To Lift All Boats

The Washington Post

Suddenly, there's a new conversation among the country's movers and shakers, and
several ambitious plans for helping the bottom half share in the nation's prosperity: Give
them, literally, a share in America. Spread capitalism by spreading capital.

Consider President Clinton's proposed "Universal Savings Accounts." Families earning less
than $40,000 would get an annual $600 tax credit deposited directly into their USA account,
plus another $700 if they deposited $700 of their own money into the account. That adds
up to an annual nest egg of $2,000. If they continue doing the same thing for 40 years,
assuming a modest 5 percent rate of return on their savings, their nest egg would grow
into a brontosaurus egg of more than $250,000. That would give most families a big boost
for retirement.

Make no mistake. The effect of this plan would be to redistribute capital assets to
lower-income families. Higher-income families would get a much smaller federal contribution.
Cost to taxpayers: Roughly $30 billion annually.

Or consider Sen. Bob Kerrey's "Kid Save." Under this plan, the government would provide
every newborn with a $1,000 savings account, and would add another $500 a year until
the child's fifth birthday. The money accumulates and the interest compounds until the child
reaches 21, and--presto--the kid has $20,000 to start his or her adult life. The taxpayers'
tab: About $15 billion a year.

If neither of these is ambitious enough for you, here's another idea, proposed by Bruce
Ackerman and Anne Alstott, both professors at Yale Law School, in a slim volume called "The
Stakeholder Society" (Yale University Press): Every 21-year-old American gets $80,000, to
do with as he or she sees fit. The cost is a whopping $255 billion a year--borne either
through mandatory payback of the original stake (plus interest) at death, or an annual 2
percent wealth tax on the wealthiest 40 percent of Americans.

I know what you're thinking: It can't happen. Even Kerrey's idea is too expensive. This
Congress would never go for any of this. Besides, we're likely to have political gridlock
between now and 2000.

But don't get hung up on the politics right now, or on the details of these plans. What's
important here is the big idea common to all of them: Rather than just redistributing income
to people after they've become poor, give them capital upfront to build their fortunes. Give
a young family a starter nest egg. Give a young adult a capital stake.

This way, we get the benefits of a market economy: We encourage saving, rely on private
ownership and depend on decentralized, personal choices about how to invest money. But
we also get the social benefits of a more egalitarian society. It's a twofer.

A big idea like this is significant because it can reframe the public debate. It can change the
prevailing assumptions. Eventually, it can change the course of the nation.

Actually, it's not as novel as it may seem. After all, the Homestead Act of 1862 gave 160
acres of Western land to anyone willing to settle there for five years. In the 1980s, Prime
Minister Margaret Thatcher invited residents of Britain's publicly owned housing (then
almost a third of the country's housing stock) to purchase their homes at bargain-basement
rates. More recently, Vaclav Klaus, as Czech prime minister, auctioned off shares of
state-owned companies to Czech citizens holding redeemable vouchers.

So why the buzz here and now? Three reasons. First, it is dawning on many people that
the old ways of trying to broaden prosperity aren't working nearly as well or as fast as
we'd like. Not even the buoyant expansion of the 1990s has done much to reverse the
long-term decline in real incomes of those in the bottom third. Those just above them
haven't gained any ground. The median American family's income is about where it was a
decade ago in real terms, and its members are now working a total of six more weeks a
year than they did then. To be sure, the incomes of the very poor have bounced up a bit
since 1996, both because the minimum wage was raised and because the labor market
became so tight that they've had an easier time finding jobs. But that bounce was from a
long way down, so they're still very poor. And when the economy cools--as it will,
eventually--the slide will likely resume.

Most of the people who have been losing out don't have an adequate education--the first
prerequisite in this global, digital economy. So obviously, the best investment in their future
prosperity is to improve their store of "human capital." But this takes considerable time, and
it's far from a sure bet. Even if the half-trillion dollars we spend every year on public schools
were perfectly utilized, and children from poorer homes were learning like mad, they'd still
start off their adult lives at a severe financial disadvantage. Many will have a hard time
financing a college education or a first home.

Meanwhile, it has also become clear that we can't rely on direct handouts to do the job.
They have all sorts of negative side effects, like dependency, and there's no political will to
carry them out on a large scale. Trying to redistribute income from those relatively rich to
those relatively poor through specific federal programs, funded by annual appropriations,
has become next to impossible, as evidenced by the difficulties of funding everything from
Head Start to housing subsidies.

The second reason for the new conversation is that capital assets--rather than income--is
now where the action is. The story of the 1990s, if you hadn't noticed, is the extraordinary
boom in the market valuations of companies, followed by that of homes and even American
dollars. The boom may end tomorrow, of course. But it's been an amazing ride, and it can't
help but affect how people think about the public interest, as well as their own personal
gain. The debate over privatizing Social Security was not galvanized by the program's
projected insolvency some 30 years hence. It was spurred by the prospect of cashing in on
Wall Street's effervescence. Does anybody seriously believe we'd be talking about
privatization if the stock market were in the doldrums?

To date, most Americans haven't gotten much out of this capital boom, however, because
most don't have much capital. Without money to invest, it's of no consequence to you
whether the Dow is at 11,000 or 1,100. While almost half of American families own some
shares of stock nowadays, most of those holdings are valued under $5,000. Young families
are even less likely to own capital. The average young family has a net worth of only about
$11,400, including the value of the family car. Fewer than half own a home, which is usually
heavily mortgaged. The typical young family in the bottom half of the income distribution
has a net worth of $2,000 or less.

On the other hand, people at the top have never had it so good. The biggest single
consequence of the Clinton bull market (or, if you prefer, the Greenspan bull market) has
been to make those who were already rich before 1991 fabulously richer. The wealthiest 10
percent of Americans have received 85 percent of Wall Street's gains since then. The
wealthiest 1 percent have gotten 40 percent of them. Even before the run-up in stock
prices, America's wealth gap had already turned into a chasm--wider and more permanent
than the income gap. It's now a canyon. Bill Gates's net worth exceeds the combined net
worth of the bottom 45 percent of American households.

Even if--or more likely, when--the stock market sags, the wealth gap is likely to endure.
When the parents of today's baby boomers leave this world, the wealthier of them will also
leave behind a collection of assets worth hundreds of billions of dollars more than they paid
for them. Their boomer offspring will inherit the largest inter-generational windfall in the
history of modern civilization. And thanks to the "stepped-up-basis-at-death" tax rule,
these assets will arrive free of capital-gains taxes. (When I once had the temerity to
suggest to then-Treasury Secretary Lloyd Bentsen that the rule be modified, he scolded
that death is an "involuntary conversion.")

The tax favors don't end there. Those people who have earned enough to be able to invest
in this buoyant capital market are also advantaged by rules allowing them to defer taxes on
that portion of their incomes. The resulting benefits are wildly tilted toward the very people
who are already gaining the most from the surge in capital values. Two-thirds of all the tax
benefits for pensions and retirement savings now go to families earning more than
$100,000 a year. Only 7 percent of these benefits go to families earnings $50,000 or less.

The asset elevator has been lifting America's wealthy to ever-higher vistas, without their
moving a muscle (except, perhaps, to speed-dial their brokers). Current tax law is lifting
them, and their children, even higher. Hence the case for allowing the rest of America on
the elevator, too. Whether it's government-subsidized universal savings accounts for
Americans of modest means, or schemes to give every young adult a certain amount of
capital, the goal is to let everyone in on the ride.

The third reason for the new conversation is that, hey, we can afford to do something like
this. Budget surpluses now extend as far as the eye can see. The president wants to fund
his plan out of them. Sen. Kerrey's Kid Save would cost half as much. The price tag on the
Ackerman-Alstott proposal is a lot higher--but with the value of stocks, real estate and
other assets heading into the stratosphere, their notion of funding it out of a 2 percent tax
on the wealthiest doesn't seem quite as far-fetched as it might in more normal eras.

To be sure, even asset-poor Americans are better off than most people around the world.
Still, this new conversation is important. Vast inequalities of wealth and income can strain
the social fabric of a nation. They make collective decisions more difficult--whether about
trade, immigration, labor or the environment--because citizens in sharply different economic
positions are likely to be affected by these sorts of decisions in very different ways. Politics
can only become more fractious.

Were inequality to grow too wide, we would risk an erosion of Americans' sense of common
purpose and identity. Those who already worry about the fragmenting of our culture and
the fading of civility will have far greater cause for concern. A polarized society is also less
stable than one with a large and strong middle. Such a society offers fertile ground for
demagogues eager to exploit the politics of resentment. No less an oracle than Federal
Reserve Board Chairman Alan Greenspan has warned that inequality is potentially a "major
threat to our security."

Will any of this new conversation be part of the upcoming presidential election? Don't hold
your breath. Candidates watch the polls, and the polls don't yet reflect the new
conversation. But there's at least an outside chance that during the dreary days next
winter, after the early primaries have worn down the aspirants, exhausted the press and
numbed the public, there will be an opening for some bold ideas about something truly
important.

-----

The Birth of Those Notions

Universal Savings Accounts (USAs), which President Clinton proposed in his State of the
Union speech and detailed further last month, and the "Kid Save" plan, outlined by Sen.
Bob Kerrey during last year's annual Democratic Leadership Council meeting, come primarily
from a larger ongoing discussion about the solvency of Social Security. Both plans try to
address the fact that a growing number of Americans are solely dependent on Social
Security for their retirement income.

The proposal put forth by "Stakeholder Society" authors Bruce Ackerman and Anne Alstott
attempts to alter fundamentally the ever-greater inequality of wealth in America and
promote economic independence for all. Their plan acknowledges the importance of private
property in a capitalist society, and claims that, through stakeholding, Americans would get
an equal chance to be a part of a national community.

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