Sunday, March 20, 2005

`Ownership society' is hardly a new notion

San Jose Mercury

When George W. Bush speaks of an ``ownership society,'' his words resonate. They sound bold, visionary and forward-looking. Yet they are not actually original. Indeed, they evoke some of the strongest and longest-running themes in our social history, from the Homestead Act through Huey Long, from populism to Peter Drucker, avatar of ``pension-fund socialism'' in mid-20th-century America.

Ownership has always been a progressive American goal. So much so that, on one occasion, the radical University of Texas economist Robert Montgomery, once a teacher to Lyndon Johnson, was hauled before the Texas Legislature to defend his views. According to legend, the entire hearing -- the shortest on record -- went like this:

Q Professor, do you believe in private property?

A Oh yes sir, senator, I believe in private property. I believe in it so strongly, I think everyone in Texas should have some.

The creation of an ``ownership society'' has distinguished American progressivism from the democratic socialism of the mainstream European left, which prides itself on the provision without charge of medical care, and on non-contributory (pay as you go) public pension schemes. But on the other side, Europeans largely live in apartments and rented homes. And although higher education in Europe is generally tuition-free, it also is restricted to a much smaller part of the population than is the case here.

In the United States, ownership starts with housing. We invented the 30-year mortgage and built the savings and loans, in the New Deal, precisely to take the risk out of borrowing to own a home. The Veterans Administration, Fannie Mae and Freddie Mac later helped pool the risk associated with lending. Most recently, the Tax Reform Act of 1986 set off a continuing rise in American ownership of homes, by favoring mortgages over other forms of debt. Today, about two-thirds of American families own their own homes, and middle-income Americans own about nine times as much housing as corporate stock.

Human capital

Americans own two other exceptional common assets. The first is what some economists call human capital: University educations are started by more than half of the adult population and have been completed by more than a quarter. In California -- the vanguard state in this respect -- the longstanding goal has been universal access to higher education, at qualities ranging up to the highest available anywhere in the world. This is the foundation of California's leadership role in the knowledge economy.

The other great asset owned by ordinary working Americans since 1935 is Social Security wealth. This is the present value of the income stream that today's working population can expect from Social Security, after they retire or become disabled -- or for their survivors if they die young. It is an enormous sum -- many trillions of dollars in capital value. And, because it is backed by the force of law, it is completely without financial risk. Social Security wealth is as good as any U.S. government bond, except of course for the purely political risk that future benefits may be cut -- as Bush and his allies are proposing.

But when Bush and his backers speak of an ``ownership society,'' they want Americans to forget about the assets they already own. Instead, their focus is on assets of which most people own relatively few -- corporate stocks. It is true that about half of Americans own some corporate stock (usually indirectly, through a mutual fund created as part of a pension plan, IRA or 401(k)). But well over 70 percent of the value of all stock is owned by 5 percent of American families, and for the other 95 percent, stocks form, for the most part, a minor backdrop to funds available for retirement and other goals.

Forty percent of all retirees aged 65 and higher live exclusively on Social Security; the bottom 60 percent of elderly people rely on that program for more than half their income. Only the top 40 percent of America's elderly can draw on assets (usually, via a pension) sufficient to double the modest benefit that Social Security provides.

Wide variation

And while they want us to associate ``ownership'' with ``stocks,'' the Bush administration, in proposing privatized Social Security stock accounts, would have us forget the most important feature of ownership of this type: risk. Stocks are intrinsically risky. They go up and they come down. This is true of individual portfolios, and it is true of the market as a whole.

Over even short periods of time, the variation in historical returns on the Standard & Poor's 500 is enormous. Under Social Security privatization, workers cashing in after 30 years as little as one or two years apart should expect large differences in their annuities depending purely on the state of the market when they retire. If the market crashes when you're 64 -- tough. Many would end up poor -- or in the laps of their children.

Meanwhile, risk is increasing in the ownership society we now have. In no sector has the risk gone up more than in the great asset that defines the American middle class: housing. And in no place, surely, more than in California.

Is California in a housing bubble? From anywhere else in the country it looks that way. The median sales price of Bay Area single-family houses hit a new monthly record in February, reaching $569,000. For Santa Clara County, the figure was $632,000, up 20 percent from a year earlier.

And it's certain that housing in California is in hock -- to an extent never before seen in our history and probably not in the history of any other place. It's clear, too, that American households as a whole are gradually coming to the limit of their willingness and ability to borrow against their homes to finance consumption expenditures of other types, from vacations to medical bills to college expenses to home furnishings -- all of which have helped the economy. Mortgage debt is now more than 80 percent of personal disposable income, up from about 60 percent in 1998 and from just 40 percent in 1984.

Last week, UCLA's quarterly Anderson Forecast warned that much of the prosperity found across California is coming from a real estate bubble, a situation those economists believe is unlikely to last much more than another year.

As long as interest rates remain low, any deflation of a housing bubble would be slow. A housing bubble is not like a stock bubble -- prices don't all collapse at once. Buyers notice long before sellers do. Unsold inventory accumulates in local housing markets. Residential construction slumps. And, without construction, the regional economy stagnates. It's not great, but it's not the end of the world. We saw as much in Texas, 20 years ago. It took more than half a decade to recover, but eventually Texas did.

Interest rate perils

But if interest rates rise, pushed up for any number of reasons by the Federal Reserve, then things might unravel more quickly. Would Alan Greenspan do that? Would he prick the bubble and crash the California housing market? To be sure, Greenspan let the stock bubble inflate for years. He has no special reason to care about the housing bubble. Outside of housing -- and also oil, an imported price -- there is virtually no inflation for the Fed to fight.

But today Greenspan has a weak dollar to defend. He has no way to defend it, except by raising short-term interest rates in the hopes of persuading the Chinese and Japanese to hold their dollars. He's been doing that for a year already. There is no sign he plans to stop.

So far, long-term interest rates haven't gone up. But if the Fed continues to tighten, they eventually will. And then housing, stocks, business investment and exports -- along with consumer spending -- could go down together.

Bush's ownership society won't be worth much if that happens. And Americans might remember, with a touch of nostalgia, that the days when we owned houses to live in, and had Social Security to retire on, weren't altogether bad.


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