Kids as Capital

When we grow old, we do not depend directly on our own children. Instead, we depend on other people's children.

By Jonathan Rauch

Americans like to think of their children as a source of pleasure rather than profit. Recently, when I asked people I know why they had had children, they talked about family values, about the kind of people they want to be, about the kind of world they want to leave behind. The one reason for having children that never came up was economic need.

This is a curious thing, when you stop to think about it. Not so many generations ago people had children because they needed them. In those simpler, more agrarian days, a child was an extra set of hands to help support the family. And a child was insurance against being left unsupported and indigent in one's dotage. Earlier cultures didn't have the luxury of thinking of children as strictly a nonprofit venture. And the truth is, we don't either. Socializing many of the costs of old age let us think for a while that we had transcended the ancient economics of family. Now it seems that we were kidding ourselves.

Children are very expensive--in terms of time, career, opportunities forgone, and cash. Thomas J. Espenshade, of Princeton University, has calculated that a middle-class family with two children is likely to spend about $100,000 to rear each child to age eighteen. And because people today are less likely to have children and the ones who do have children are having fewer of them, the American fertility rate is barely half what it was thirty years ago, when the Baby Boom was at its peak. Of the children that we do have, a higher proportion have been impoverished in this decade than at any other time since 1965: as of 1987 one in five American children lived in a poor family--this when the economy was strong. Forty-six percent of all black children lived in poverty in 1987; so did 40 percent of all Hispanic children. In New York City 38 percent of the children are poor. Why all this matters to the middle class may not be immediately obvious--which is just the problem. If boys and girls grew up to become industrial machinery instead of men and women, it would be easy to see that everybody had a stake in other peoples children.

"Kids are a form of capital," David P. Hale. the chief economist of Kemper Financial Services, in Chicago, told me recently, when I asked him what was behind all the talk about "investing" in children "There was always an intellectual camp running around saying these things. But suddenly the intellectual camp has a following, out of need." As the sparse generation of the Baby Bust enters the work force, business is discovering that the supply of qualified young workers is tightening.

This same sparse generation will have to undertake the potentially staggering burden, starting early in the next century, of paying the public costs of their parents' dependency. Inexorably, the intergenerational circle closes. Here is a question that every working-age American might do well to ask himself; If we have fewer kids, and if more of the ones we do have are slouching toward adulthood from poverty then how generously am I going to be supported in my old age?

The past half century has established as a basic principle of American life that we will pay for other people's retirements. Today, as we face the need to nurture our work force and safeguard our retirements, the question forcing its way onto the agenda is how much more we will pay for other people's children. More out of necessity than out of choice, a new redistributional politics is emerging--a politics of redistribution from the childless to the child-rearing.

It is no accident that George Bush, a pro-business, more or less conservative Republican, has proposed a European-style children's allowance. The proposal, a per-child federal subsidy for parents, would help only the poorest and is modest in scale--so modest that many liberals sneer at it, perhaps unwisely. A lot of the critics miss the point. Conceptually speaking, the Bush children's tax credit is a political preview of the next few decades.

THE FUTURE NEEDS KIDS

The national "family," having had fewer children, is going to find early in the next century that its labor force has stopped growing. New entrants into the work force are already becoming a scarce commodity, at least relative to what the country has been accustomed to. Projections are showing that in the 1990s the U.S. labor force will grow more slowly than it has at any time since the 1930s. Fully a third of the new entrants into the work force between now and the turn of the century will be members of minority groups. Those future minority workers are today's minority children--among whom the rates of poverty and illiteracy are highest. On average, poor children grow up to make poor workers. Poor workers generate lower standards of living for society--and for their old parents. The primordial interdependence of generations ultimately makes itself felt, albeit at the level of the national unit rather than the family unit.

"The two ways that a society provides for its future," Frank Levy, an economist at the University of Maryland, told me, "are its level of physical capital accumulation"--that is, the number and quality of its machines, factories, roads, and so on--"and the number and the quality of its kids. In both cases, you can cheat on the accumulation and, by doing that, raise your current consumption. But eventually it comes back to haunt you."

Right now about one in eight Americans is sixty-five or older. That will start changing fast, as the Baby Boom generation marches in unprecedented numbers across the line between work and retirement. According to projections by the Census Bureau, by late in the 2020s one in five Americans will be sixty-five or older. As the proportion of dependent elderly people in the adult population rises, the number of workers supporting each of them must fall. And that is exactly what is going to happen. The number of working-age people on hand to support each elderly person will drop by almost half, from almost five in 1990 to about two and a half by 2030 or so.

This is a retirement burden whose like no generation of American workers has yet borne. John L. Palmer, of Syracuse University, has figured that the federal tax take will have to rise by an amount equivalent to at least five percent of the gross national product, and quite possibly a good bit more, to cover the health and pension costs of the Baby Roomers' retirement. Today the government takes in about 19 percent of the GNP in taxes. So we are talking about at least a 25 percent federal tax increase.

Economically the burden is probably manageable. The important question is whether it is politically manageable. The country is already moving to raise the retirement age (thus increasing the worker-to-retiree ratio), and it's likely to have to reduce benefits to the elderly somewhat. But cutting benefits is politically inflammatory and, for those affected, personally wrenching. We can ease the need to take either step by making the workers we have more productive, getting more workers, or some combination of the two. For instance, we could save and invest more. That should boost the future productivity of the economy, making the retirement bill more affordable. Or we could import workers. Immigration, which brings new talent and muscle and youth to an aging population. is one of our richest resources--potentially a major advantage over Japan and the many European countries, like West Germany and France, that are aging even more rapidly than we are and that lack our immigrant tradition.

Unfortunately, in a population as big as ours immigration can do only so much, and it is no substitute for seeing that the native labor force is adequately skilled. As for saving, the trouble is that we're saving less than we used to, not more, as our big budget deficits and low personal savings rates make clear. Besides, the better machines and equipment that we would presumably use our savings to invest in do not look after themselves; they tend to require better workers to run them. Inevitably, then, the discussion comes around to having more children or more productive children or both--taking steps to replenish the child-capital stock, as it were.

POLITICIANS NEED KIDS

Many countries have long worried explicitly about the number and quality of their children; among the industrial countries, indeed, the United States is an oddity for its lack of an explicit or coherent family policy. Most of our allies and competitors run big redistribution programs to transfer money from people who don't have children to people who do. In some cases the rationale is out-and-out pronatalism: the idea is to get people to have more children, usually for cultural reasons even more than economic ones. France, in particular, has a long tradition of concern about the birth rate. Valery Giscard d'Estaing when he was the French President, once said, "A society no longer capable of assuring the replacement of generations is a condemned society." Many of the Western European programs that transfer money to families with children began as attempts to buy more children, although that goal has often faded away over time and been supplanted by social-welfare concerns.

Eastern Europe, in contrast, remains explicitly pro-baby. Rumania doubled its fertility rate practically overnight after it took measures, in 1966, that sharply curtailed the availability of abortion, divorce, and contraception. (As it turned out, much of the effect was temporary.) Hungary, East Germany, Bulgaria, and Czechoslovakia took the less intrusive, but very expensive, route of providing big economic inducements to parents--tax incentives, birth payments, preferential housing programs, paid maternity leave, and so on. According to one estimate, Hungary's inducement package paid more than a third of the costs of rearing children.

Scholars who have examined incentive-based pronatalist programs generally conclude that over the long run they raise the birth rate very little, if at all--no doubt because government inducements of any practical size are overwhelmed by the total costs of rearing children and by considerations of life-style. (How much would the government have to pay you to have a child? Probably more than it could afford to.) "You get a short-run effect mainly in the timing of births," Thomas Espenshade, of Princeton, told me. "The lesson from Europe on these questions has been that governments have a difficult time buying babies, unless they're willing to spend several times more than they've been willing to spend to this point." Fertility rates in Eastern Europe are generally higher than those in noncommunist Europe, but whether that is owing to pronatalism or something else is a mystery.

We Americans come from a different tradition. People here have always viewed the size of their families as a matter of personal rather than public concern. Yet even here some people are calling for outright pronatalism. One of them is Ben J. Wattenberg, of the American Enterprise Institute, a center right think tank in Washington, D.C. Citing Census Bureau projections that show the U.S. population ceasing to grow by the decade of the 2030s, Wattenberg thinks the government should offer big- very big--per-child tax inducements to parents. "The only pronatalist policy that has any chance of working is serious dollars," he said. He is the first to admit that such a program might not get the birth rate up much. But even if it didn't, he pointed out, it would help solve the child-poverty problem. If you want to say what's the biggest problem in America, and you want to put it in two very short words, it's poor kids," Wattenberg said. "The question is, Can you make it easier for young couples who want to have children to be able to have children? You have half a century where the basic drive of this government--properly, in my judgment--was a redistribution of wealth from rich to poor. That isn't going to wash politically anymore. But suppose you say, instead of redistributing from rich to poor, 'Hey, I've got a pro-family program that redistributes money from the childless to the child-rearing.'" That kind of program could get liberals and conservatives on the same side, he said. "It's pro-family and it's pro-kids, and it's pro-poor-kids."

He has a point. The way to get people to have more children is generally the same as the way to relieve poverty among children, which is generally the same as the way to help struggling young middle-class parents; transfer money to families with children. That fact helps account for the broad support in European countries for family-benefits programs. More than sixty countries, including most of the industrial ones, have what are known as family allowances or children's allowances, which typically pay families for each child an equivalent of five to ten percent of the average wage. The benefits may or may not be taxed, but they are generally universally available.

Furthermore, well over a hundred countries, including Canada and countries throughout Europe, give one or both parents cash and time off from work when they have a new baby--typically about four months' paid leave. It's also common for countries to provide preschool or other child care for children three or older; France, Sweden, Italy, West Germany, Finland, Denmark, the Netherlands, Israel, and a number of Eastern European countries do that. All in all, America's transfer payments to children, measured as a percentage of the national output are less than half those of, for instance, Sweden, the United Kingdom, Australia, and Canada.

Generous family benefits have not created any sort of baby boom overseas. But they certainly help account for the fact that child-poverty rates are much lower abroad than here. I asked Sheila B. Kamerman, of the Columbia University School of Social Work, why public benefits for families with children are so generous in Europe and elsewhere. "The concept," she replied, "is that people with children are making a contribution to society, in terms of producing the future labor force and the quality of that labor force, the quality of citizens--even, if you will, financing the social security system. Children are viewed as a social resource." This is less true in the United States. "The only way families with children have sustained their income in the last fifteen years has been with increased labor-force participation by mothers," Kamerman said. "Families have been putting more and more effort into rearing children, and it doesn't seem to be recognized. And the society is very dependent on those children, ultimately."

In Europe the wide appeal of pro-family policies rests on a convergence of political interests. The right likes programs that support bigger families; the left likes programs that help prevent child poverty. "We may be moving in a similar direction," Kamerman observed. Political pressure is mounting to socialize more of the costs of raising kids--that is, to spread the burden of child-rearing.

BUSINESS NEEDS KIDS

In Washington you can hardly turn around these days without hearing about children's and family issues. Liberals are horrified at the high rate of poverty among children, and they understand that the best way to get money to needy families is to point out that these families have needy children. The right, too, is fighting for the pro-family banner. Social conservatives have been worrying for some time about economic and social pressures on the "traditional" family. They are pushing initiatives to come to families' aid. So, it seems, is almost everyone else. You can practically drown under the waves of press conferences and legislative proposals and speeches on children and families.

The social activists have a new and important ally. "In the seventies," Frank Levy, of the University of Maryland, said, "corporations had workers coming out of their ears, so they didn't have to worry about the quality of the work force. They could just discard what they couldn't use. But once you have the labor force growing slowly and you start bumping into scarcity, then you have to assess the quality of the whole work force, because you can't just throw away the bottom quarter or twenty percent. Then you realize that we're all in this together."

Today business is making contact with the sparse generation and finding it lacking. Alan Magazine, the president of the Council on Competitiveness, a Washington-based group whose leadership includes representatives of business, labor, and education, remarked in an interview with me, "We have, in a sense, a ticking time bomb that can't be ignored anymore. Some people have been saying that for years, but now people in the corporations are really seeing it. They're seeing it in the kinds of people they're hiring, the amount of money they have to spend for basic learning to get people up to a level that they can do even menial jobs; they're seeing it in the results of the tests that they give hundreds of people for minimum-wage jobs, and the numbers of people who actually pass those tests."

The past few years have witnessed a redoubling of business's interest in issues relating to children and youth--above all, education, but also day care, child poverty, and so on. When I asked Walter B. Wriston, a former chairman of Citicorp, what accounted for this, he replied flatly, "The reason they're interested in it is, like anybody, self-interest. It isn't that people are more or less sensitive to education; it's that the realization grows that when a college freshman can't pick out the United States on a map of the world, we've got a problem."

It is no coincidence that pro-business Republicans in Washington are starting to get interested in social issues--not just as "fairness" issues, which Republicans regard as belonging to Democrats, but as "productivity" issues, which Republicans view as their specialty. When business talks, Republicans listen. One morning in his office late last year, Senator Pete Domenici--a conservative, pro-business, balance-the-budget Republican who represents New Mexico--startled me by saying that it's time for the federal government to mount a campaign against what he called "socio economic drags": the effects of undereducation, drugs, and poverty on the children of the inner cities. "I think these are very, very dangerous things for our economic productivity," he said. "They're not just social issues." We're only going to be hearing more of this kind of talk.

COMMON GROUND?

Businesses can attest to the fact that transferring resources to families with children doesn't necessarily involve government. Corporations are finding themselves providing more parental-support services to their workers. They have to. Employees with day-care problems lose productive hours, and so the number of companies in this country providing some sort of day-care help has risen dramatically in recent years. A mother who has a premature baby lands her company (if it provides health-care benefits) with big hospital bills, and so companies have started to provide maternal education programs. New parents need time off from work, and so a growing number of companies, especially large ones, provide paid parental leave. All these services are expensive. Consumers, stockholders, and childless employees pay.

Many liberals like the idea of requiring businesses to assume more of the costs of children--for instance, they tend to favor legislation requiring companies to provide their workers with some form of maternity leave. Conservatives abhor that approach, although they usually aren't quick to suggest an alternative. That is not the only difference between the left and the right. Liberals, who seek to remove obstacles to women's entering the work force, want the government to provide day-care services for parents. Conservatives, many of whom would prefer that women care for their kids themselves, would rather just give parents money (which, in essence, is the strategy of Bush's proposed children's tax credit).

Yet there is much common ground. I recently went to talk to Gary Bauer, the president of the Family Research Council of America, a conservative think tank on family policy and social values. Bauer was President Reagan's domestic-policy adviser for two years, and was known as one of the administration's hard-core social conservatives. When I arrived at his office, the first thing I picked up was a newsletter calling on the federal government to "offer assistance to first-time home buyers." "Home ownership," it complained, "is financially beyond the reach of many young families," and "such families should not have to choose between adopting a two career lifestyle or remaining perpetually propertyless." This is the kind of conservatism that liberal Democrats, who are the long-standing champions of government help for the middle class, ought to be able to cut a deal with.

Bauer told me that an important strain of American conservatism has long focused on families, and on the stresses they encounter in trying to meet their responsibilities. "One of the things that astounded me when I was in the administration," he said, "was that from the end of World War Two to the present, the only group in society that really suffered a major increase in taxes, after adjusting for inflation and so on, was families with children"--which, he said, have taken an "incredible hit." In particular, the tax code's personal exemption is the main tax break for dependents. It allows you to subtract from your family's taxable income a certain amount per family member (now $2,000). In 1948 the exemption was high enough that a typical family with three or more children paid virtually no federal income taxes. Today the personal exemption has been so corroded by inflation that it would have to be more than tripled in order to shield from taxation as large a share of families' income as it did in 1948.

Bauer's group, like many conservative organizations, favors greatly increasing the personal tax exemption, a step that, Bauer argues, would help all families with children, whether the woman chose to stay home or to work. I asked Bauer about per-child tax credits of the sort that many other countries have. "There's some support in the conservative community for the child-allowance approach," he said; but his group is still just considering it.

Never underestimate the ability of liberals and conservatives to overcome their agreements and argue to a standstill. There are profound differences both within and between the left and the right over who should get relief from the high cost of kids (two-earner families or single-earner families or all families? everybody or just the poor?) and in what form relief should be provided (tax credits? tax exemptions? subsidized day care? mandated benefits for employees? cash?). "Both sides have philosophical approaches here that neither wants to concede," Bauer said. "I think there may be an inclination for gridlock for a while longer."

But something will give. Unrest in the middle class will see to that. Today almost two thirds of women with children--and well over half of married women with children under six--are in the work force, whether out of choice or out of necessity (the comparable figures in 1960 were 30 percent and less than 70 percent, respectively). Many of these women and their husbands are financially strained, and they want help with the costs of their kids, and they vote. That, finally, is why President Bush found himself proposing a children's allowance.

Well, who could be against doing more for families with children anyway? The answer is that people who do not have children could be against it, because they would pay the bill. And it is a big bill. According to the Census Bureau, 30 percent of American families with children were getting by on incomes of less than $20,000 in 1987. To give significant aid to significant numbers of those families runs into a lot of money fast. For instance suppose we raised the personal exemption to $6,300, so that it would shield as much of families' income as it did in 1948. Each child would then reduce a median-income family's taxes by about $950 a year as against about $300 today. An extra $650 per child per year wouldn't solve parents' every problem, but it would certainly help. The trouble is that a tax cut of that size would cost the Treasury enough to almost double the federal deficit. Making exceptions or targeting the poor would reduce the cost. But it would also weaken middle-class support, because it would change the issue from making children cheaper for everybody to making children cheaper for the poor--a very different kettle of fish, politically speaking. The unhappy fact is that any program, public or private, that brings substantial relief to middle-class parents is going to be very expensive.

When we discuss spreading through society more of the burdens of child rearing, we are talking about transferring money from the later part of adulthood to the earlier, and also from those who do not have children to those who do. People with families would get government subsidies during their child-rearing years; then, as they passed into middle age and beyond, they would pay higher taxes to support the younger group coming behind. People without children would simply pay higher taxes throughout life. That is the essence of the new redistributional politics: the middle-aged, the elderly, and the childless would inevitably have to sacrifice more so that young parents would not have to sacrifice so much.

Within families, this sort of spreading of sacrifice between old and young, between those who have kids to support and those who don't, goes on all the time. The problem coming before us today is how to do something similar in society as a whole without tearing ourselves apart politically.

This article available online at:

http://www.theatlantic.com/magazine/archive/1989/08/kids-as-capital/308428/