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July 05, 2005

On the "Ownership Society"

Mark Schmitt's view of economic security:

TPMCafe || Politics, Ideas & Lots Of Caffeine: Beyond Mush and Muddle By Mark Schmitt: I don't want to limit the question to Social Security or retirement security. When I say that we need a broader vision of economic security, I mean the whole system of social insurance that can protect working Americans from the sharpest edges of capitalism, without impeding the dynamism of capitalism. Even if you wouldn't change anything about the specific program known as Social Security (and I'll come back to that), there are more risks than just old-age poverty.

To take an example of a program that should be updated for the present, consider Unemployment Insurance. UI provides 26 weeks of income support to a very limited number of established workers. Why? Because it was designed for a very particular economic situation: the U.S. manufacturing sector of the 1950s....

The cornerstone of an economic security platform would be a system that protects you when you lose your job for any reason -- technology, trade, business cycle, outsourcing, even incompetence -- by which I mean not only your boss's incompetence, but the possibility that you weren't adequately trained for the demands of the job. It would involve income support (like UI and trade adjustment), but also opportunities for retraining, and it might be partially based in private accounts, partly in a competitive system that rewards the companies or community colleges that were most successful at placing people back in the workforce, and partly in a traditional social insurance model....

I would retain the core social insurance function, virtually unchanged... but I would develop a private account system, which would either be an add-on, or could serve to finance early retirement, at 62, on s simpler version of the model proposed by my colleagues Phil Longman and Ted Halstead, so that people could use an account either to retire early or to supplement their later income.... But that narrow policy proposal raises the question: Why might some form of private account be appropriate to the current circumstances, when it wouldn't have been in an earlier decade? The answer, I think, lies in the tremendous imbalance between the returns to capital in the current economy, and the returns to labor. One way to boost the security of individual workers is to help them share in those returns to capital....

[But] why shouldn't labor get its reward, even its reward at the 1970 level? Are private accounts and "ownership" just a way of covering up the fact that only "ownership" currently captures any of the value of the productivity gains in the economy? Would we be better off forcing some of the returns to shift to labor, which would lead to policies such as living wage (e.g. $10/hour instead of the shocking level of $5.15), universal health care, and real pensions?

These are real alternatives, not "mush and muddle." But they also imply choices -- one approach is confiscatory, the other probably more regulatory. Either one can form the basis for a new vision, but the choice cannot be avoided.

Let me briefly comment on this--particularly on Mark Schmitt's apparent belief that boosting "ownership" through having wage-earners save more is a way to a less unequal distribution of income.

I think Mark is wrong.

I don't think that an "ownership society" in any form is a way of equalizing the distribution of income. Capital income is currently very high, yes. But asset prices are also currently very, very high. Buy capital, and you get expected returns that are lower looking forward than they have been on the past. You see, the value of the large future income streams flowing to capital that people anticipate are already largely incorporated into the prices of the assets you buy with your "ownership society" money: there is (probably) some money on the table--the poorer half of Americans should have some stock-market investments, and right now they don't--but there's not enough money on the table to shift the income distribution in anything but the smallest ways.

In my view, the answer to Mark's question, "Why weren't [add on] private accounts appropriate in earlier decades?" is simple: they were appropriate. They would have been a good idea. Nothing has changed to boost the rewards to savings that has changed whether add-on private accounts are a good idea or not.

Posted by DeLong at July 5, 2005 05:42 PM