No Third Rail - Investor Politics: The New Force That Will Transform American Business, Government, and Politics in the Twenty-First Century - Review

National Review, Nov 19, 2001 by Kevin A. Hassett

Investor Politics: The New Force That Will Transform American Business, Government, and Politics in the Twenty-First Century, by John Hood (Templeton, 308 pp., $24.95)

In the post-Reagan era, conservatives have aggressively pursued two major economic-policy objectives: lower marginal tax rates and the privatization of Social Security. On taxes, the struggle is ongoing, but Republicans have won more battles than they have lost; marginal tax rates are now about half as high as they were when Reagan took office. The Social Security skirmishes, however, are another story. Every election year, conservatives roll out plans for privatization; Democrats respond with highly effective efforts to induce hysteria, by suggesting that the GOP is preparing to float America's senior citizens away on an iceberg.

One could, therefore, forgive right-wing politicians if they felt a vague yearning to talk about something else. But the fact is, we have to talk about Social Security. As John Hood makes abundantly clear in his insightful new book, the consequences of the Social Security debate are immense. Indeed, its outcome will profoundly shape the political history of the 21st century. And this, says Hood, is good news.

His book provides ample cause for optimism. It begins with a carefully researched, albeit lengthy, history of the welfare state: Much of American political history involves pitched battles between those with property and those without, with the latter seeking to use the confiscatory power of government to finance generous entitlements. This issue was, Hood reminds us, a central concern for our Founding Fathers. The reason Thomas Jefferson supported an agrarian rather than a commercial republic was that he foresaw that industrial prosperity would cause farmers to migrate to cities. When that happened, the farmers would lose their vested property interests, and democracy's ideal citizenry would be lost. Ordinary laborers would become dependent on their employers, and, in Jefferson's words, "dependence begets subservience and venality, suffocates the germ of virtue, and prepares fit tools for the designs of ambition." He viewed this situation as the antithesis of farming, which-because farmers own their capital and develop a protective sense of community-is conducive to public virtue.

Hood is an able policy analyst, and carefully documents how well founded were Jefferson's fears. Over time, conflicts between those with property and those without dramatically reshaped our economic landscape. Most important, big, intrusive government programs sprang up that have had the self-sustaining effect of encouraging citizens not to acquire wealth. The most significant of these is Social Security, which collects 15.3 percent of a worker's salary (half from the worker and half from the employer) and promises to pay benefits upon retirement. Since 15.3 percent is well above the desired saving rate of most people, the policy virtually guarantees that a large share of the populace will have nothing in the bank. This, in turn, creates a moat around our bloated government, and a barrier between our society and the ideal proposed by Jefferson.

But the moat has grown shallow. Investments have a funny property that has worked a quiet magic over the years: Their returns compound. Many Americans have regularly put small amounts of money into private investments, and these stakes are now impressive. Armed with newfound wealth, many are again pursuing Jefferson's property-based society, and aggressively supporting limits on large and intrusive government. Their voices have been added to those of traditional property owners, and this new coalition has acquired significant political might. Today, as a result, it is far less politically risky to advocate Social Security privatization and other free-market policies.

Since the case for privatization is so strong, we can expect to see it broadcast to this ready audience with increasing urgency. Republicans will quietly renew their efforts later this year, when President Bush's Social Security Commission issues its report. Other-surprising-voices may soon join them. Indeed, one can always ascertain how strongly the facts support a conservative policy by inspecting Democratic rhetoric. When the evidence becomes overwhelming-welfare reform comes to mind- then the policy often turns out to have been a Democratic idea all along. Already there are rumblings. At some point soon, then, it is likely that Democrats will embrace partial privatization of Social Security. After that, the rest of the Social Security program will likely change. With investors a large and growing voting bloc, it will be easy to enlarge the private accounts.

What happens after that? What will the Left and the Right argue about if taxes and Social Security have been fixed once and for all? It is here that Investor Politics makes its strongest contribution. Having carefully constructed a framework for interpreting political conflicts and the policies that have resulted from them, Hood goes on to muse about the types of reforms that might be possible once everyone has an ownership stake in society. In so doing, he provides an interesting road map to the likely policy debates of the 21st century. After privatization, just about everyone will recognize the tremendous possibilities associated with private ownership. New policies, once unthinkable, may become possible. Hood lays out a description of many of these, and-for an inside-the-Beltway wonk, at least-it is entertainment of the highest order. Who needs government unemployment insurance? Why not let individuals invest their own money in private policies, or provide "unemployment savings accounts"? Other areas- including education, welfare, and health policy-are just as ripe for similar reforms. After having a taste of freedom and control, American voters might never turn back.