The coming Investor revolution. (In Review).
By John Hood
308 pp., Philadelphia, Pa.: Templeton
Foundation Press, 2000
The non-stop expansion of the welfare state during the twentieth century could finally be unraveling under a new force in the twenty-first century. That force is investor politics, according to John Hood, president of the John Locke Foundation, a North Carolina think tank. In his new book appropriately entitled Investor Politics, Hood predicts that the expansion of individual savings accounts to fund not just retirement, but also health care, education, unemployment, and other big government spending areas ,will liberate Americans from dependence on Washington.
Over half of Americans now own corporate stocks through 401(k)s, Individual Retirement Accounts (IRAs), and other channels. This rising investor class, claims Hood, is the starting point for changing the politics of the welfare state.
THE HISTORY OF BIG GOVERNMENT
Hood's book describes the historical growth of a remarkably broad range of federal programs, including Social Security, Medicare, Medicaid, housing programs, education programs, unemployment insurance, and others. Hood does an excellent job of synthesizing a tremendous amount of fact and detail on so many programs, and his book is well worth a read just for his summaries of the pur-pose and functioning of those programs.
The author ties each program into his broader theme of the relationship between savings, investment, and the welfare state. While many of those federal spending programs began in the New Deal, Hood digs further back in history, even prehistory, for the foundations of big government and the centrality of saving to the modern economic system.
Although much of the structure of the modern welfare state was laid in the 1930s, Hood notes that the seeds actually were planted in the late nineteenth century with politicians such as Bismarck seeking a "third way" between socialism and capitalism. Populists and progressives, whose ideas infiltrated both major American political parties, nurtured those seeds in the years prior to the New Deal. In parallel to those developments, the United States was becoming industrialized with the rise of large corporations helping to foster the development of new and innovative financial instruments, and a huge widening and deepening of the publicly traded securities markets.
An important theme woven throughout Hood's discussion of programs for retirement, health, education, housing, and other areas is the distinction between investment and consumption. Government should not penalize investment, as it frequently does under the current income tax. The author notes that, to the extent that each activity represents investment, individuals should be able to take a tax deduction for it and build up assets for the future in a tax-deferred account. Basically, individuals would accumulate an alphabet soup collection of IRA-type accounts to substitute for the current alphabet soup of big government spending programs.
Americans, who have partly built their lives around federal entitlements, could return to self-sufficiency with this new financial investment strategy. And the strategy is not just good economics, writes Hood, but good politics because it will be more effective in undermining the welfare state than the frontal assaults that have been attempted by conservatives and libertarians in recent years. Laying siege to the welfare state and penetrating it from different angles with new savings accounts will work far better than calling for an immediate replacement of the income tax with a flat tax or national retail sales tax, according to the author.
Too dangerous? In making that argument, Hood raises important issues with regard to political strategy. But complicating the tax code with a slew of new program-specific savings accounts could backfire. Anyone who has struggled with complicated rules on an MSA or IRA will question whether the American public would have the patience to juggle half a dozen such vehicles, each with different income limits, contribution limits, and withdrawal restrictions.
As each particular account gains a political constituency, it will become more difficult to enact overall reforms and simplification of the tax code. And surely the new vehicles would give Congress more power to play favorites with important political groups, each claiming that its activity should be classified as an "investment" deserving of a special savings account. Savings accounts for zero-emissions electric cars, anyone?
Perhaps a better solution would be To have a single tax-favored accout with very liberal rules. Such accounts would not only be simpler, but their greater flexibility would encourage more savings.
Hood has delivered a thoughtful and very engaging text that will help move the debate from the last century's entitlement-dependent view of society to the country's Jeffersonian roots of self-reliance. In this century, as the author notes, growing financial sophistication converging with an impending demographic crisis caused by retirement of the body boomers is offering us a way to avoid the looming train wreck of Social Security. We should look at that convergence as an opportunity to create Social Security private accounts and continue expanding the investor class by further reductions in the tax penalty on saving.
Chris Edwards is the director of fiscal policy studies at the Cato Institute. He can be contacted by e-mail firstname.lastname@example.org.
Tad DeHaven is a fiscal policy analyst at the Cato Institute. He can be contacted by e-mail at email@example.com.