Go on a savings spree

NYTimes

February 22, 2008
Op-Ed Contributor
Go on a Savings Spree
By DALTON CONLEY

CONGRESS has passed and President Bush has signed legislation to rescue the economy from the jaws of recession. The $168 billion package, which includes an effort to increase consumer spending by distributing $600 rebates to individuals, can be faulted in many ways: with two wars and a budget deficit the nation can’t really afford it; it will probably arrive too late in the business cycle to actually make a difference; and the near-universal aspect of the rebates doesn’t make much sense. But the most fundamentally troubling thing is the premise that while consumer overspending got us into this mess, more will get us out of it. This is akin to the old saw about curing a hangover with the hair of the dog that bit you.

What if instead of giving rebates we helped create an investor society by seeding universal investment accounts? This would not only pump cash into the economy, through the slightly more indirect route of investment, it would also help us correct some of the near-fatal flaws in our long-term economic landscape.

The recent slowdown in gross domestic product growth is only a symptom of recession, not the cause. While there are many things to blame for the current crisis — most notably the subprime mortgage mess — one factor that has received little attention is America’s low savings rate. In 2005, net private savings in the United States were negative. In other words, we were spending money that we didn’t have, chipping away at our national wealth.

The last time the savings rate dipped into the red was during the Great Depression. At that time, of course, it made sense not to save. Joblessness was high and money scarce; we needed to dip into our kitty to survive. But our negative savings during the Bush boom had a different cause. Evidently, we felt so flush with (paper) gains in the stock and housing markets that we spent money as if there were no tomorrow.

Republicans have long argued that the way to stimulate long-term growth is by promoting investment over spending. Hence their perennial efforts to lower taxes on capital gains, dividends and corporate profits. But whether such policies actually stimulate increased investment is open to debate, since the wealthy folks who gain most from these tax reductions are probably already investing their money. And the tax savings don’t trickle down as much as their advocates claim.

Democrats, more concerned with helping working families, consider consumer spending to be the magic bullet, so they favor tax rebates. But this only encourages us to continue our profligate ways.

Why not combine the best of both philosophies and try to stimulate investment by all Americans? The simplest approach would be to seed universal mutual fund accounts for low-income Americans. The best way to do this would be through a so-called refundable tax credit deposited directly into a special investment account for each taxpayer. In future years, the government could contribute an additional 50 cents for every dollar the taxpayer deposited into this account. Think of it as a universal 401(k), but one that could be used not only for retirement but also for things like a down payment on a house, college expenses or unexpected health costs.

Such investment incentives would do more than just help stimulate business growth by providing new capital. They would fundamentally change taxpayers’ lives. Some research suggests that asset-holders behave more responsibly and are more civic-minded than those without wealth. After all, they have a stake in the future of the economy and their community. This is why banks in cities don’t readily offer mortgages for apartments in buildings in which most of the tenants are renters, not owners. My own research suggests that having savings and investment equity is one of the best predictors of whether someone’s children will attend and graduate from college. Investing motivates people of all income levels to defer gratification and become knowledgeable about the economy and society.

Finally, to the extent that investment accounts grow, they decouple economic security from job security. By providing a cushion during employment transitions, they are the best possible form of unemployment insurance.

For some reason, legislation to create universal investment accounts — proposed by senators and representatives from both parties over the past decade — has repeatedly stalled in Congress. But now the economy is in trouble, and there is general agreement that this is a time for action. President Bush has already authorized the plan to stimulate more of the spending that got us into this trouble. But it’s still not too late to make the effort to create a true investor society.

Dalton Conley, the chairman of New York University’s sociology department, is the author, most recently, of “The Pecking Order: A Bold New Look at How Family and Society Determine Who We Become.”