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.
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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.