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August 1989
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.
Copyright © 1989, Jonathan Rauch. All rights
reserved.
"Kids as Capital";
The Atlantic Monthly, August, 1989, issue.
Volume 264, Number 2 (pages 56-61).
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