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.

It is human nature to make assumptions about the future based on extrapolations from the past. Many homeowners, for example, have become so sure of continuing high returns that they've stopped saving entirely, and have started borrowing against recent home-value appreciation. (Personal saving rates have declined precipitously in recent years, and are now near zero nationwide.) In this climate of seemingly ever rising returns it is no wonder that enthusiasm for an ownership society has taken hold.

On the one hand, the Bush administration is smart to use government policy to encourage saving and investing. But on the other hand, the ownership society is likely to be a failure if it leaves individual Americans naked against risk.

What to do? First, we must remember that insurance is as crucial a concept as ownership. Insurance is hardly anti-capitalist; rather, it's integral to capitalism's smooth functioning, a device to mitigate the random fortune and "creative destruction" that might otherwise make a purely capitalist society unbearable. Consider Social Security. It was originally devised as an insurance scheme to protect people against the ups and downs of life, to alleviate poverty among children and the elderly. People differ in their ability to take care of the dependent generations; some are irresponsible or impoverished, or die before they have finished fulfilling their parental or filial responsibilities. Social Security was meant in part to take on some of the family's traditional function. In effect, Social Security transfers some risk from the family to the nation. Replacing much of Social Security with a system of individual accounts would be an abrogation of one of our most fundamental social covenants.

Many people have evidently concluded that by winning re-election, President Bush has won a mandate to create an ownership society, just as President Franklin D. Roosevelt did to create the New Deal in 1932 (when both the stock market and the wider economy were tanking). But Bush should be careful. If we get the ownership society wrong, growing inequality and social unrest are likely to follow. An ownership society should build on the social-insurance system we already have, not replace it.

For instance, in April the United Kingdom will begin making every one of its newborns a capitalist from birth, by setting up a personal trust fund of about $500 or more. Relatives are encouraged to add to the trust fund, which accumulates tax-free. Here in America the economists Shlomo Benartzi and Richard Thaler have constructed a "Save More Tomorrow" plan, based on the premise that people understand they should be saving more, but are bound by habit and often procrastinate. Under the plan participating employers merely ask their employees if they would like to commit to automatically saving a fraction of future pay increases, through payroll deduction. The first company to try the scheme found that nearly 80 percent of employees signed up, and retirement saving rates quadrupled within forty months. Both plans are attractive, because they actually increase saving, rather than merely encouraging a shift of existing savings toward risky investments. The second plan would cost the government nothing.

Americans, of course, are a famously sanguine people, and this is mostly a good thing. It accounts for our entrepreneurial spirit and for much of our economy's growth over the decades. But too much optimism can be dangerous: among other things, it can blind us to the risks of unalloyed exposure to markets, and make us entirely too willing to forswear insurance in pursuit of larger returns. The constellation of factors now in place—increased volatility in the job, housing, and stock markets; growing blindness to the risks of investing; and the administration's intention to expose more Americans to market risk through its ownership-society proposals—threatens to transform the United States into a nation of gamblers. And as anyone who has visited a casino knows, most gamblers lose.