P ersonally, it doesn't bother me at all that Bill Gates's net worth ($46 billion) is larger than the combined net worth of the bottom 40 percent of American households ($37.8 billion, excluding their cars). Several years ago I had dinner with Bill Gates and about a dozen other people at a nicely appointed home in the Cleveland Park district of Washington. I had been invited by a former member of Congress, whom I had known as a friend for a number of years. Before dinner, I exchanged a few words with Gates. I asked him what he thought about Newt Gingrich's proposal to give every poor child in America a personal computer. He said it would cost a lot of money, but would be worth it. I was tempted to ask whether it would cost more than 10 percent of his net worth, but restrained myself. After that brief conversation, Gates and I sat down at opposite ends of the charming dining room, and said nothing further to one another until we shook hands goodbye. A month later I received a bill for $75, along with a note from the former congressman explaining that since Microsoft had paid for the dinner, I was obliged under government ethics laws to pay my share. It did not bother me one bit to send $75 to Bill Gates for a meal that I had been led to believe was a purely social event paid for by my friend, the former member of Congress. I could afford it, and I'm grateful for Bill Gates's vigilance in adhering both to the letter and to the spirit of our government's ethics laws.
But the episode got me wondering. There are a lot of basic things that America still can't seem to afford to do—but other nations accomplish—like giving all children a decent education and providing all citizens with adequate health care, although America is now richer than it has ever been, the richest nation in the history of the world. Not only is the economy in splendid shape, but the nation's overall wealth has exploded by 30 percent in just the last fifteen years. Yet when it comes to basics, we seem to suffer a permanent case of performance anxiety. Every time we approach the point where a bolder vision seems possible, we decide that we can't afford it quite yet. When the Cold War officially ended in 1989, we briefly debated how to spend the so-called "peace dividend," but then the nation decided that the more prudent course was to keep most of our military intact, should it be needed. "We have more will than wallet," intoned George Bush, ruefully. When Democrats subsequently took over the White House in 1993, the President and Democratic Congress concluded that before we did another thing the budget deficit had to be reduced, as a percentage of the nation's economy. It then totaled 4.1 percent of gross domestic product, and we resolved to cut that by half before embarking on the agenda that Bill Clinton had been elected on. The deficit waned, but the bar was lifted again in 1995 when a Republican Congress (backed by several noted Democrats) threatened a constitutional amendment to balance the budget. In order to block such an attempt, the larger agenda was put off until the budget was in fact balanced. Now it is 1998 and the budget has been balanced. There are even surpluses. But it appears that the bar has been lifted yet again: we must first deal with Social Security.
D emocrats and liberals were, by and large, encouraged by the proposals that the President announced in his State of the Union address. True, many of the ideas are rather meager in comparison with the size of any of the problems they seek to address. Medicare expansion, for example, will reach no more than 300,000 early retirees and laid-off workers over the age of 55, out of three million in this group, which itself is a small portion of the 41 million Americans lacking health care. But, it is argued, these proposals are at least a beginning. True, most of the new initiatives are in aid of people earning middle-class wages rather than of the working class and the poor. But, it is said, the President at least signaled something of a return to the themes with which he began his presidency, and perhaps they can be built upon in future years. And assuming that Republicans fall into the trap of opposing these popular ideas, he has given Democrats a platform for their 1998 campaigns.
Yet to focus on the proposals themselves misses a deeply troubling aspect. The President has offered no larger vision for how the nation might eventually afford to do what's needed. To the contrary, the President's proposals depend for their financing on proceeds from a hoped-for tax on tobacco, and from various "loophole closers" in the tax code, all of which will be fought over in Congress. By refusing to use budget surpluses for anything other than saving Social Security, the President has raised the bar so high as to render any larger agenda almost unattainable. The public has been misled into believing that the wealthiest nation in the history of the world cannot afford to address the most basic needs of its citizens. "Social Security First" implies that Social Security is in grave danger, and that only two possible things come second: eliminating the debt or cutting taxes. All of this is dead wrong.
Social Security is not endangered. According to projections from the actuary of the Social Security trust fund, Social Security revenues (plus interest) will exceed Social Security expenditures through the year 2018, at which point the fund will begin to draw itself down. By 2019, when the great wave of postwar boomers begins to hit the shore of retirement, expenditures will begin to exceed income. Without "corrective actions" (in the words of the actuary), by 2029 the fund will be unable to pay all its obligations—unless, of course, the Treasury simply issues more debt to cover them.
This is incorrect. As a former trustee of the Social Security trust fund, I can tell you that the actuary's projection (made, by the way, before anyone expected the budget to be balanced by 1998) is based on the wildly pessimistic assumption that the economy will grow only 1.8 percent annually over the next three decades. Crank the economy up just a bit, to a more realistic 2.4 percent a year (what the actuary gloomily termed the "high option" projection), and the fund is flush for the next 75 years. Even if we have several recessions along the way, it's highly doubtful that the economy will grow any slower, on average. Productivity gains alone are likely to exceed 1.5 percent per annum, not counting all the gains that go unmeasured; immigration will surely make up for any slowdown in population growth. And if lower wage earners were ever to get a larger share of the economic pie, of course, Social Security revenues would be much higher. It should not go unnoticed that 2.4 percent growth per year is exactly the projection used by the White House in its new budget, anticipating costs and revenues over the next five years.
A six-tenths of 1 percent difference between the official projection and the "high option" may not sound like much, but compound it over several decades and you're talking real money. To be sure, we may wish to give ourselves an extra margin for error by making small changes in the formulas for paying into or taking out of the fund-perhaps taxing a bit more of what's taken out by high-income retirees—but this is no big deal. It's certainly no bar to using current and projected budget surpluses for the unfinished agenda.
The President's "Social Security First" campaign is also an open invitation to those who wish to argue that we must use any budget surpluses in future years to eliminate the federal debt. Social Security is, of course, a pay-as-you-go system, so that any effort to "shore up" the trust fund is, in effect, an effort to pay down the debt. This is what's known as a slippery slope. Once you concede that paying down the debt is a good thing to do, there's no obvious stopping place. Why not apply every penny of surplus in future years to this noble objective? Conservative think tanks, editorial writers, followers of Ross Perot, Concord Coalitioners, and all other advocates of public austerity and private profligacy will happily slide down this hill.
Saner voices should be clear: public debt is not necessarily bad. Not only may debt occasionally be useful for stabilizing the economy (in the long run, John Maynard Keynes is not dead), but its proceeds might be used in such a way as to hasten economic growth. As the President argued early in his administration (but hasn't since), public investment in education, infrastructure, and basic research are as important to future growth as is private investment. Families and businesses borrow in order to invest all the time. As long as the economy grows faster than the national debt, its exact size isn't worrisome. And that is precisely what has been occurring. In 1997, the federal debt totaled about 50 percent of the nation's gross domestic product (GDP). This year, it will be below that even if we spend every penny of the surplus, and it will continue to drop if the budget is balanced. If we invested the surplus in our people, it would drop even more quickly. Economic growth is the key, and the way to grow faster is to invest—privately and publicly.
I t is worth noting, by the way, that federal investments in education, infrastructure, and research continue to fall behind. [See Dean Baker, "Invest It."] They represented 2.7 percent of GDP in 1981, had fallen to 1.8 percent by the time Ronald Reagan left office in 1988, and then remained flat until 1995, when they began dropping again. The trend is well documented in a table in the back of the annual budget books distributed by the Government Printing Office. Even if enacted, the President's new budget initiatives would notch public investment up only a bit.
The austerity crowd will meet its match in the tax cutters, whose members include most Republicans now holding office or harboring political ambition. Tax cuts are wildly popular, of course, especially among middle- and lower-income Americans whose wages have barely edged upward during this economic boom. "Social Security First" has trumped the Republican tax cutters, temporarily. When the choice is between cutting taxes and saving Social Security, the latter wins. But for the longer term, Republicans have found their platform, if not for 1998 then surely for 2000 and beyond. Now that the budget is balanced, they will continue to clamor to cut taxes, pushing various "flat" variants that are likely to favor the wealthy. "Social Security First" is, at best, a momentary fix. As soon as Social Security is deemed to be out of danger, the tax cutters will compete for floor space with the debt cutters.
Despite the extraordinary surge in the nation's wealth, then, no room has been left for the large unfinished agenda of America. No broad argument has been made for how the nation can afford to accomplish it, even when we can most easily afford to do so. We are facing the millennium without a public philosophy about what we can achieve together in the next century, because the current argument has been framed so narrowly as to exclude any such possibility: we must first save Social Security, then pay down the debt or cut taxes. Yet we can save Social Security, don't need to pay down the debt, can cut taxes on the middle and working classes, and can still afford to do what a great nation must do for all its people.
T his brings me back to my $75 dinner with Bill Gates. Most of the surge in wealth has, of course, gone to people at the top. Professor Edward N. Wolff of New York University, who has made a specialty out of analyzing the Federal Reserve Board's tri-annual Survey of Consumer Finances, has just completed his analysis of the board's 1995 survey—released in July 1997. Wolff found that median wealth (the wealth of the household in the middle of the distribution) was about 10 percent lower in 1995 than in 1983. By contrast, the top 1 percent of families became much wealthier: by 1995 they owned almost 39 percent of the total household wealth of the nation. Excluding the value of homes, they owned 47 percent. The top fifth owned 93 percent.
In the three years since the survey was completed, the stock market has surged 30 percent annually, which suggests that wealth is even more concentrated than it was in 1995. The vast majority of Americans owned little or no stock in 1995 because they didn't have enough income to buy into the market, let alone save. According to the same Federal Reserve survey, the richest 1 percent held half of all outstanding stock and trust equity, almost two-thirds of financial securities, and more than two-thirds of business equity. The top 10 percent owned 82 percent, including indirect ownership through pensions and mutual funds. We can assume that these proportions have remained roughly the same since then, because the median wage has risen only slightly and most Americans still have little or no discretionary savings. (A recent New York Times lead story—"Share of Wealth in Stock Holdings Hits 50-Year High"—was misleading in this respect: it is not that wealth has become more widely "shared," but simply that those who have it are now choosing to put a larger "share" of it into stocks.)
Bill Gates is not quite representative of the richest 1 percent, but the recent accumulation of wealth at the top has few parallels in American history. Perhaps the closest analogies are the Gilded Age and the Roaring Twenties. The rich are paying more taxes than ever before, to be sure, but they are paying less in taxes as a percentage of their total wealth, or even of their total incomes, than at any time in the postwar era. All levels of government have shifted their sources of revenue in recent years from income taxes, property taxes, estate taxes, and taxes on capital gains (all of which tend to be progressive) to payroll taxes and taxes on sales (which tend to be regressive). As a result, the working middle class (families earning $20,000 to $50,000 a year) have been squeezed the hardest. In a real sense, they can't afford to do more.
America can afford to do more, because the rich have grown breathlessly wealthier, and they can afford to do more. A progressive tax on wealth should not be beyond imagination. "Soak the rich!" isn't precisely the banner I would choose, because it connotes blame, and there is no reason to blame anyone for becoming rich. I rather liked Bill Gates in the few moments I talked with him, for the price of $75. And no one would get soaked; this isn't a zero-sum game in which the rich lose and the middle and below win. A better-educated and healthier society is in everyone's interest. Tie a progressive wealth tax to tax cuts for middle- and lower-income earners, to an education trust fund to rebuild schools and attract the very best talent to teaching, to universal health care (with choice of doctor, of course). Perhaps consider a "grubstake" of $25,000 for every young person who finishes high school, to be spent on additional education or invested. The public would get a twofer: an incentive for young people to finish high school, and a whole new generation of capitalists.
There will be doubters, of course, even among loyal American Prospect readers. Impossible, you may say; the wealthy would sooner take their fortunes out of America than be subject to a wealth tax. They will bankroll politicians that oppose it. The right will claim it's confiscatory. The news media will object because their big advertisers will be against it. Middle-income Americans will oppose it because they aspire to become wealthy themselves. No one believes in government anymore anyway. And so on. My retort: Let's try, and see.