Bush & Kerry: A Big Divide

1.

Twenty years and five presidential elections ago, Walter Mondale said that Ronald Reagan’s economic policy was turning America into a “nation of hamburger flippers.” Although the recovery from the steep 1981–1982 recession was well under way by election time, and American businesses were employing four million more people than they had four years earlier, the increase in jobs was entirely in the service sector. All other industries combined—manufacturing, construction, mining—had shed more than 800,000 employees. Moreover, American workers’ wages had, on average, failed to keep pace with inflation.

In this year’s election John Kerry could level something like the same accusation at George W. Bush. The recession that began in March 2001 ended the following November, but American businesses are still employing 900,000 fewer people than they did when Mr. Bush took office. Employment in industries other than services is down by 2.6 million. And after rising during the first year or so of the economic recovery, wages are again falling in real terms. (Despite substantial gains during the Clinton years, average weekly pay remains below what it was when Reagan took office.)

Mr. Bush might honestly reply that his goal is a nation not of hamburger flippers but coupon clippers. The policies he has put in place during his first term, including sharply lower tax rates on dividends and capital gains and the phased elimination of estate taxes, are supposed to encourage Americans to save more. The policies on which he is campaigning for a second term, including tax-favored savings accounts for health care, personal accounts to replace part (and perhaps in time all) of Social Security, and further tax breaks for savings accounts of whatever purpose, have the same rationale. Mr. Bush’s declared goal is the “Ownership Society.”

Clipping coupons sounds a lot better than flipping hamburgers. Many Americans would probably welcome the prospect of receiving a good chunk of their income from simply cashing interest and dividend checks, instead of having to show up at work. Government policies that promise to give people more such checks to cash therefore have a certain appeal—far more than policies that throw them in increasing numbers into low-end service-sector jobs. The “ownership society” promised by Mr. Bush may not have the ring of the New Deal or the New Frontier, but as an election slogan it appeals to aspirations many Americans hold.

The idea raises two questions, however. First, do Mr. Bush’s policies offer a serious prospect of bringing about such a society? Or do they really amount, for most Americans, to a road toward hamburger-flipping dressed up with misleading labels advertising coupon-clipping? Just as important, how do Mr. Kerry’s proposals differ, both in their declared aims and in their likely practical consequences?

The more fundamental question is what Mr. Bush’s policies will imply, if the nation embraces them, about the value to be attached to work. Ronald Reagan’s brand of supply-side economics repeatedly emphasized incentives “to work, save, and invest.” (If people could keep more of their income, they would, it was said, work harder.) In the new incarnation, the first element in this familiar triad has somehow disappeared. In his acceptance speech at the Republican convention, Mr. Bush said nothing about incentives to work; instead he spoke of requiring work as part of welfare reform.

Labor as an input to the economic production process has little place in Mr. Bush’s vision of an “ownership society,” and people whose place in the economy is simply to work for a living are clearly not those whom his policies seek to encourage and reward. Is this the new future—a world in which, as in Star Trek, the problem of satisfying society’s material wants has been solved and human input (or at least input by Americans) is mostly unnecessary? Or is it a betrayal of the long tradition of respect for everyday work that Max Weber identified with Calvinism, and that in America has been a popular moral theme from Cotton Mather to Horatio Alger to Franklin Roosevelt to Ronald Reagan?

A consistent emphasis running through President Bush’s economic policy proposals is on encouraging families and individuals to look after their own needs rather than look to either their employer or the government. The prime example to date is the new Health Savings Accounts (HSAs), which people can now set up when they purchase health care insurance with a large deductible. Money contributed to an HSA is tax-deductible, up to $2,600 for individuals and $5,150 for families, and withdrawals to pay medical bills are tax-free. Interest earned in an HSA is also free of tax. One objective of these accounts is to get people to pay more of their ordinary health care costs on their own rather than have either private insurance or government cover every dollar of their care. (The assumption is that since they are paying directly they will therefore be reluctant to let their doctors order “unnecessary” procedures and drugs.) A second objective is to stimulate private saving.

A cogent case can be made for both objectives; the debate is over whether HSAs are the right way to achieve them. Mr. Bush is now proposing to encourage greater use of HSAs by allowing those who have them to deduct from their taxable income the premiums they pay for major medical insurance. He is also proposing a combination of direct government contributions ($1,000 per account) and refundable tax credits to encourage lower-income people to use HSAs.

When Mr. Bush ran for president four years ago, he similarly embraced the idea of allowing workers to divert part of their Social Security contributions into “personal accounts,” over which they would exercise some degree of investment control, and from which they would then receive a portion of their benefits on retirement. This proposal is more controversial, not least because taking money away from the core Social Security fund—from which current payments are drawn—would worsen the imbalance between intake and outgo that Social Security will face as the baby-boom generation retires and the ratio of workers paying in to retirees drawing benefits shrinks. It is not surprising, therefore, that Mr. Bush made no progress on this front during his first term. But he has revived it as part of his reelection campaign. Here too, the twin objective is to encourage private saving—the theory is that once people get used to making decisions over their Social Security personal accounts they will want to save more outside of Social Security—and also to move in the direction of having retirees depend on savings that are identifiably their own, rather than on a government-sponsored system. (Many advocates of this proposal would like to see America in time move all the way in this direction.)

Even elements of Mr. Bush’s economic program that stand at some remove from core issues of saving and investment have the same general objectives. One part of his approach to unemployment, for example, is to offer Personal Reemployment Accounts of up to $3,000 for unemployed workers to use to finance job training, or simply to keep as a “cash bonus” if they find a new job within thirteen weeks. Similarly, part of his approach to stimulating housing is a tax credit for builders who put up houses designed to be affordable to middle-income families; he would also provide funds to enable state housing finance agencies to give further tax credits to developers who build in below-median-income areas. Houses are different from financial assets, but the idea of encouraging saving and ownership is the same. The administration’s proposals to expand the existing Individual Retirement Account program into a combination of Retirement Savings Accounts and Lifetime Savings Accounts, with a maximum contribution of $30,000 for a family of four using both RSAs and LSAs, likewise moves in the same direction.

Finally, Mr. Bush has called for a high-level commission to consider fundamental tax reform. Although he has not been specific, the consistent direction of many of his other proposals suggests that what he has in mind is moving as close as proves politically feasible to a system in which both savings and income earned from savings are exempt from taxes altogether, and the entire burden of financing the federal government falls on income that is earned from working—what The New York Times recently called a “wage tax.”

Senator Kerry takes a sharply contrasting approach to these issues. The difference emerges most starkly in his proposals for health care, which at an estimated cost of $653 billion for the next ten years are by far the most ambitious element in his domestic agenda. Mr. Kerry would have the federal government take over responsibility for medical claims in excess of $50,000, thereby cutting the costs of ordinary medical insurance and making it easier both for employers to offer it and for families to buy it. He would also expand Medicaid eligibility to include millions of the children who, to America’s shame, currently lack medical insurance, and he would include as well many of the unemployed or otherwise low-income parents of these children.

Both candidates seek (or at least say they seek) to expand health care coverage to include many of the 45 million Americans who are now without it. But Mr. Bush’s HSAs, which are controlled by individuals, would work outside the existing system of health care insurance for the nonelderly based on employer contributions; and over time they will work to undermine that system. He also proposes little if any expansion of the backup the government provides (mostly through Medicaid) for those whom that system misses. Mr. Kerry’s proposals would instead strengthen the employer-based system and would both reinforce and expand the government backup.

The contrast is just as evident in what Mr. Kerry is not proposing. He opposes “personal accounts” to replace Social Security, and instead offers a variety of (mostly small-scale) ideas for strengthening the Social Security system. He certainly does not favor diverting funds from Social Security in a way that would hasten the time when the nation has to consider cutting retirement benefits or even doing away with government-provided pensions altogether. Similarly, while Mr. Kerry has offered suggestions for tax reform, they are mostly about eliminating clearly abusive corporate tax benefits. He surely does not plan to take America’s tax system in the direction of a consumption tax or a tax only on income earned by working.

2.

It is important to distinguish the goal of encouraging people to save from the effect of merely rewarding those who happen to be both willing and able to save. An often quoted quip from the French Revolution had it that France’s ancien régime was fully egalitarian: in Paris both rich and poor were equally permitted to spend the night sleeping under the city’s bridges. President Bush’s economic program seems to aim at a comparably egalitarian America in which both rich and poor are equally encouraged to save what they earn and live off tax-free income from their savings and inheritances.

The point as it bears on middle-class American families today is twofold. First, with an income stuck at just over $50,000, and with health care fees, college tuition, and other middle-class expenses rising sharply, the median American family does not feel able to put much aside. The families in the top one percent of income distribution, whom Mr. Bush’s policies consistently favor, have incomes of over $1 million. It is easier to see how they can take advantage of enhanced “incentives to save”—which should be translated in their case as “rewards to be collected for saving.”

Second, most of the money that middle-class American families do manage to save goes into two kinds of assets, their houses and their 401(k) plans, which are already heavily tax-protected. The average family in the middle fifth of the income distribution has a net worth of $37,000, distinctly less than a year’s income. Among those families that own their own homes, the average value of their house, after allowing for their mortgage obligation, is $50,000. Among those who have 401(k) plans and similar tax-deferred retirement accounts, the average net worth is $12,000.¹ Yes, Americans own, outright, trillions of dollars’ worth of stocks, bonds, real estate, and other assets. But the Americans who own those assets are mostly those at the upper level of the distribution.

Incomes in America have been growing more unequal since well before George W. Bush (or Ronald Reagan, for that matter) became president. Sometime in the late 1960s, or the early 1970s at the latest, the narrowing of inequalities that had been going on for decades began to reverse itself, and since then the incomes of Americans have become progressively more unequal. The reasons are many, diverse, and much debated.

But President Bush’s policies to date have also further skewed that growing imbalance. A study released in August by the Congressional Budget Office confirmed what everyone already knew: that the tax cuts enacted during Mr. Bush’s term have disproportionately favored families who have the largest incomes. To date, the middle fifth of taxpayers (average income $57,000) have had their after-tax incomes boosted by 2.3 percent. Those in the top fifth (average income $204,000) have received a 5.2 percent boost. For those in the top one percent (average income $1,171,000), after-tax incomes have risen by 10.1 percent.

Here again the contrast to Senator Kerry’s proposals is sharp. Of the $269 billion that all taxpayers combined will save this year because of the Bush tax cuts, $179 billion will go to the top fifth of taxpayers, and $89 billion to the top one percent. Hence Kerry’s proposal to rescind these tax cuts for people earning more than $200,000 would provide large revenues for the government. In considering the costs of the Kerry proposals, the question of whether America can afford $65 billion per year to expand health care coverage, as he recommends, is really a question of whether those with million-dollar-plus incomes can afford to pay for it. The answer is clearly yes. Whether they should do so is of course an ethical as well as a political question, one that next month’s election will partly decide.

Other elements of the Kerry program also seek to stem or reverse the recent skewing of the income distribution—and, importantly, in ways that would enable more people to get better- paid work. His proposals for expanded job training go far beyond what the Bush administration has either done or proposed to do. In contrast to Mr. Bush’s approach to education, which claims the almost entirely unfunded No Child Left Behind Act as the President’s distinctive contribution to domestic policy, Mr. Kerry would fund a variety of education initiatives including expanding Head Start coverage, increasing the number and quality of teachers in schools, and financing out-of-school programs.

The consistent objective is to make tomorrow’s American workers more productive and therefore able to earn higher wages. As is well known, there is continuing controversy over whether programs like Head Start improve students’ academic performance in a lasting way, as measured by the usual standardized tests. But the evidence is clear that those who take part in such programs, when compared with those from equivalent “at-risk” backgrounds who don’t, are more likely to finish high school and go on to college, more likely to hold a job and receive higher wages, and less likely to commit crimes or become pregnant in their teens.

Mr. Kerry’s proposal to increase the minimum wage to $7 an hour is again consistent with the goal of emphasizing the importance of work. At $5.15 per hour, the current minimum wage is 26 percent lower after allowing for inflation than when President Eisenhower introduced the $1 minimum in 1956. At $7, Kerry’s minimum would, when adjusted for inflation, be identical to Eisenhower’s. President Bush wants to ensure that those able to save are rewarded when they do so. Mr. Kerry seeks to ensure that those able to work are rewarded.

Even the US government’s astonishing turn from record budget surpluses under Clinton to record deficits under Bush has elements of the same contrast. Surpluses mean that the government is adding to the saving available to finance the nation’s investment in factories, equipment, and other productive assets. In the financial markets the effect is to reduce real interest rates and the real returns to other assets as well. In the nonfinancial economy the effect of a budget surplus is to stimulate a higher investment rate and therefore faster productivity growth, and ultimately greater growth in wages and living standards. Eliminating the deficits of the Reagan and first Bush administrations and producing the Clinton surpluses had exactly those effects: the US economy’s investment rate rose, productivity shot up, and, for the first time in two decades, both real wages and the median family’s real income recorded solid gains.

One terrorist attack, two wars, and three tax cuts later—including what President Bush hailed as the largest tax cut in US history—the situation is reversed. In January 2001 the Congressional Budget Office projected surpluses averaging 4.5 percent of US national income over the ten years 2002–2011. Last month the CBO projected deficits averaging 2.3 percent of national income over the same ten-year span. In a country where private saving (after allowing for depreciation and obsolescence) has averaged only 5.4 percent of national income over the last decade, a budget swing of this magnitude is more than sufficient to wipe out any plausible stimulus to saving and investment that incentives created by lower taxes would allegedly create. In time the deficit will cause real interest rates to rise and capital formation to be reduced; productivity will grow more slowly, and so will wages. Returns from owning assets will benefit. Returns from working at a job will suffer.

Both Mr. Bush and Mr. Kerry say their goal is to reduce the deficit by half over the next four years. Mr. Bush’s claim is clearly not credible. Most obviously, this projection relies on allowing his tax cuts to be phased out, as specified under current law. But he proposes to extend these cuts, and in his campaign he has repeatedly highlighted that goal. He claims that he will find sufficient spending cuts to cut the deficit nonetheless, but he has not said what programs he wants to cut. Certainly in his first term he has shown no reluctance to spend money, even for non-defense programs (witness the doubling of farm subsidies); nor have his supporters in Congress. Indeed, those members of Congress who have signed the “No New Taxes Pledge” turn out, on average, to vote for more domestic spending than those who have not.²

Kerry, too, points to largely unidentified savings, mostly from running the government more efficiently, as well as to tax loopholes to be closed (these are mostly unidentified although he has, for example, called attention to the taxes avoided by corporations that move some units overseas). As his critics have pointed out, he is proposing new spending, and what he proposes to spend for health care is sizable (though nowhere near as much as the Medicare prescription drug coverage that Mr. Bush put in place with no provision whatever to pay for the three quarters of the cost that subscribers’ premiums will not cover). But he has also been explicit about one source of new revenue—rescinding the Bush tax cuts on incomes above $200,000—and the amounts involved there are sizable as well.

In the end is Kerry’s claim to potential deficit reduction credible? Do all his different proposals “add up”? No one can be confident of the answer. Too many elements in the economy and in the fiscal implications of his program are unpredictable. What is clear, however, is that under Kerry the relation of Americans to their government would be very different from what they would have with President Bush with respect to the burdens of taxation and the purposes of federal spending. The distinction between those who earn enough to save most of their income, or who get their income mostly from savings, and those who work and have to spend most of what they earn would have a lot to do with the difference.

Attitudes toward work are one way to judge how a society regards itself. Athens and Rome were slave societies. Citizens ideally did no work, but rather devoted themselves to participation in civic affairs. The Judeo-Christian tradition more typically regarded work as a necessity compelled by divine order, reflecting an essential burden borne by humanity (in its most concrete form, the expulsion from the Garden of Eden: “In toil thou shalt eat of it all the days of thy life…. In the sweat of thy face shalt thou eat bread”).

In America, where the prevailing concept of both society and the individual’s place in it has traditionally been dynamic, not static, work has always been identified with the theme of personal advancement. Tocqueville dwelled at length on the “restlessness of temper” with which the citizens of the new nation went about their business:

It is strange to see with what feverish ardor the Americans pursue their own welfare…. Everyone wants either to increase his own resources or to provide fresh ones for his progeny.

Seventy years after Tocqueville’s visit, Max Weber famously identified this kind of eagerness to achieve worldly advancement with the Reformed Protestant notion of the “calling.” Weber chose the thoroughly secular Benjamin Franklin as the “ideal type” of what he called the “Protestant ethic,” but he could easily have pointed to American religious leaders such as Cotton Mather and Jonathan Edwards as well. (Mather wrote, “Every Christian should have a calling…some settled business wherein…he may glorify God by doing of good for others and getting of good for himself.”) Tocqueville’s Democracy in America even included a chapter titled “Why Among the Americans All Honest Callings Are Considered Honorable.”

Later in the nineteenth century, Horatio Alger’s earnest declaration that “all honest work is respectable” sounded like an echo of Tocqueville. And at times when large numbers of Americans have been unable to find work, that too has typically been framed as a moral problem. During the Great Depression—hardly a time when most Americans thought of themselves as rich—Roosevelt declared, in one of his fireside chats, that “no country, however rich, can afford the waste of its human resources. Demoralization caused by vast unemployment is our greatest extravagance. Morally, it is the greatest menace to our social order.”

Today some Americans may regard the waste of our human resources as a cost the nation can afford. Some may not even regard human resources on a nationwide scale as a resource at all; for them the workforce is more likely to be seen as a problem, a liability. It is hard to imagine that this view represents the outlook of more than a small minority. But the direction charted by the current administration suggests that it is highly influential nonetheless.

Judging from the economic proposals that the two candidates have offered, and in President Bush’s case from those he has actually carried out during his first term, the fundamental economic issue of this election involves the respective roles of work and saving—of labor and capital—in the economy we seek to create. Do we value and encourage one, or the other, or both? Do we look to income earned from one, or the other, or both, to pay for what we collectively undertake as a society, whether in waging war in Iraq or providing health care or education at home? Do we distribute economic rewards to those among us who happen to be in a position to do one, or the other, or both? These questions are what our choices are really about.