Comment March 2005

American Casino

The promise and perils of Bush's "ownership society"

When they arrived in the New World, in 1620, the Pilgrims of Plymouth Colony tried communal ownership of the land. It didn't work: crops were not well cared for and the result was a severe food shortage. So in 1623 each family was given a private plot of land along with responsibility for maintaining it. This worked much better. As William Bradford, the second governor of Plymouth Colony, recounted in Of Plymouth Plantation, people worked harder when they had private plots, and the crop yield was much higher. The moral of this story—at least according to the proponents of private ownership who like to quote from it—is simple: people take better care of things they own individually than of things they hold in common.

The many advantages of private ownership have been recognized for millennia (Aristotle described some of them) and are supported by modern social science. For instance, a 1999 study published in the Journal of Urban Economics found that even after income, marital status, and education level are controlled for, people who own their own homes are more likely than those who don't to be good citizens (as gauged by membership in nonprofessional organizations, knowledge of local politics, voting in elections, and attempts to solve local problems). Basic economic theory holds that encouraging more people to own things—whether land, homes, or equity shares in private companies—produces better economic incentives, increased motivation to work creatively, a deeper sense of citizenship, and a stronger society.

Herein lies the philosophy behind George W. Bush's proposed "ownership society." Over the past few years President Bush has proposed to let people "own" their Social Security contributions, in the form of personal retirement accounts; "own" their health care, through portable health savings accounts; and own their homes in greater numbers, through bigger housing subsidies. Individually, each of these plans has something to recommend it; collectively, they could encourage saving (a worthy economic goal) and provide people with more choices (a worthy political one).

It's easy to forget, however, that such plans as those Bush proposes don't just encourage personal ownership—they also increase personal risk. And the Bush administration has chosen a particularly infelicitous moment to be piling additional financial risk onto individual citizens—because economic life in America is already becoming inherently riskier.

How so? For one thing, the job market is growing increasingly volatile. The information revolution is constantly accelerating, leading to rapid changes in business practices. (Globalization is one major consequence of the information revolution; the replacement of human beings by machines is another.) The speed of economic transformation means that career trajectories are less predictable than they used to be, while swings in fortune over the course of one's working life are greater. At the same time, technology seems to be contributing to an economic winner-take-all effect, in which a tiny fraction of the population earns most of the money—and a large fraction doesn't earn very much at all.

It's not just career trajectories that have become more unpredictable. Over the past decade or so American stocks, commodities, and housing markets have also become generally more volatile. The surge in the stock market from 1995 to 2000 marked the biggest five-year percentage increase since the rebound from the Crash of 1929. And over the past five years the average price of single-family homes has risen more in percentage terms than it has over any comparable period since the late 1940s, when veterans returning from World War II fueled a boom. The greater volatility over much of the past decade reflects Americans' growing appetite for speculative investments: stimulated by widespread financial reporting, many Americans worry more than they did before the recent booms about missing out on the opportunity to profit from rising markets; they jump in and out of the stock market with much greater abandon than before. For the foreseeable future this will continue to produce big, sudden swings in the prices of stocks, and perhaps of houses.

Presented by

Robert J. Shiller is a professor of economics at Yale University. The second edition of his book Irrational Exuberance will be published in April.

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