A Modest Capitalist Proposal

In the middle of the 1960s, it was clear that the nation needed to undertake serious economic changes.

• In 1962 Michael Harrington published The Other America: Poverty in the United States. Harrington exposed the plight of tens of millions of Americans who were living in poverty.  He identified the searing poverty of Appalachia, and he detailed the humiliating plight of many older Americans

• On August 28, 1963, some 200,000-300,000 people converged on Washington for one of the most significant displays of popular demands for economic justice. It was called “The March on Washington for Jobs and Freedom.” It was at that gathering that Martin Luther King, Jr., delivered his “I have a dream” speech, the most visionary and best known public address since Lincoln’s speech at Gettysburg 100 years earlier. King focused the purpose of the March in these terms:

“When the architects of our republic wrote the magnificent words of the Constitution and the declaration of Independence, they were signing a promissory note to which every American was to fall heir.  .  .  .  It is obvious today that America has defaulted on this promissory note. . . . America has given the Negro people a bad check which has come back marked “insufficient funds.” .  .  .  . But we refuse to believe that the bank of justice is bankrupt. So we have come to cash this check.”                                 

• Less than a year after King’s speech, President Lyndon Johnson gave a commencement address at the University of Michigan. Known as his “Great Society” speech, he used it to set ambitious goals for the nation’s future. He gave his vision an historical context:

“For a century we labored to settle and to subdue a continent. For half a century we called upon unbounded invention and untiring industry to create an order of plenty for all of our people. The challenge of the next half century is whether we have the wisdom to use that wealth to enrich and elevate our national life, and to advance the quality of our American civilization.” Speaking to the students, Johnson said, “Your imagination, your initiative, and your indignation will determine whether we build a society where progress is the servant of our needs, or a society where old values and new visions are buried under unbridled growth.”

We certainly have failed to meet Johnson’s goals. Old values and new visions alike are now deeply “buried under unbridled growth.”  In spite of the civil rights achievements of the 1960s and the range of programs established as part of Johnson’s Great Society, more and more of us are living with unpaid promissory notes while fewer and fewer are living with more and more immense wealth.

The changes in the 1960s were revolutionary, but they didn’t go far enough. White men suffered an immense loss of status. They lost their legitimized entitlement to privileges not enjoyed by others, but nothing restrained the power of those who actually held economic, political, and social power. By the time of Reagan’s first administration, that power had focused in economic power. The race and gender entitlements that had legitimized white male power were replaced by money. On the positive side, race and gender did lose importance. In the light of big money, differences of skin color or sex became invisible.

The down side was that most white men did not have a lot of money. Most white men lost their status of race and gender without any compensating gain. As we moved into the 1970s it became clear that the majority of white men were also losing money and often their solid middle-class jobs. Conversely, the status gains enjoyed by non-whites and women became increasingly hollow victories as most discovered that they had won admission to a structure that was losing its value to mere money. In the meantime, money was less and less equally distributed. Most Americans have been falling behind since 1970 while economic inequality has grown immeasurably.

Clearly we must face up to the issue we ducked in the 1960s: restraints on economic power. A coherent effort to correct things requires many facets, but all will be to no avail without meaningful redistribution of wealth. In part that means more resources made available to public services: health care, education, infrastructure. It means a frankly redistributive tax structure: higher marginal rates on income taxes, elimination of capital gains taxes that privilege money earned by money over money earned by work, revision of the estate tax to curb the continued concentration of wealth.

Such measures can be argued on many grounds, but by themselves we have no reason to believe that they would make a real change in American life. It seems that we have tried everything imaginable to make America a better country, but we have in fact overlooked the most fundamental mechanism we have available: capitalism itself. It is time to make all Americans capitalists.

In terms of our traditional discourse, such a goal seems incredibly costly and complicated. The goal would not be cheap, but it need not be terribly complicated. The direct route is very simple: we just need to give people capital and rely on the dynamics of capitalism.

There is nothing un-American about such an action. The transfer of capital to individuals by the government has solid American roots. For generations public land was available either free or very cheaply. And the Homestead Act, while its actual impact was modest, set a model for uncompensated federal capital distribution directly to individuals. We should also remember that the fabulous wealth on public lands was left in the hands of those lucky enough to find the Comstock Lode and other mineral riches. There is Social Security, which provides minimal income support for retirement. There was also the model of the G.I. Bill which funded college education and subsidized housing for millions.

The problem is that most government transfers of capital benefited the wealthy and the most prosperous of the middle classes, such as the tax deductions available for interest paid on home mortgages or the myriad federal subsidies provided to all sorts of capitalist activities, from industrialized farms to airlines and oil companies, as well as the capital contributions made through the funding of basic research in agriculture, medicine, aviation, high technology.

Another problem is that for the most part they systematically discriminated against non-whites. For much of our history non-whites could not own land. Social Security was intentionally designed to exclude domestic help and farm workers, employment typically filled by non-whites. FHA intentionally refused to lend to blacks.

The biggest problem, however, was that all of these programs benefited adults only. Children benefited only if their parents qualified to benefit. We need to provide capital to children at birth with Individual Capital Endowment Accounts modeled on Individual Retirement Accounts.

For both economic and psychological reasons we need to begin with children rather than adults. Economically the need to begin with children is simple: that approach leverages the public funds provided by the economic growth accumulated over the years to adulthood. Adults are, in most respects, beyond help. As demonstrated by the nearly universal catastrophe which lottery winnings bring to their winners, those who grow into adulthood with no expectation of owning capital and with no education in the management of capital are not likely to benefit from possessing capital. Capital alone is no panacea. Expectation and education are also critical. Children need to grow up expecting to enjoy the benefits of capital and being educated to use capital wisely. Only by knowing from infancy that he or she will benefit from significant capital can Americans grow into adults with a secure sense of belonging in American life and of the dignity which only such belonging can convey.

DETAILS

To be meaningful when each child reaches adulthood, the amount provided at birth needs to be significant. A reasonable measure would be the cost of tuition for a four-year post-secondary education at a state university plus the equivalent of a 10% down payment on a median-priced home. Today that would come to about $50,000. With 4 million live births a year, that would require $200 billion dollars a year, a substantial investment but quite manageable for the American economy.

To achieve the distributional aims of the program, the funds should be raised by means which enhance the redistribution of assets.

The most obvious source would be estate taxes. Estate taxes have not been well thought of lately. In large numbers even those who will never have to pay any—99% of us—agree that they should be eliminated. If we seriously want a more just economy, however, we need to take the opposite course. Estate taxes should be expanded. As a practical matter estate taxes are needed to fund individual endowments, but their philosophical importance is even greater. Defense of the estate tax has too often been limited to a “soak the rich” mentality. It has seemed that the only justification for an estate tax was as a punishment to the rich and successful, as a gallant sort of bureaucratic Robin Hood taking from the rich to give to the poor, a rough form of charity.

An estate tax is designed to redistribute accumulated wealth, but it need not be founded on punitive grounds. Again, if we seek a just economy, we should not employ the power of the state to punish those who are financially successful. Estate taxes must be established on principles which justify the use of state power and which can provide a political argument to reject the pleas of those who believe that, because they think they accumulated the wealth by themselves, the government has no right to take it away from them.

Any asset accumulation is in part a public creation, no matter how brilliant the individual effort which creates the fortune. It is therefore as just that a portion of such accumulations should be shared with the civil order which made it possible as it is that the successful individual should retain a portion. Such an argument can be convincing, however, only if it is applied democratically. It is not only the massive accumulation of wealth which should be returned in part to the civil order. Every accumulation of assets should be shared. As a practical matter some level of exemption would be sensible, but it should be no higher than $100,000.

A serious problem with the current structure of estate taxes is that most estates escape them completely, but when the taxes do take effect they start at a relatively high 35%.  Estate taxes can be justified only if they are democratized and made much more progressive. They should start as low as 2%, then rise in gradual progression until they reach marginal rates of at least 75% for estates over $1 billion. Such a reform of the estate tax would insure that they would cover at least 25% of the annual sum needed to fund the Capital Asset Endowments.

Another 25% would come from a “wealth tax” of 1% levied on privately held productive capital assets, such as closely held companies and real estate.

The remaining dollars need not be tax dollars, however. Every publicly held corporation holds authorized but unissued stocks, often many times more shares than the number actually outstanding. Each corporation with publicly traded stock would contribute each year a number of shares equal to 1% of its total outstanding shares at the end of the previous year.

This mode of financing the program would produce a gradual, systematic, and broadly based redistribution of assets without punitive taxation or serious disruption of financial markets. The distribution of previously unissued stocks means that everyone owning any shares of publicly traded companies (including beneficiaries of existing Capital Asset Endowments) would experience an annual 1% dilution of the value of his or her own holdings, but that dilution would, on average, be recovered within less than two months by the natural action of the stock market (long-term average appreciation of stocks has been 6-7%). Over a period of 20-30 years, however, the program would effect a cumulative redistribution of socially significant proportions.

These resources would be held initially by a National Endowment Mutual Fund Group, a quasi-public corporation. It would function like such large groups of funds as the Vanguard Group or TIAA-CREF Group, dividing its assets into mutual funds with differing investment objectives and differing levels of risk.

Each year’s contribution would be divided into Individual Capital Endowment Accounts for children born during the previous year as they reach their first birthday. The assets of each Individual Capital Asset Endowment would be invested in a diversified portfolio of the mutual funds managed by the National Endowment.

The accounts would be truly individual. They would become fully vested at age 30, with the funds of any dying before that age returning to the National Endowment rather than devolving on the parents. They could be drawn on for post-secondary education (with payments going directly to qualified institutions).

Social Impacts

The social consequences of such a program would be immense. Instead of having an economic system reinforcing those aspects of our culture which insist that individuals do not belong until they prove that they deserve to belong, we would have a system which enacts the central meaning of our traditions of equality: each person belongs on the basis of simple humanity and is provided a basic capital stake as evidence. We would, by public policy and public action, say to each American child that he or she is included in the economic life of the nation, which is what each wants. Few want a leveling equality which seeks to make everyone the same, but all want an equality which affirms the dignity and worth of each.

It is easy to imagine that the social impact of such a program would grow as the first generation of recipients approaches the age of full entitlement, but we wouldn’t have to wait 30 years to realize great social returns. The social and psychological impacts would begin immediately. Young parents would know, from the day of a child’s birth, that America has embraced the child, making it one of its own. Parents would know that the child would have a real future. They would know that the child would have a chance for an education and the ability to buy a home. They would know that when their child married, the two young people would each bring assets to the union; their child would not compound poverty by marrying but rather would combine the beginnings of wealth.

The greatest institutional impact would probably be on our public schools. The students who now do least well come overwhelmingly from families which lack the resources to provide the child with realistic hope for inclusion in American life as an adult. We would no longer have such children. America’s schools have been subject to reform of one kind or another for the past 50 years, and they still don’t work. It is time we recognize a basic truth: the problem lies not with our schools but with our children. No one challenges the fact that economic status is the primary predictor of success in school. The lesson here is that changing schools cannot change significantly the outcomes of schooling. The only way to change the outcome of schooling is to change the economic situation of the students.

The only meaningful way to change the economic situation of students is to include them in the dynamics of American capitalism. Students who cannot imagine that they can participate in that dynamics receive a different message from school than those who come to school feeling themselves part of the capitalist dynamic. For those without capital, school is a system which tries to teach them to accept their exclusion. That students drop out of such a system, psychologically if not bureaucratically, should not surprise us. When the system teaches an individual that he or she doesn’t really belong, the motivation to stay is weak.

A system producing the universal possession of capital would radically shift the individual student’s motivation to remain in school, but it would also provide a new center for organizing school curricula. If teachers knew that every student could look forward to the possession of meaningful capital, schools could make the economic realities central to our culture a shaping force in school experience. One of the key functions of schools would be to provide education in the management of capital. There is no clearer evidence of American culture’s continuing policy of restricting capital than the fact that, where capitalism is concerned, our public school systems have been cheerleaders, not teachers. They have celebrated the greatness of capitalism, but they have never taught students to exploit the opportunities of a capitalist economic system. Such education has remained the private function of those families who have already acquired capital. For those from families without capital, the functioning of our economic system has remained a mystery to which they have no access.

As long as our economic system is exclusionary, public school instruction in the exploitation of capital would be awkward. Those from families without capital would find such instruction more a pointless reminder of their own exclusion than an invitation to inclusion. When all students in the classroom know that they will have capital to manage some day, the capital management portion of the curriculum could well invigorate the entire process of schooling.

One factor which vitiates the schooling process is the industrial basis on which it is erected. Public schools expanded as industrialism expanded, and schools naturally worked to prepare the nation’s young to be useful contributors to the work of industry. Industry employs a small and decreasing portion of our population, however, and students are smart enough to know that a schooling process designed to prepare people for factory work can do little to prepare them for the futures they face.

The core function of schools needs to shift its focus from preparing our young to be wage earners to preparing them to be asset managers. This would not mean that we expect everyone to be able to live off assets without gainful employment; it would mean only that we assume that all Americans will have significant assets to manage. One of the most mismanaged of assets today is consumer credit. An individual’s credit is a critical financial asset. Wisely managed it enables the use of other’s assets to build one’s own. Foolishly managed, as with the use of credit card debt, credit can suck dry the individual’s capacity to build assets. With its high interest rates, the credit card industry operates a massive transfer of capital assets from those with little to those who already have much. Another area of abuse is the trend toward reliance on loans to individual students rather than use of public funds to support college education. The use of loans directly reduces the asset value of the education received. Those who must pay back big education loans will not have capital to invest in businesses or homes. The rich get richer, the poor get poorer.

Our schools need to teach such basic economic realities as the management of assets and wise use of debt. In classrooms filled with children with families without assets and with no prospect of ever possessing any, education in the management of assets can be no more than simultaneously mystifying and humiliating; education in the management of debt can be no more than the morally hollow preaching of deferred gratification to those who have nothing.

When all students in a class possess assets whose growth they can watch the way middle class adults watch over their IRAs, lessons in economics would not be mere abstract fantasies. Each child would have assets whose value could be traced in the daily news. The rise and fall of corporations, the growth and contraction of foreign economies, the changes wrought by technology, the practical meaning of disruptions in trade in oil and other components of daily news would impinge on their personal lives (and indirectly on the lives of their parents) in a meaningful, measurable way.

As the children grow, they and their parents could gradually become involved in decisions about selecting the specific National Endowment Mutual Funds which the child’s growing portfolio should include. By the time children reach the age at which their Endowment would be fully under their own control, they would be well prepared to manage their assets intelligently.

It would be important that the Individual Capital Endowments be truly individual. If the child dies before the funds are fully vested, the entire endowment would return to the public realm. Reserving full vesting until the beneficiary reached the age of thirty would help insure that few parents would succeed in wresting the funds from their children.

The social changes flowing from such possibilities would be massive. Even more significant, however, would be the broad cultural change which would be enabled. Today we remain entangled in a symbolic system developed to deal with the realities of a geographical frontier which challenged all elements of the culture brought here from Europe. The unshaped continent provided a setting in which ideas of human equality could develop much more freely than in Europe. It was also a setting in which ideas of human inequality could compete for the definition of the emerging culture. The symbolic systems shaped by the frontier celebrated some forms of human equality while hardening and strengthening some forms of inequality. America defined itself in the Western, a story which embodied the inescapable violence arising from attempts to reconcile the new equalities and inequalities in an ethics of winning.

America and the world have changed. The contradictions of our lives can no longer be reconciled by the myths which have failed. We need a view consistent with our developed awareness of the world as an ecological system, the spreading recognition of human rights, the right of women to explore their full human potential, the failure of management based on contempt for workers.

America has developed as fully as it can within the confines of an exclusionary capitalism. We can develop further only when it becomes possible to develop a new coherent symbolic system. The inequalities built into exclusionary capitalism block that development. Only an inclusionary capitalism can foster such a development and free us from the violence inherent in the Western and in the need to win.

A nation which actively includes its people in its national life will produce riches unknown. Such a nation has always been the fundamental goal of American culture. The dynamic of our national life still drives us in that direction. The main obstacles to moving forward are not inherent in the nature of the cosmos. They are merely the consequences of our history. We stumbled into exclusion because it was the easy course at the time. Exclusion has ceased to be easy. Exclusion gets in our way. Exclusion was a temporary solution which now must be replaced with inclusion.