Sunday, January 13, 2013

Why Republicans Are Half-Right About The American Entitlement Problem

The fateful remarks made by Mitt Romney at a private fundraiser during his 2012 presidential bid stirred up quite a controversy, as many of us recall. The one word that most people remember from that hidden camera video is “entitled” – which sums up the intention of his remarks: too many Americans feel entitled to something that they have not fairly earned. The 47% figure may have been over the top, but to be fair, who hasn’t exaggerated in private when frustrated by the dysfunctional behavior of too many people? Yes, I know. Just like Facebook’s amusing “Privacy Notice”, presidential campaigns come with the same disclaimer: if it’s private, don’t open your mouth.

I can’t cast stones in the exaggeration department. It has taken me many years to realize that exaggeration is a display of intellectual laziness. Meaning, you are trying to make a point that is not as valid as you say it is, so you stretch the truth beyond distortion to suit your agenda. Surely, “6.5%” of Americans that feel they are entitled to your money without contributing a cent does not stir up rage as much as “47%”. But we have to admit, the pre-exaggeration issue does raise an important question: who are the entitled ones, and how much value are they destroying?

The Heritage Foundation is a conservative think tank, with the majority of its members coming from Republican administrations. On a recent testimony before the U.S. House of Representatives (Committee on the Budget), Robert Rector, Senior Research Fellow from the foundation, shared a total welfare figure for FY 2011: $927 billion -- proportionally almost one trillion dollars. 

Dissecting the trillion-dollar figure we find that only $717 billion is at the federal level, since $210 billion are state programs. That translates to an allocation of $1,400 per federal taxpayer last year going towards federal welfare programs -- which further translates to $117 per month. Mr. Rector breaks down welfare into three general sub-categories: health (50%), cash, food, housing related (38%), and training related (12%). Let’s set aside the training impact, which even the Heritage Foundation considers an enabling program -- the opposite of entitlement. That brings our monthly, average taxpayer welfare impact to $105.

So who is sucking just around $100 per month from the average taxpayer, and feeling entitled to it? Well, the Census Bureau reports there are 40 million Americans that live in poverty -- meaning, they do not contribute to revenue.  Out of those 40 million, the Heritage Foundation recognizes about a quarter of them as being disabled adults, and another quarter as being children living in poverty. That would mean that there are roughly 20 million adult and able Americans that have become entitled to taxpayers’ funds, without any economic contribution from their part. That is in essence the entitled poor, at 6.5% of the American population.

Six-and-a-half percent of the American population is not a small amount of non-contributing, entitled citizens, compounding into a three-quarters of a trillion dollar burden. But at 5% of total GDP, that might still be a manageable number -- IF only that were the only source of entitlement.

Every time the board of directors of a major corporation lobbies Washington for entitled privileges that too easily enable job destruction, predatory competition, and regulatory manipulation, it inevitably results in the destruction of billions and ultimately trillions of dollars -- in favor of a few entitled rich. In terms of population, they are a relatively insignificant number, even less than the so-called 1%. But it’s not the population number that is of concern when it comes to the entitled rich: it is the impact and drain they have on the economy when they destroy more than they create. As an obvious example: between 2007 and 2009, U.S. homeowners lost a total of $7.3 trillion dollars in value. A few but deadly entitled rich created the bubble, enabled by Washington, and cashed-in before the bubble burst -- the oldest trick in the book.

Thankfully for the U.S., the vast majority of individuals, AND corporations, are value creators. Between the two, the U.S. is producing over $15 trillion dollars in value per year. When one of the entitled segments takes away 6.5% of the value, it hurts – no doubt. But when the other entitled segment takes at least another 6.5% chunk, on average, we are now at 13% destruction of value – and rising. Like unemployment or inflation, we may be able to handle a 6.5% bleed. But we cannot go on indefinitely with a double-digit destruction of value. It is too disruptive, and inconsistent with our claims to a first-world nation.

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