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March 28, 2006

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American Stakeholders

Three years ago, in a spectacular issue of The Atlantic Monthly (“The Real State of the Union,” done in partnership with the New America Foundation), Ray Boshara wrote a fascinating proposal. What if we gave $6,000 to every American citizen at birth, and invested that money in a safe portfolio until the citizen grew old enough to use it?

Wealth inequality in the US, Boshara pointed out, is much greater even than income inequality:

By the close of the 1990s the United States had become more unequal than at any other time since the dawn of the New Deal—indeed, it was the most unequal society in the advanced democratic world. The top 20 percent of households earned 56 percent of the nation’s income and commanded an astonishing 83 percent of the nation’s wealth. Even more striking, the top one percent earned about 17 percent of national income and owned 38 percent of national wealth. In nearly two decades the number of millionaires had doubled, to 4.8 million, and the number of “deca-millionaires”—those worth at least $10 million—had more than tripled, from 66,500 to 239,400.

And the wealth gap is even more significant than the income gap, Boshara argued. Wealth enables financial security, which promotes planning for the future. Wealth, like debt, is self-replicating, Boshara said. “Compound interest turns wealth into more wealth and debt into more debt. Other things being equal, those with interest-bearing savings accounts will end up richer after a year, and those who must pay interest on credit-card or consumer household debt will end up poorer.”

And the US government already does a hefty amount of wealth distribution, Boshara explained, only 90 percent of it is reserved for the 55 percent of Americans who are already wealthiest. For Americans who already own homes and businesses and retirement accounts, the government provides a number of systems to build on these assets. But for Americans without these things, the government provides only income assistance, thus exacerbating the wealth gap.

So, calling to mind the great American wealth distribution schemes of the past — the Homestead Act and the GI Bill — Boshara proposed his $6,000-for-everybody plan, and even gave it a name ready for prime time — the American Stakeholder Act.

Boshara has retooled his aims some since 2003. Over at AssetBuilding.org, he’s collected a wealth of resources and information on the idea of wealth creation for the poor. Boshara and the New America Foundation crew have thrown their support behind some more incremental approaches to asset-building, like the ASPIRE Act, currently wending its way through Congress (with Bipartisan Support™!). Under this bill, the government would loan every American child $500 to start a savings account, to which they could add up to $1,000 a year. The person would have to start paying off the initial $500 loan once she turned 30.

Britain’s already started doing a version of this. And in Singapore, you’re required to have a savings account. It’s called the Central Provident Fund.

Clearly ASPIRE is no American Stakeholder Act. But the New America crew hasn’t totally abandoned the $6,000 idea.

I was reminded of Boshara’s article when I read this week’s Wall Street Journal piece (by Bell Curve co-author Charles Murray) arguing for an annual government payout of $10,000 to every American citizen 21 and over, financed by ending all federal welfare programs. A fifth of that would go into a retirement fund. $3,000 would pay for health insurance. And the last $5,000 is presumably for discretionary spending. To find out, I guess we have to read Murray’s new book. You might start by reading this interview.

Murray’s idea seems more sweeping and ambitious, but I prefer Boshara’s focus — the idea that, from birth, every American is given something to tend. I’m guessing Murray’s plan presupposes that most individuals will be spending that last $5,000 every year. In any event, the poorer the individual, the higher the likelihood that the extra money won’t go towards wealth acquisition, but towards staying a bit higher afloat. The annual $2,000 retirement contribution in Murray’s plan mitigates this a lot, though. I don’t know. Snarketeers, your thoughts?

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Posted March 28, 2006 at 5:33 | Comments (5) | Permasnark
File under: Snarkpolicy

Comments

First of all, as an overaching statement: inequality doesn't matter, poverty does. The Cato article linked from here earlier does into a large discussion about that.

"But for Americans without these things [homes, businesses, et al], the government provides only income assistance, thus exacerbating the wealth gap."

The government does not provide the assistance, the taxpayers (i.e. the people with the "things") do. Also, it doesn't exacerbate the wealth gap: having a supplement to income (obviously) reduces the gap in wealth--- higher incomes do lead to higher wealth. Perhaps I've misunderstood Boshara's position as represented here (I can't get the original article, there's a problem at the Atlantic's website). Perhaps what he meant is the amount of government transfers to the wealthy exceeds that to the poor? But even that is prima facie false since again, the wealthy are the ones who are funding the government to begin with.

I'd like to go into more detail about these ideas later, probably as a post on my own blog. But I like the idea as Murray phrases it in the linked interview: if you are going to transfer money to people, it is better to just give them the cash than set up a huge bureaucracy.

The biggest problem I see with Murray's scheme is that it's politically and practically unworkable for the elderly and aging, as well as the already-ill. I'll assume for the purposes of the argument that a health insurance company will give a healthy 21-year-old lifetime insurance for $3000/year in premiums. But what if he has leukemia? Likewise, if you made a 65-year-old with diabetes and high blood pressure start from scratch, no insurance company would touch him for that figure. And how are kids covered? Or are they at all?

Also, I'm not totally convinced of the wisdom of the market when it comes to delivering these kinds of goods. If the $3000/year per person really would pay for health insurance for everybody, and the $2000/year would pay for retirement (at least a chunk of it), why not keep the two government programs we have that work reasonably well -- Medicare and Social Security -- and expand or adjust them as needed?

Actually, Social Security probably wouldn't need to be adjusted too much. Is the $2000 on top of Social Security? Do the disabled or orphans get any benefit from this scheme?

I might grant PON's point that it's better to give people money directly than to set up a huge bureaucracy. But this isn't giving people money directly -- it's giving them money, then telling them that they have to spend it on health insurance. What qualifies as health insurance? Could I set up an HMO myself? Presumably not, but there'd have to be regulations or widespread fraud and abuse. What happens when an HMO collects premiums for years and then goes under? We'd have to bail them out, or there'd be a lot of uninsured taxpayers. There'd need to be a regulatory commission, monitors. And whatever flexibility the market does have would be gone -- there'd only be one kind of health insurance, the $3000 premium for life, plus maybe a handful of options for those wanting to pay a little more. Their whole business model of actuarial models and risk/reward would collapse -- the only way they could make money is by raising premiums. Of course, in five years, the health insurance companies would come back to Congress and say, "No, we can only do it for $5,000 per year..." then $6,000.... then $10,000... Meanwhile, their own bureaucracies, and especially their marketing departments, would explode. You've given every American $3000 and told them they must spend it on health care. Is there any comparable spending mandate in American life?

What counts as a welfare program for Murray? LIHEAP? Do the Pell Grants? Does Social Security? What exactly are we giving up?

First of all, as an overaching statement: inequality doesn't matter, poverty does. The Cato article linked from here earlier does into a large discussion about that.

I took a different conclusion from the Cato roundtable: not that inequality doesn't matter, but that "inequality" is a rather broad term to describe fairly discrete concepts. And some would even argue -- in the pages of this week's New Yorker -- that inequality is the most useful measure of American poverty.

Also, it doesn't exacerbate the wealth gap: having a supplement to income (obviously) reduces the gap in wealth--- higher incomes do lead to higher wealth.

I oversimplified Boshara's argument. He points out that because wealth is self-replicating, those who begin with more wealth are already in a position to gain yet more of it. That's one of the sources of the gap. He then points out that 90% of the government's wealth-building programs are targeted to those who are already wealthy, which is what exacerbates the gap.

And actually, the part of Murray's argument that resonates least with me is the "eliminate the bureaucracy, give folks the money, and let the free market take over" shtick. As you mention, Tim, especially when it comes to health care, government bureaucracy can beat the private sector on efficiency (even by the industry's own calculations). I think his libertarian bona fides keep Murray from advocating for all-out single-payer, but I'd expect that to be the functional outcome of this mandatory $3,000 set-aside.

I almost feel like there's a long-tail argument to be made here somewhere. Wealth-building systems, public and private, serve those already wealthy because that's where 80% of the wealth is. (Or, you know, 99%, as the case may be.) It's a classic power-law distribution... the signature inequality of so many systems, it seems.

So okay -- even if we're not concerned with inequality per se, maybe we should at least recognize the tremendous opportunity present in the long tail of citizen wealth, just as retailers have recognized the opportunity present in the long tail of consumer demand.

Actually I have no idea what that means -- it just occurred to me and I wanted to put it out there. Maybe someone else can say something smarter about it.

Tim, I agree with what you are saying about the problems with implementing a $x/person social welfare plan. I just think that on balance, the problems in implementing a large state bureaucracy to award benefits is prone to even larger systemic problems.

90% of the government's wealth-building programs are targeted to those who are already wealthy, which is what exacerbates the gap
I still haven't been able to get into the website to read the specifics. As I said before, since the government is funded by the wealthy, I don't see how this could exacerbate the wealth gap.

Yeah, the Cato roundtable goes down a bunch of different streets. One of the essays talks about how "inequality doens't matter, poverty does" and that was what I was trying to reference.

About the "long tail" of wealth, I know a few instances. For example, Sharebuilder.com attempts to serve people with small amounts of capital. But I think for those in the long tail of the wealth distribution, they are better served by increases in their income or reductions in their expenses rather than additional services targeted at their (small) level of wealth.

hmmmmm... but perhaps I'm shooting before I aim here... Many poor neighborhoods don't have banks. And many Americans can't figure out their credit card, or why leasing is so much worse than buying. Services that address the problems of education and access could help.

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