Here’s an important new idea for helping the bottom half share in the nation’s prosperity. Spread capitalism by spreading capital. Rather than just redistribute income to people after they’ve become poor, give them capital up front to build their fortunes. Give a young family a starter nest egg. Give a young adult a capital stake.
This idea quietly underlies Bill Clinton’s newly proposed universal savings accounts. The plan is currently being touted as part of social security reform. But it’s not really about social security. It’s about redistributing capital assets to lower-income families.
Here’s how it would work. Families earning under $40,000 would get an annual $600 tax credit, plus another $700 if they deposit $700 of their own money into their account. This adds up to an annual nest egg of $2,000. If they continue doing the same thing for 40 years, their nest egg, assuming a modest 5 per cent rate of return, would accumulate into a giant brontosaurus egg of over $250,000. Higher-income families would get a smaller subsidy. Total cost to taxpayers: about $30 billion a year, most of which would go to poorer families.
Or consider Senator Bob Kerrey’s Kid Save. Under this plan, the government would give every newborn a $1,000 savings account, to which $500 would be added every year until the child’s fifth birthday. The money accumulates and the interest compounds until the child reaches 21, and – hey presto! – the kid has a cool $20,000 to start his or her adult life. The tab: about $15 billion a year.
If neither of these is ambitious enough for you, here’s another, 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 gets $80,000 (just under £50,000), to do with as he or she sees fit. The cost is $255 billion a year – borne either through mandatory payback of the original stake (plus interest) at death or by an annual 2 per cent wealth tax on the wealthiest 40 per cent of Americans.
It’s unlikely that any of these schemes will see the light of day any time soon. But what’s important here is the big idea common to all of them: redistribute capital.
Big ideas like this are significant because they can reframe the public debate. They change the prevailing assumptions. Eventually they can change the course of the nation.
So why the buzz now? Three reasons. First, it’s 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 American expansion of the 1990s has done much to reverse the long-term decline in real incomes of the bottom third. Those just above them haven’t gained any ground.
The median American family 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 very poor have bounced up a bit since 1996, both because the minimum wage was raised and because the labour market became so tight that they’ve had an easy time finding jobs. But that bounce was from a long way down, so they’re still very poor. And when the economy cools, the slide is likely to 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 the US spends every year on public schools were perfectly utilised, and children from poorer homes were learning like mad, they’d still start off their adult lives at a severe financial disadvantage. They would have a hard time getting a university education or buying a first home.
Furthermore it’s become clear that society cannot rely on direct handouts and income transfers to do the job. They have all sorts of negative side effects, such as dependency. And there’s no political will to carry them out on a large scale. Trying to redistribute income from the relatively richer to the relatively poorer people through specific federal programmes funded by annual appropriations has become next to impossible.
The second reason for the new conversation is that capital assets – rather than income – are 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 homes. The boom may end tomorrow. But it’s been an amazing ride, and it can’t help but affect how people think about the public interest, as well as personal gain.
To date, most Americans haven’t got much out of this capital boom, however, because most don’t have much capital. While almost half of American families nowadays own some shares of stock, 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 of them own a home, which is usually heavily mortgaged. The typical young family in the bottom half of 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 per cent of Americans have received 85 per cent of Wall Street’s gains since then. The wealthiest 1 per cent has got 40 per cent of them. Even before the increase 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 per cent of American households.
Even if 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 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 civilisation. And thanks to the “stepped-up-basis-at-death” tax rule, these assets will arrive free of capital-gains taxes.
The tax favours don’t end there. Those who have earned enough to be able to invest in this buoyant capital market also profit from rules allowing them to defer income 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 goes to families earning more than $100,000 a year. Only 7 per cent of these benefits go to families earning $50,000 or less.
Current tax law is lifting America’s wealthy even higher. Hence the case for allowing the rest of America on to the lift, too. Whether it’s government-subsidised universal savings accounts for Americans of modest means, or a scheme 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 we can afford to do something like this. The US government’s budget surpluses now extend as far as the eye can see. President Clinton wants to fund his plan out of them. Senator Kerrey’s Kid Save would cost half as much. The price tag on the Ackerman-Alstott proposal is higher – but with asset values of stocks, homes and the rest heading into the stratosphere, their plan to fund it out of a 2 per cent wealth tax on the wealthiest doesn’t seem far-fetched.
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 because citizens in different economic positions are likely to be affected by these decisions in very different ways.
Politics can only become more fractious; common purpose and identity will be eroded. Those who already worry about the fragmenting of culture and the fading of civility will have far greater cause for concern. A polarised 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.
Will any of this new conversation be part of the upcoming US presidential election? Don’t hold your breath. Candidates watch the polls, and the polls don’t yet reflect the new conversation, because it’s new. But there’s at least an outside chance of an opening for some bold ideas about something truly important.
The author, US secretary of labour in the first Clinton administration, is professor of social and economic policy at Brandeis University