More than any election in living memory, the 2012 race is shaping up to be about one thing: jobs. Pundits are convinced that the rate of job growth between now and November is the magic number that will determine the outcome. The main policies the candidates are debating—whether to cut taxes or raise them on the rich; whether to shrink government or increase investments in infrastructure or research—are all pitched as ways to “grow” jobs. The presumption is that if we can get the economy to create jobs like it used to, America will be back on the right track.
But it’s worth remembering that before the crash we had nearly full employment, and yet it had already become clear that the American Dream was fading for most Americans. Indeed, the middle class was drifting into insolvency. Through a combination of stagnant wages, indebtedness to often predatory lenders, and the rising cost of middle-class staples such as health care and energy, the average family’s personal balance sheet—assets minus liabilities—was turning red. Household debt soared from 77 percent of disposable income in 1990 to 127 percent in 2007. During the same interval, the personal savings rate dropped from 7 percent of disposable income to near zero.
By 2007, the average consumer was so tapped out that even many people with jobs were no longer able to make their mortgage payments. That was the spark that set off the financial crisis. The ensuing recession further ravaged family balance sheets. The Federal Reserve made front-page news in June when it reported that median family net wealth had decreased by nearly 40 percent from 2007 to 2010, with younger families being particularly hard hit.
With household asset levels so depleted, it’s folly to think that the economy can be set right merely by adding more jobs, however much they’re needed. That’s the lesson of the Great Depression and World War II. As James K. Galbraith has pointed out in these pages (“No Return to Normal,” March/April 2009), the New Deal built infrastructure and put Americans back to work, but failed to spark self-sustaining economic growth. It was “the war, and only the war that restored (or, more accurately, created for the first time) the financial wealth of the American middle class.” Not only did the war boost production to levels never before seen, just as importantly it increased household savings. Faced with rationing and price controls, and inspired by patriotic zeal, Americans poured their incomes into war bonds. After the war, these savings boosted the balance sheets and creditworthiness of millions of Americans, thereby making the great postwar boom possible.
The obvious lesson for our own time is that whatever we might do to stimulate the economy—through direct federal spending, as Democrats want, or tax cuts, as Republicans demand—won’t be enough to put us back on a path to healthy growth. We’ll also need policies that specifically and directly help ordinary Americans both to avoid ruinous debt and to accumulate productive assets.
The stories that follow make the case for a variety of such policies. On the debt side, what’s needed is a regulatory crackdown on abusive lending so strong that consumer finance firms either change their predatory business models or go out of business. That, in theory, is the mission of the Consumer Financial Protection Bureau, the new watchdog agency created by the Dodd-Frank financial reform law. The question is whether the agency will be allowed to do its job, or will get strangled in its crib.
On the assets side, we argue for two kinds of policies. The first would better enable Americans to save and build wealth, like a new mandatory retirement savings plan to ensure that young people today have the assets they need to avoid poverty in old age. The second would allow people to reap higher returns on assets they already have—for instance, by letting homeowners produce and sell green energy from solar panels on their roofs.
Over the last twenty years, abundant pilot projects and social science research have confirmed that with the right incentives and institutional structures, even the poorest Americans can save, and that asset accumulation has long been the prime determinant of who gets ahead in American life and who does not. More recent findings show that the effect is not just material, but aspirational. Children who acquire the savings habit and even a modest nest egg are more likely to strive for good grades and a chance at college, for example. All this research and experimentation has yielded valuable insights about what works and what doesn’t in asset-building policy and could help us take the best of these policies to scale.
The means to do so are within our reach. Every year, the American tax code directs half a trillion dollars to subsidize savings and homeownership, via things like the mortgage interest deduction and preferential rates for capital gains. Some 80 percent of these tax expenditures goes to the richest 20 percent of Americans—precisely the people who need the least help saving. Redirecting a portion of this windfall to help people of modest means save and acquire assets could transform the economy as profoundly as the policies that nurtured household savings during World War II. With the entire tax code likely to be on the table shortly after the next presidential election, the political opportunity to correct this major and egregious cause of economic stagnation and diminishing opportunity in American life has not been greater in generations.
Rebuilding the tattered balance sheets of ordinary American families does not offer a free ride to prosperity. Nor will it transform the economy overnight. But, like the magic of compound interest, it has the capacity, if followed over the course of years, to restore an American Dream that all of us can realistically hope to achieve.