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W. Bush's promise to nudge Social Security in a free-market direction
will be the most important policy issue
in this year's election. More than any other issue, it will determine
who wins the White House. And that's just for starters. Bush's proposal
has the potential to alter the course of American politics for decades
to come.
How could it be otherwise? Social Security is the federal government's
largest program. Receiving a check from the program is the principal
interaction 40 million Americans have with the federal government.
For millions more, the mailing of those checks is one of the few
things the federal government does that make them view it positively.
It is, symbolically, what's left of the New Deal. Agriculture subsidies
and welfare were drastically overhauled in 1996, and only a small
part of the country cares about the Tennessee Valley Authority.
What Bush is saying is that this relic is no longer sacrosanct.
All of the other institutions that were suitable to mid-century
America have had to adapt to today's more individualistic, decentralizing
culture: the phone companies, the media, the academy, the churches,
even the military. Bureaucracy is in retreat almost everywhere,
and Social Security is no exception.
That's not the way it looked when the program was born, of course.
Social Security was a response not only to the economic crisis of
the 1930s, but to an economic order that threatened cherished American
values. After decades of industrialization, the fiction that we
were a country of self-reliant yeoman farmers could no longer be
sustained. Labor and capital had become two distinct classes. Most
Americans worked for others, their livelihoods dependent on vast
impersonal forces they could not control or even understand.
Political scientist Charles Kesler summarizes the argument that
prevailed in the '30s: "Given the insecurity built into the modern
economy, government had to provide social security to save the middle-class
basis of American democracy. Since people could no longer independently
save for their old age, the government had to help them to do this
in order to lift them to freedom." By framing the issue this way,
FDR was able to sell government pensions — a policy idea imported
from Europe's emergent social democracies — as an outgrowth
of our best political traditions. FDR also had to resort to some
deception, presenting a mild program of redistribution as though
it were a form of insurance (a deception that continues to this
day in Democratic criticisms of Bush).
It was through expedients such as these that FDR got credit from
historians for "saving capitalism" by tempering its excesses. Class
conflict between capital and labor remained a muted theme of American
politics, but it never became virulent. At the same time, dependence
on the state increased. The inventor of government pensions, Chancellor
Bismarck, explicitly sought this effect: "Whoever has a pension
for his old age is…far easier to handle," he said, having become
the equivalent of "a servant in the chancellery or at court." In
America's more democratic circumstances, the chief political effect
of Social Security was to increase popular support for the party
of government.
There was, however, an alternative method of solving the labor-capital
problem that had attracted interest from thoughtful businessmen
from the dawn of the industrial revolution: making the laborer an
owner of capital himself. Albert Gallatin, Jefferson's treasury
secretary, implemented the first profit-sharing plan ever at his
glass works in New Geneva, Pa., arguing that the "democratic principle
upon which this Nation was founded…should be applied to the
industrial process." The president of Sears, Roebuck and Co. testified
to the Senate in 1939 that profit sharing "helps to avoid labor
unrest and strikes, and gives the employee a feeling of greater
security and unity of interest with the employer."
The profit-sharing strategy failed because its efficacy depended
too much on the success of particular companies. Over the past two
decades, however, worker capitalism has taken off as employees have
gained access to capital markets generally, through mutual funds
and "defined contribution" corporate pension plans. (In a defined-contribution
plan, workers have a large say in the management of their accounts.
In "defined benefit" plans, which used to be the norm, employers
managed the accounts and promised workers a benefit based on their
wage and length of service to the company.) While fewer than a fifth
of American households owned stock 20 years ago, today slightly
more than half do, either directly or through their pension plans.
In "The Rise of Worker Capitalism," a paper for the Cato Institute,
Richard Nadler has surveyed the research on how this stockholding
revolution has affected workers' attitudes. He finds that it has
made them more interested in saving for the future, more productive,
happier on the job, more committed to their companies, and less
likely to strike or quit. They are also more likely to be reading
the same business publications as their CEOs.
Reform of Social Security is conceivable now because the historic
tension between capital and labor is beginning to dissolve. Increasing
numbers of Americans have confidence that they can manage their
own money. They know that wealth accumulation can provide them with
more retirement security than income transfers can. They know too
that the risks of investment can be reduced in various ways and
must in any case be set against the political risks that affect
Social Security. Unsurprisingly, stockowners are more likely than
non-owners to support Bush's proposal. This last fact suggests something
important about the political dynamic of Social Security reform.
Social Security has grown over the years for the usual reasons programs
grow: The more beneficiaries there are, the larger the constituency
for the program; and the bigger the benefit, the greater that constituency's
fervor. Private accounts would work the same way, but in reverse.
If the government were to let workers invest 2 of the 12 percent
of their wages that go to Social Security, almost the whole adult
population would be made of investors. Over time, public pressure
to let workers invest 3 percent — then 4, then more —
would be irresistible.
Opponents of reform have darkly suggested that private accounts,
if introduced on a small scale, will eventually completely replace
Social Security. They are quite correct, though they are wrong to
see this as a Wall Street plot.
Just as Social Security altered public attitudes toward the federal
government as a whole, so would universal worker capitalism affect
political psychology. Social Security made large-scale income transfers
directed by the federal government a matter of routine. The number
of groups demanding such transfers naturally proliferated.
Bush-style reform of Social Security could make routine the idea
that people should be allowed to save their own money to accomplish
important social purposes. People invest primarily to provide for
their retirement, but also to finance their children's education
and to cover unforeseen medical expenses. Why shouldn't people be
allowed to save for these purposes without facing multiple layers
of taxation? Why, for that matter, should any savings be subject
to multiple taxation? In a nation of investors, such questions are
going to be hard to answer. That's why reform of Social Security
would almost certainly lead to reform of Medicare and of the tax
code as well. (Thomas Saving, a felicitously named economist at
Texas A&M, has already designed an investment-based solution for
Medicare that has attracted interest from conservatives on Capitol
Hill.)
The rise of the new investor class has already led to more capital-friendly
policies. In 1989, President Bush was unable to secure a cut in
the capital-gains tax even though it was one of his highest priorities.
In 1997, a cut passed easily, with bipartisan support and not much
debate. The major difference: More than 25 million Americans had
entered the stock market in the interim. Their view of capital-gains
taxes had changed. Can there be any doubt that their view of corporate
taxes will change too?
In worker-capitalist America, successful businessmen will no longer
be objects of suspicion but quasi-heroic celebrities. The polls
in the Microsoft case have consistently shown public admiration
for Bill Gates and hostility to the Justice Department's lawsuit
against the company. In John Zogby's poll, only 17 percent of the
public favors the department's proposal for a breakup of the company.
Says libertarian activist Grover Norquist: "The Roosevelt-Taft attacks
on the steel companies would not have survived in investor America."
Nadler's Republican Ideas Political Committee is testing the effect
of ads on how the Clinton administration's hundreds of lawsuits
against corporations affect investors.
The shift toward free-market attitudes brought about by worker capitalism
can be analyzed in terms of a field of economics called "public
choice." Public-choice scholars look for structural explanations
for why the political economy of the welfare state routinely generates
irrational public policies. In many cases, they conclude, the problem
is that the benefits of such policies are highly visible and concentrated
in the hands of a few people who are therefore well organized to
defend the policies, while the costs are disguised and dispersed
so far and wide as to be practically invisible to those who pay
them. Protectionism, for instance, rarely helps the protected industry
as much as it hurts consumers and other industries. But even though
the costs outweigh the benefits, the distribution of costs and benefits
tilts politics in favor of unsound policy.
The problem fades if special interests can be subordinated to some
more all-encompassing interest. One way to do this, sought by activists
such as Norquist, is to require supermajorities to enact any redistributive
policies. Another is to create a massive constituency with a direct
interest in the economy as a whole, and thus in sound economic policy.
That is what worker capitalism does. When most people have a capital
stake in the economy, it isn't necessary to make speculative arguments
to persuade them to oppose bad policies; pointing to their bottom
lines will suffice.
Conservatives, especially social conservatives, have been slow to
appreciate the advantages that the democratization of capital ownership
offers them. Some, like Gary Bauer, cling to a Buchananite model
of the politics of labor that is, as Nadler remarks, "ideologically
leftist and demographically obsolete." More commonly, they are so
intent on disparaging Clinton that they disparage as well the rising
Dow that has occurred on his watch. So what if the Dow is rising,
they ask, if our popular culture has gotten filthier? But it has
to help conservatives of all stripes if capital ownership makes
people think harder about the long-term consequences of their actions
and about the behavioral conditions of individual success. Moral
dissolution and wealth accumulation are not a natural fit.
Democrats and union leaders have much greater reason to fear worker
capitalism. Workers will rely more and more on what Bush calls "the
security of ownership" and less and less on their ostensible protection.
The Democratic party and the unions could well survive the transition
and perhaps even prosper, but doubtless only as very different —
and more market-oriented — institutions. It will certainly
be fun watching them try to adapt.
Instead of a radical transformation of Social Security, Gov. Bush
has prudently decided to approach reform incrementally. His proposal
is no less important for that. If enacted, it would put within reach
many conservative goals for America that can now scarcely be conceived
of. His Social Security plan, all by itself, is reason enough to
elect him.
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