Contents | January/February 2003

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From the archives:

"The Hidden Side of the Clinton Economy" (October 1998)
The official government measures of unemployment and poverty disguise the fact that millions of Americans can't make a decent living. By John E. Schwarz

"The Return of Inequality" (June 1988)
The great bulk of Americans are losing economic and political power, while the affluent are gaining both. This is not a recipe for social comity. By Thomas Byrne Edsall

"The Declining Middle" (July 1983)
With most jobs being created at the top and the bottom of the ladder, America may have difficulty remaining a middle-class society. By Robert Kuttner

The Atlantic Monthly | January/February 2003
 
[Wealth Inequality]

The $6,000 Solution

The United States is more unequal than at any other time since the dawn of the New Deal—indeed, it's the most unequal society in the advanced democratic world. Here's how to fix that

by Ray Boshara
 
.....
 
hroughout our history, periods of unbounded market exuberance, like the one we recently experienced, have been followed by periods of far-reaching social and economic reform. The Gilded Age of the late nineteenth century gave way to the Populist and Progressive reforms of the early twentieth century, the Roaring Twenties to the New Deal, and the Eisenhower-Kennedy Nifty-Fifty bull market to the Great Society and the War on Poverty. From this cycle of great wealth creation (and abuse) followed by great reform has emerged a social contract that has smoothed out the rougher edges of American capitalism while making us a more prosperous society.

Further reading
selected by Ray Boshara
Like the Gilded Age and the Roaring Twenties, the Roaring Nineties (which had its roots in the early 1980s) brought worrying new levels of inequality. Those who owned stock, homes, and other assets enjoyed substantial gains each year—and those with privileged access to initial public offerings often doubled their money in a day. Meanwhile, global competition and the ruthless restructuring of the economy put a lid on wages and benefits for the great majority of Americans, especially those without college degrees. While the rich monitored the gains on their monthly brokerage statements, Americans without financial assets struggled each month to pay the interest on their credit-card bills.

By the close of the 1990s the United States had become more unequal than at any other time since the dawn of the New Deal—indeed, it was the most unequal society in the advanced democratic world. The top 20 percent of households earned 56 percent of the nation's income and commanded an astonishing 83 percent of the nation's wealth. Even more striking, the top one percent earned about 17 percent of national income and owned 38 percent of national wealth. In nearly two decades the number of millionaires had doubled, to 4.8 million, and the number of "deca-millionaires"—those worth at least $10 million—had more than tripled, from 66,500 to 239,400.

In contrast, the bottom 40 percent of Americans earned just 10 percent of the nation's income and owned less than one percent of the nation's wealth. The bottom 60 percent did only marginally better, accounting for about 23 percent of income and less than five percent of wealth. The racial gaps are even more disheartening. The typical African-American household had fifty-four cents of income and twelve cents of wealth for every corresponding dollar in the typical white American household. Hispanics had sixty-two cents of income and four cents of wealth.

The wealth gap dwarfs the more oft noted income gap not only in size but also in significance, for several reasons. First, ownership of assets—a home, land, a business, savings and investments—provides the kind of security that permits planning for the future and the future of one's children. Second, although a job and an income are obviously important, they cannot be bequeathed to future generations, whereas wealth—and the status and opportunities it confers—can be. Finally, with wealth comes political influence. Many politicians spend more time raising money from the wealthy than they do speaking with their own constituents. As Kevin Phillips, the author of Wealth and Democracy (2002), recently observed, the intense concentration of the nation's wealth in a small sliver of society has raised the specter of plutocracy.

One way the rich use their influence, of course, is to protect and increase their wealth. But the political privileges enjoyed by the rich over the past decade cannot alone explain the size of the wealth gap. Clean up all the corruption on Wall Street and K Street, and we would still have huge inequalities of wealth. Deeper forces are at work, among them the introduction of labor-saving technologies that have benefited the owners of capital at the expense of workers; the downward pressure that globalization has exerted on wages; and changes that have made the tax code less progressive and more friendly to the better-off.

There is also the fact that wealth, like debt, is self-replicating. Compound interest turns wealth into more wealth and debt into more debt. Other things being equal, those with interest-bearing savings accounts will end up richer after a year, and those who must pay interest on credit-card or consumer household debt will end up poorer. Thus even a neutral government policy toward wealth and asset building will end up exacerbating the wealth gap. But over the past several decades policy has hardly been neutral. The federal government currently has two distinct policies: asset-building incentives for better-off Americans (in the form of more than $300 billion in tax benefits each year for such things as home ownership, business development, college education, and retirement saving)—and income support for the rest.

Tax breaks that encourage asset building are smart policy—except that more than 90 percent of the benefits of the two largest programs (which support home ownership and retirement saving) go to the wealthiest 55 percent of taxpayers. This enormously regressive policy thus excludes people who don't earn enough to enjoy the benefits built into the tax code. In addition, many poorer Americans face limits on the assets they can own if they want to continue receiving necessary food, health, and other income-support assistance.

f asset-building policies are good for better-off Americans, shouldn't such policies be good for all Americans? Actually, broad-based asset-building programs have a long and successful history in America. The Homestead Act of 1862, for example, offered 160 acres of land to every American—rich or poor—who was willing to occupy and cultivate it for five years. And the GI Bill of 1944 helped millions of Americans get a college education or buy a first home. These programs greatly equalized the distribution of wealth in America—not by punishing the rich but by expanding opportunities and the ownership of assets.

In the effort to shrink the huge wealth gap that has developed over the past decade or two, the first step is straightforward: we should extend the same opportunities that better-off Americans now have to everyone else, through refundable tax credits and matching deposits to encourage college education, home ownership, business ownership, and retirement saving.

From the archives:

"Against Inequality" (April 1999)
A valiant proposal to give every American twenty-one-year-old the same chance to prosper (or fail). By Jack Beatty
But the next step has to be bolder: a Homestead Act for the twenty-first century. Here's how it might work. Every one of the four million babies born in America each year would receive an endowment of $6,000 in an American Stakeholder Account. If invested in a relatively safe portfolio that yielded a seven percent annual return, this sum would grow to more than $20,000 by the time the child graduated from high school, and to $45,000 by the time he or she reached thirty (assuming that the account had not yet been used). Funds in the American Stakeholder Account would be restricted to such asset-building uses as paying for the cost of higher education or vocational training, buying a first home, starting a small business, making investments, and, eventually, creating a nest egg for retirement. Withdrawals would of course decrease the account; work and saving would build it back up. Family members and others could also add money to the account.

Although the program would be universal, giving every American child a tool to help meet his or her lifelong asset needs, it would especially benefit the 26 percent of white children, the 52 percent of black children, and the 54 percent of Hispanic children who start life in households without any resources whatsoever for investment. For these children and others, an asset stake would provide choice, a ticket to the middle class, and, most important, hope.

Prime Minister Tony Blair has proposed a variation on this idea in England, and it could be done in the United States for only about $24 billion a year—a very small amount by the standards of federal programs, and only about a sixth of what the government gives in tax breaks to corporations every year. The American Stakeholder Act, like the Homestead Act and the GI Bill before it, would be a smart investment in our nation's future. Nearly a quarter of all American adults today have a legacy of asset ownership that can be directly linked to the Homestead Act. The GI Bill has generated returns to our country of up to $12.50 for every dollar invested. If asset-building were started at birth, even greater returns could be expected from the American Stakeholder Act. Moreover, research indicates that asset ownership increases educational attainment, civic involvement, health quality, and life satisfaction, while decreasing marital breakup. And assets, unlike public assistance, can be passed from one generation to the next.

Americans readily tolerate inequality of outcomes, accepting that it's a necessary by-product of how we reward the hard work, initiative, and creativity that underpin our much envied economy. But we should not accept inequality of opportunity. Expanding the ownership of assets through a program of American Stakeholder Accounts would help to ensure that wealth inequality in one generation does not become magnified into gross inequality of opportunity in the next.

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Ray Boshara is the director of the Asset Building Program at the New America Foundation.
Copyright © 2003 by The Atlantic Monthly Group. All rights reserved.
The Atlantic Monthly; January/February 2003; The $6,000 Solution; Volume 291, No. 1; 91-95.