In tomorrow night's acceptance speech, President Bush is expected to make a brief diversion from all the convention 9/11 commemoration to talk about his domestic agenda, notably his vision of an ownership society.
The idea of the ownership society is that the more people own assets like homes and stocks, the more likely they'll be to think like capitalists and entrepreneurs, hence boosting the GNP (and probably the GOP). Bush and his allies took steps toward the ownership society in his first term when they reordered the tax code to favor investment income over wage income.
The major obstacle to greater ownership isn't a recalcitrant Congress or an American fear of investing. It's debt—debt that the president and his ally, Federal Reserve Chairman Alan Greenspan, have done their best to increase. President Bush, despite having an MBA, has never shown much understanding of finances, and he has failed to recognize that there are two sides to the ledger: assets and liabilities. The defining financial phenomenon of President Bush's first term has been a vast increase in the amount Americans owe—collectively and as individuals. Thanks to Greenspan's marvelously accommodative monetary policy and the Republicans' reckless fiscal policy, we have more of a debt society, and less of an ownership society.
There has been a little progress on the ownership front in the past few years. As Bush repeatedly trumpets, home-ownership is up, from 67.5 percent of the population at the end of 2001 to 69.2 percent of the population in the 2004 second quarter. (Here's the Census Bureau's data on home-ownership.) And Americans have proven to be resilient investors. According to the Investment Company Institute, the number of American households owning mutual funds has risen from 51.7 million in 2000 to 53.3 million in 2003, although the percentage of households owning mutual funds has fallen from 49 percent to 48 percent.
But these extremely modest increases in ownership have been drowned out by massive increases in debt. The Federal Reserve Board lays it out in its quarterly Flow of Funds report. (See tables D.1-3, on Pages 6-8 for the relevant data.) Total U.S. nonfinancial debt—which is all the debt held by governments, households, and companies not in the financial sector—has risen from $18.1 trillion in 2000 to $22.8 trillion in the first quarter of 2004. As a result, after holding steady for much of the 1990s, the ratio of nonfinancial debt to GDP has risen in each of the last few years and has topped 2 to 1 for the first time. Every component of that debt has been rising in alarming ways. Federal debt rose from about $3.4 trillion at the end of 2000 to $4.15 trillion in the first quarter of 2004—up more than 22 percent. Total household debt has soared from $7 trillion at the end of 2000 to $9.5 trillion in the first quarter of 2004, up 36 percent. The amount of outstanding mortgage debt has risen 43 percent in Bush's first term, while consumer credit is up 20 percent. State and local government debt has risen sharply, too, up 33 percent since the end of 2000. And with investment banks and hedge funds taking full advantage of Alan Greenspan's near-free-money policy,financial debt, too, has risen 35 percent since the end of 2000.
How does the rise in debt jeopardize President Bush's plans for expanding ownership? Unlike the loan Bush took when he was on the board of Harken Energy, these debts have to be paid back. Let's say the income of individuals and governments fails to grow rapidly, as has been the case for the last few years. They will still have to service their debts. After making required interest and principal payments, there isn't likely to be enough cash left over for the government to make the necessary investments in defense and education, or for individuals to pay into 401(k)s and medical savings accounts—the kind of ownership investments the president favors. If debt continues to increase at twice the rate of economic growth, we can expect more personal bankruptcies and home foreclosures, in which case people who recently became owners lose their assets. (Andrew Jacobs' excellent pieces in the New York Times earlier this spring on the rash of foreclosures in the Poconos provide a cautionary tale.)
What's more, each of Bush's ownership proposals would require adding even more to the federal debt. Bush's signature plan for Social Security involves allowing younger workers to divert a portion of their payroll taxes into accounts that they would own. It's a nice idea. But in order to do so while keeping promises made to current older workers, the government will have to come up with transitional costs on the order of several hundred billion dollars. Every penny of that sum would have to be borrowed. The same holds true on a smaller scale for other Bush proposals like expanding health and retirement savings accounts.
Since one person's debt is another person's asset, the vast expansion of American debt in recent years theoretically could have been accompanied by an equivalent rise in American assets. But the U.S. is blessed with open and vibrant capital markets. With Americans simply refusing to save, the government has increasingly sold its debt to the central banks of our trading partners like Japan and China. To a large degree, then, the debts of American taxpayers are now the assets of Asian governments. If the U.S. Department of the Treasury simply becomes a funnel through which American tax dollars flow to foreign central banks, President Bush's ownership society could become more of an Asian phenomenon than an American one.
But don't expect to hear much about deficits or debt tomorrow night, or any time this week. Like the phrase "Democracy in Iraq," the words have simply evaporated from the Republican vocabulary.