed the US informal institutions. 

I didn't think Americans were that invested in the welfare state, even though more and more data have been pointing that out pretty clearly. For example, the aforementioned text from the Wall Street Journal published couple of weeks ago claims that more and more Americans have switched to welfare in the last 30 years (a 7-fold increase since the 1960s). This comes as an outright surprise compared to the spirit of Americans from the first half of the 20th century, not to mention anything earlier than that. 

"From the founding of our nation until quite recently, the U.S. and its citizens were regarded, at home and abroad, as exceptional in a number of deep and important respects. One of these was their fierce and principled independence, which informed not only the design of the political experiment that is the U.S. Constitution but also their approach to everyday affairs.  

The proud self-reliance that struck Alexis de Tocqueville in his visit to the U.S. in the early 1830s extended to personal finances. The American "individualism" about which he wrote did not exclude social cooperation—the young nation was a hotbed of civic associations and voluntary organizations. [my emphasis] But in an environment bursting with opportunity, American men and women viewed themselves as accountable for their own situation through their own achievements—a novel outlook at that time, markedly different from the prevailing attitudes of the Old World (or at least the Continent).

The corollaries of this American ethos were, on the one hand, an affinity for personal enterprise and industry and, on the other, a horror of dependency and contempt for anything that smacked of a mendicant mentality. [my emphasis] Although many Americans in earlier times were poor, even people in fairly desperate circumstances were known to refuse help or handouts as an affront to their dignity and independence. People who subsisted on public resources were known as "paupers," and provision for them was a local undertaking. Neither beneficiaries nor recipients held the condition of pauperism in high regard."

This admirable mentality has obviously changed, and to the worse. And as Nicholas Eberstadt concludes in his text, not only does this change in mentality affect the unsustainability of the public finances, it threatens to change the American character.

Update (20/09/2012): A new MIT working paper by Acemoglu, Robinson and Verdier offers potentially good insights on the subject:

"We show that, under plausible assumptions, the world equilibrium is asymmetric: some countries will opt for a type of “cutthroat” capitalism that generates greater inequality and more innovation and will become the technology leaders, while others will free-ride on the cutthroat incentives of the leaders and choose a more “cuddly” form of capitalism. Paradoxically, those with cuddly reward structures, though poorer, may have higher welfare than cutthroat capitalists; but in the world equilibrium, it is not a best response for the cutthroat capitalists to switch to a more cuddly form of capitalism." [my emphasis] (Abstract)

"This perspective therefore suggests that the diversity of institutions we observe among relatively advanced countries, ranging from greater inequality and risk taking in the United States to the more egalitarian societies supported by a strong safety net in Scandinavia, rather than reflecting differences in fundamentals between the citizens of these societies, may emerge as a mutually self-reinforcing equilibrium. If so, in this equilibrium, we cannot all be like the Scandinavians, because Scandinavian capitalism depends in part on the knowledge spillovers created by the more cutthroat American capitalism." [my emphasis] (pg 36)

The title of the paper is "Can’t We All Be More Like Scandinavians? Asymmetric Growth and Institutions in an Interdependent World?"