June 14, 2014


A capital agenda we can all agree on (Stan Veuger, 6/02/14, The Hill)

As Chris DeMuth explained in The Wall Street Journal a few weeks ago, shifting Social Security toward a system of private accounts would do much to expand middle-class capital ownership. Piketty dismisses such an idea out of hand in his book, because he believes that the return to capital is "extremely volatile." Fortunately, the return to capital (r), which equals the return on your contributions to private accounts, is on average higher than the economy's growth rate (g) is likely to be. What determines the return on your contributions, in the absence of tax increases, to a PAYGO pensions system is precisely this g, adjusted for the ratio of retirees to workers. In an aging society, this return will be even lower than g, which, remember, is already lower than r. It is precisely this large gap between the return on private accounts and the return you receive in a PAYGO system that allows us to address understandable worries about risk: Holders of private accounts could sell off some of their upside risk in exchange for insurance that would help them out if they happen to retire after a period of low returns. This logic, which Martin Feldstein of Harvard University developed over a decade ago, would allow for significant wealth accumulation by all workers, at low levels of risk, and would, as a massive side benefit, help address the long-term fiscal challenges facing the nation.

Similar reform ideas could be applied to some of the other large social insurance programs that are currently funded year by year with the tax money of current workers, like Medicare and unemployment insurance. Helpfully, Feldstein has developed blueprints for those programs as well. Again, these reforms would come with important side benefits: Pre-funding Medicare would do even more than privatizing Social Security to alleviate looming budgetary pressures, whereas unemployment insurance savings accounts would end the current practice of improvised congressional decision-making around the livelihood of workers who just lost their jobs. But more to the point of Piketty's concerns: They would add tremendously to the stock of wealth held by the middle class, as total pension, health and unemployment savings would go up by some 150 percent of GDP, or almost 40 percent of total societal wealth. Add that to the amounts of wealth already owned by the "bottom 90 percent," and one would get close to what Piketty refers to as the "ideal society," one in which the top 10 percent owns but 30 percent of the capital stock.

Getting to this point would take quite some time, but there are other, smaller reforms that can speed up the process and produce a more balanced allocation of capital in the near future. For example, to address Piketty's concern that larger capitals reap higher returns, one could reduce the capital gains tax and the dividend tax for middle-class savers. To mitigate increases in the share of wealth dedicated to residential housing, which are responsible for the practical entirety of the capital stock increases Piketty documents, one could eliminate the mortgage interest deduction (and cut an enormous tax expenditure in the process), as well as ease the kind of land-use restrictions that have chased the middle class out of the most prosperous metropolitan areas.

These are important decisions, but they should not distract us from the central lesson that flows from Piketty's data analysis: that his "ideal society," like President George W. Bush's "ownership society," is well within reach.

It's entirely fitting that the Left's new Marx accidentally arrives where W started. And, of course, using the Obamacare mandate to universalize the HSAs that W liberated is one of the best ways to build middle and lower class capital.

Posted by at June 14, 2014 7:24 AM

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