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As Washington debates how to increase America’s indebtedness, American families watch their wealth shrink: A lesson for lawmakers

Ryan Streeter
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Pew has a new survey out today on the wealth gap in America, showing that the wealth gap between whites and minorities is at an all-time high. The report will be used by many enthusiasts of class warfare and racial politics to drum up a range of bad ideas and policy recommendations.

But we shouldn’t let that take our eyes off the reality behind its findings: between 2005 and 2009, American families – and especially minorities – saw their overall net worth take a big hit.

Because assets among minorities have been concentrated mostly in their homes, America is at a fragile point in our socioeconomic history: cynicism about the American Dream is real and even understandable. We have pushed homeownership as the main fulfillment of the Dream for a long time, and now it is the main reason why many Americans - and especially minorities - are feeling poorer these days.

Some key findings from the report:

Net worth is down dramatically. Between 2005 and 2009, whites saw their net worth drop 16%, while Hispanics experienced a 66% drop and blacks 53%. Let those minority figures sink in. They're huge. And they're owing to the fact that a disproportionate amount of net worth among minorities was wrapped up in homes, while whites have  diversified their wealth more.

Zero or negative net worth has spiked. More than one third (35%) of black families and 31% of Hispanic families have zero or negative net worth, compared to 29% and 23%, respectively, in 2005. Among whites the figure rose from 11% to 15%. Even if people have jobs and are paying their bills, the loss of a sense of forward progress for many Americans has a dangerous dampening effect on aspiration and a willingness to try hard to get ahead.

Business equity is way down. Buried in the report, and ignored in the headlines altogether, is that – as a percentage – business equity has dropped the most for all racial groups. More than housing, more than anything. The housing bubble recession has also taken a huge toll on enterprises, especially those of minorities – business equity dropped by 54% for Hispanic and 57% for black households.

While everyone’s consumed with the debt negotiations, there are three very important points that lawmakers should take away from this report:

The politics of debt is hitting home for ordinary Americans like never before. Most Americans never knew when Washington rose the debt ceiling in the past. Now they do, because Washington's profligacy stands in stark contrast to the reality of their lives. Across America, people feel poorer – because they are. They are shedding debt as Washington takes more on. They are most interested in how the actions of lawmakers in Washington affect their prospects. Lawmakers will not earn their praise for reaching a "deal" but for finding a solution that increases opportunity.

We clearly need a renaissance of the American Dream. The Dream will likely be revived through a new emphasis on entrepreneurship and business creation, not homeownership. This was Walter Russell Mead’s point here. It makes sense because (1) we need to increase the rate that we create new companies in America if we want job growth, and (2) the downward pressure on home values will continue for some time, even as prices start to slowly climb (meaning, home values won’t rise as rapidly as we once expected them to do). New businesses and growing investments among Main Street Americans is the way forward.

Washington needs to focus on upward mobility. Whether people have had an opportunity to improve the quality of their lives has always mattered more than how unequal America is. That is, so long as people have a shot at upward mobility, they don’t care as much if the rich are richer than they are. The question for Washington is what drives upward mobility. Right now, we are living through an undemocratic recovery – that is, one that is benefitting the affluent while everyone else struggles. Republicans need to understand that what Americans want isn’t just jobs, though they want those, too: they want opportunity, a way up, a realistic shot at improving their lives over time.

Upward mobility and the American Dream are in peril at a time when Washington wants to raise the debt limit to a number larger than our entire economy. That's not only terribly ironic. It's also the main conclusion lawmakers should draw from the report as they explain to their constituents what exactly it is that they're trying to do in Washington these days.

Four key issues separating how conservatives and liberals view poverty, the loss of opportunity, and what we should do in response

Ryan Streeter

Whether we recognize it or not, we as a country are engaged on the front end of what will be a protracted debate about the purpose of government.

Post-2008 Democratic overreach, the November elections, the spending debate, and our deficit debate – underneath all of this is a fundamental disagreement in America about the right role and purpose of government.

It seems that history has passed by the public institutions we spent so much time and money creating.

This can be seen perhaps most acutely in how we as a nation deal with poverty and the loss of opportunity in our most fragile communities.

The outdated nature of our welfare state is an underlying theme of three posts we ran this week in conjunction with The Clapham Group.

Tevi Troy’s essay showed just how outdated our poverty establishment is. While dropping out, out-of-wedlock childbearing, and poor levels of work preparation and attachment are driving poverty, our institutions focus on myriad other problems.

Jedd Medefind reinforced a key point that Tevi made: when it comes to the most vulnerable among us (orphans), our mass solutions have failed. Success comes at the micro-level by focusing on the individual, families, faith communities, and community. This creates challenges for policy and government.

Mark Rodgers kicked off the week by pointing out that it’s time to reformulate what it means to promote opportunity among the poor and disenfranchised. Very little that we are doing seems to be working.

We live in the 21st century with 20th century programmatic responses to vexing problems such as the sources of joblessness, educational failure, and criminality.

As conservatives and liberals debate stagnation, the loss of opportunity, and poverty, it's worth looking at four key differences in how they view these issues: the nature of the safety net, who's responsible for poverty, how we define "justice," and who controls what's possible under our various policy responses.

1. Safety net – what is it?

Left: Money-based, need-based. The left prefers large programs, large income transfers, with little variation in services. This explains everything from the Left’s advocacy of Head Start to ObamaCare.

Right: Community-based, expectation-based. Public funding should not be tied to some ideal amount, but to high standards that communities help define and meet. Service quality will vary by community, which is a good thing. Poor performers get less, not more, future help.

2. Agency – what is the prime mover of poverty?

Left: Circumstance. Institutions, discrimination, the inherent unfairness in market economies are most responsible for people’s poverty. Changing institutions is the solution.

Right: Behavior.  Culture matters more than institutions (e.g., families in a community affect behavior more than “the system” or employer discrimination).  Individual choices, embedded in communities as they are, open up or close down opportunities. Tying consequences to behavior is a key ingredient in overcoming poverty.

3. Justice – how do we define fairness, equity?

Left: Restrain the upper class. Making the “rich pay” is key, since they are part of the system that they rig to their advantage. This is just and fair.

Right: Elevate the lower class. Removing the barriers to upward mobility and allowing people to advance as far as they can on a merit basis is just and fair. Restraining the upper class in various ways, while not inherently unconservative, does little to remove barriers to the lower class and is therefore not all that related to justice in this regard.

4. Options – who defines what is possible under a given policy?

Left: The designers. The left trusts the experts, the bureaucracy. Liberals don’t really expect ordinary people to make the best choices for themselves. This explains their defense of unions, government workers, regulators.

Right: The doers. Conservatives trust parents to choose schools, patients their doctors, families their insurance providers. Not everyone will choose well. But this is one way of tying consequences to behavior (see Agency above).

The movement, or party, that wins the public's heart and mind in these four areas will have the most success implementing its anti-poverty agenda.

Conservatives should define what opportunity for those left behind looks like in the 21st century

Ryan Streeter

Obama’s been using the word “compassion” lately to frame the 2012 election, according to the Post’s Chris Cillizza.

Listening to the President, “compassion” is predictable code for government spending on social welfare, perhaps with some tax hikes on the rich thrown in for good measure.

Paul Ryan wrote last week in the Washington Post that his budget is “compassionate and optimistic” because of it would spare Americans from the higher taxes and health care rationing that result from the status quo under Obama.

It's interesting that our political leaders are using a word that so many have considered discredited during the George W. Bush years.

As Mark Rodgers points out today, compassionate conservatism faltered, and its resulting unpopularity has kept conservatives from thinking creatively about the relationship between poverty and opportunity. Yet, for millions of Americans, nothing is more important than a little bit of concrete hope and opportunity right now.

The Left has become the movement of the status quo, stasis, unoriginality. Conservatives, on the other hand, have put forward a host of new ideas on health care, entitlements, spending, and education. It's time to extend this spate of originality to opportunity once again.

The Clapham Group, which Mark founded, is organizing an occasional series of posts on opportunity-based conservative solutions to poverty.

Why is this important?

Life, liberty, and the pursuit of happiness. Conservatives have a strong position on the first two, as recent debates over Planned Parenthood and the continuing influence of the Tea Party have demonstrated. But conservatives should also be the protectors of the third. In America happiness is opportunity, ownership, forward motion. The Left has nothing other than the status quo and unaffordable security to offer people in need. Happiness in the near term will mean incremental progress in the standard of living for struggling families. This, in turn, will come through new employment opportunity and lowering the cost burden of daily life.

The safety net needs repairing, and conservatives are the only ones with any fresh ideas on this front. Whether we realize it or not, we have entered a new phase in American public life in which we have begun to radically reconsider what a safety net is and should be.  As the debate over spending has shown us, our expansive entitlement programs are eating away at all other federal spending. Traditional safety net programs are being forced to get smaller, though not necessarily better. Conservative advocacy for means-testing and slowing the growth of entitlements is also an exercise in re-thinking how the safety net in America should be structured. Democrats have no ideas on this front. They want more of the same.

The future of opportunity. Upward mobility is the key to American prosperity from one generation to the next. Yet the lower and middle classes in America face tremendous obstacles to enjoying a future that’s better than what their parents enjoyed. A big reason for this can be found in the fact that the unemployment rate for less-educated Americans is so much higher than it is for the educated. The Left has no plan on this front other than more government support to help people weather economic uncertainty. Republicans are already the party of education reform. They need to build on this and become the party of 21^st century workforce preparation. This means having a higher education plan of action.

More practically at the political level, a focus on opportunity for low-income Americans will appeal to younger and non-traditional voters. The party that figures out what opportunity means for those left behind in the 21^st century (which is including growing numbers of people in their 20s who have gone to college) will be strong.

David Brooks, Kevin Hassett, Gary Andres, Nick Schulz and Ross Douthat on what the GOP can do to improve the prospects of the middle class

Ryan Streeter

Demographer and futurist Joel Kotkin observed Monday on ConservativeHome that the “huge, mainly suburban working, middle and upper-middle class” are politically up for grabs. He says:

These include managers, store owners, lone entrepreneurs and skilled laborers in the private sector. Neither party focuses on presenting a positive vision for growth and improvement of quality of life for this segment. So people in this group shift back and forth, making havoc of the best laid plans of both parties.

This is the shifting middle of America. And many families in this group are facing grave economic stagnation compounded by social breakdown. I have talked about this problem here and here.  

The GOP does not yet have a coherent framework – rhetorically, politically, or in terms of policy – to restore middle class confidence. Or, in Kotkin’s terms, to present the middle class with a positive vision for growth.

Today, to get the discussion going, we feature a mini-symposium of some bright minds on the right, providing an answer in just a few lines apiece to the question: what should the GOP do to improve the prospects of the middle class?

The mini-symposium participants are: David Brooks, Kevin Hassett, Gary Andres, Nick Schulz, and Ross Douthat.

David Brooks

Columnist, New York Times

The most fundamental threat to the middle class is the stagnation of human capital. Graduation rates from college have been flat for a generation. Single parenthood is skyrocketing, among all races and ethnic groups. Social trust is breaking down.

There's no one solution. Building human capital is like nutrition. You have to do it in different ways every day. It starts with better early childhood education, the single most effective investment. It shouldn't be state run, but where applicable it should be state funded. Then there are mentorship programs to support students through college. Job training programs should be turned into voucher programs. Perhaps no job training programs work in the end, but the workers themselves should at least be in control. There should also be social entrepreneurship funds - locally-controlled pots of money to support secular and faith-based groups. 

Basically, people have to grow up in dense communities, with a thousand influences pointing them in the right direction, from conception onward.

Kevin Hassett

Director of Economic Studies, American Enterprise Institute

The most important thing that the GOP can do to help the middle class is cut the corporate tax rate. When Japan cuts its rate next year, we will stand out as the highest corporate tax country on earth. That encourages firms to locate plants in lower tax countries, and depresses jobs here at home. The impact of tax minimization by multinationals is so dramatic that there is a clear Laffer curve in the international corporate tax data. Higher tax rates depress revenue because it is so easy to transfer price profits into low tax jurisdictions.

This tax game has a terrible impact on blue collar workers.  My colleague Aparna Mathur and I studied many years of data, and found a very strong link between corporate tax rates and wages.  Low tax countries attract capital, and that capital increases the productivity of workers and their take home pay.

Earth to Washington: If you want to see higher job creation, cut what is soon to be the highest tax on earth.

Gary Andres

The Weekly Standard & Dutko Worldwide

Middle class Americans suffer due to a federal government that can’t take its hands off the wheel of power.  When Washington gets too big and demanding, it squelches creativity, burdens entrepreneurs – and disadvantages workers.

Education and training programs are a great example.  Republicans could champion the middle class by providing governors more flexibility to use Pell grants for shorter-term vocational programs.  Current rules are too rigid, aimed more at providing educational institutions money, not middle class job skills.

Giving states the authority to experiment with health insurance alternatives is another example. Obamacare’s one size fits all approach will ultimately hurt the middle class.

Finally, promoting pro-growth policies like lower taxes on business and more free trade agreements will create an environment where middle class job creation can flourish.

The best way to help the middle class is through a smaller, more flexible federal government – one that creates an environment for opportunity, not a Washington-based scheme to get there.

Nick Schulz

Editor-in-Chief, The American

The middle class needs two things -- rising economic growth and stable families. There is little policy can do to help the weakness of the family in the short run. How about growth? New firm formation is indispensible to economic growth. To get more of it, the GOP should make young firms exempt from payroll taxes.

We featured an interview last month with New York Times columnist Ross Douthat, in which he addressed the issue of how to strengthen the middle class. With his permission, we summarize his remarks here:

First, a reform of the health care reform that moves us in a more market-friendly direction than Obamacare, but also creates some kind of a tax credit/deduction for people who don't get insurance
through their employer and can't afford it on the individual market. This is something the Republican leadership hasn't been willing to embrace, but it's a necessity to make the health care system fair and equitable.

Second, a comprehensive tax reform along the lines that Ramesh Ponnuru and Robert Stein have proposed, which lowers rates and curbs deductions (something most conservatives favor) but also makes the tax code more family friendly, through a larger child tax credit (something some conservatives are still skeptical of).

Finally, a broad move toward greater competition in the public education system, both in the context of K-12 education, and in public colleges and universities as well. Here's there's increasingly a bipartisan consensus on the value of choice and competition: What's needed is the political will to fight a long war of attrition to reform the public-school bureaucracy. 

How can the GOP help the proverbial “capital on the sidelines” onto the playing field? Four ideas to support the innovation-driven entrepreneurs who will drive our growth

Ryan Streeter

The IBD’s editors draw our attention to an important point as we look at what needs doing in the lame duck Congress and the new 112^th.

 They write:

Today’s leaders, as with those in every one of the 26 market cycles since 1900, are the entrepreneur-driven innovators whose shares have been brought public in recent years…They are companies that are outmoding those that led the market as recently as 10 years ago, let alone those that set the pace in the last century.

They go on to write that Cisco, Intel, Microsoft and GE are all off their peaks and resting more on their laurels than current performance. Same for Wal-Mart and Home Depot.

I leave it to market analysts to dispute IBD’s implicit claims about valuation. The point worth focusing on is the blunt reality of America’s dynamism when it comes to innovation and new firms.  

Growth and innovating firms go hand-in-hand in our country, and in a political marketplace riddled with anxiety about growth and jobs, the GOP should absorb the underlying conclusions in IBD’s editorial.

First, the GOP cannot leave anything on the table when it comes to extending the Bush tax cuts.  Higher taxes on income and capital gains will do nothing to move capital off the sidelines to support the innovators.

Second, shame the Obama administration and Democrats in Congress publicly who will not act to provide predictability in financial markets. The fact that the Fed and other regulators have been delegated so much authority in Dodd-Frank has capital sitting around waiting to know what it can and cannot do.  Don't spend time publicly defending the financial services class and their value to society. They will survive. Focus on enterprise and say, over and over, how capital freeze hurts them.

Third, use the Bowles-Simpson proposals to make the point, over and again, that our 35 percent corporate income tax needs to be dropped. We are trailing the developed world miserably in an outdated corporate tax code. In the end, those who get hurt are the people who should be hired by innovating firms but are not – because the firms aren’t growing as fast as they could.

Fourth, make healthcare reform about enterprise. Obamacare has really only made things worse for business. Firms want to be competitive by offering healthcare plans to their employees.  Pushing people out onto the exchanges isn’t good for HR policy. But Obamacare has only made insurance more expensive, which curbs business competitiveness in a major way. This needs to be a major theme going forward.

3 reasons that America is still an exceptional nation, despite the doubters

Ryan Streeter

The United States' fiscal and economic problems raise the poignant question as to whether American exceptionalism is in danger.

David Brooks' comment today that it's countries like Germany, not big stimulus spenders like us, who had better economic fundamentals going into our economic crisis. That Europe has been instructive to America on one of the two big issues on which we have long enjoyed global superiority, the free market (military is the other), is an observation that more and more people make.

Today, we feature an article by British Chancellor George Osborne in which he explains the tough choices the British coalition government has made to get Britain's fiscal house in order as a pre-condition for growth. The implication of the article is clear: America can learn from Britain in this regard. The reaction among political leaders to the Bowles-Simpson recommendations shows that there is some opportunity for the kind of consensus we need to tackle spending as Britain has, but it has also shown that we're a long ways off.

David Ignatius reported last week in his column that that America's inability to act on its economy signals to other countries that we are a nation in decline, and then they behave accordingly.

Are we still an exceptional nation?

We are. The left doesn’t like this. President Obama once said that he believes in American exceptionalism the same way that Brits believe in British exceptionalism or Greeks believe in Greek exceptionalism. It was an apologetic frame of mind useful for endearing oneself to the resentment crowd and overseas elites, but it doesn’t even make sense. 

Despite our economic doldrums, the United States still cannot sneeze without the world knowing. America moves, and the rest of the world feels it. But it's not our economic might that makes us exceptional any more than our economic malaise makes us unexceptional.  American exceptionalism is rooted in the nation's character. Some on the right don’t like to think too much about this much more than those on the left do. But we have to.

American exceptionalism isn’t something to apologize for. It’s something to understand and use as a basis for policy.

American exceptionalism matters for three reasons. I haven’t made these up. I’ve distilled them from my reading of a wonderful 2006 essay by James Q. Wilson, “American Exceptionalism”:  

• A built-in buffer against statist control of domestic affairs. Our constitutional nature demands that we protect both liberty and equality with a near-gridlock system of checks and balances. What other nations, such as those Ignatius is referring to, see as a weakness is part of our strength. When we reach consensus on tough issues, it means we've really had to work at it.
• A diplomacy of emulation. It is in our national DNA to export our democratic norms. Our popular culture is embraced by other nations, but this probably works against us more than we think. It gives an appearance of progress without the real thing. Millions of young people in China watching American basketball doesn’t get us across the goal line. What really matters is America’s expectation that our trading partners around the world will protect citizen rights, promote the rule of law, and share core economic values. This makes it less likely we’ll war with these nations and more likely that we’ll be allies in global affairs. Backing away from this aspect of our exceptionalism is dangerous.
• Spiritual entrepreneurship. This is Wilson’s term. America’s aspirational culture, rooted in religious commitment, is basically unknown in the “developed” world. It is statistically related to upward mobility, generosity, crime reduction, and health improvements in America. Talk of “values voters” cheapens this aspect of America’s exceptionalism. It is difficult to differentiate America’s history of growth and enterprise from its spiritual entrepreneurship.  

These three distinctives suggest a few things, respectively:

• Expect gridlock. Our constitutional system forces us to compromise and negotiate more than parliamentary systems. We want to repeal Obamacare, but more realistically, over the next couple years we will likely have to engage in the art of persuasion, and keep taking good policy to the public and relying on them to force the right kind of change. We can’t win with a politics of rant. We need to win hearts and minds.
• Articulate foreign policy goals above spending goals. There is a strong urge to curb military spending in some wings of the conservative movement. This is understandable. Nothing should be off-limits when it comes to deficit reduction. But cutting spending alone is not a policy. We are engaged in a global battle for hearts and minds whether we like it or not, and we need to act accordingly.
• Invest in spiritual entrepreneurship. What does THAT mean? Innovation in education, challenging Americans to change expectations to prepare for entitlement reform, keeping America’s tradition of giving intact, enlisting the help of religious groups – these all matter. How we do as an aspirational nation is hard to measure and yet has concrete outcomes. It is perhaps best seen when middle class families are characterized by high levels of confidence that they can make a future for themselves and their children. America's spiritual enterprise is related to people's willingness to take risks and try new things.

As Foreign Policy's Will Inboden points out today in Big Ideas, we cannot afford for America NOT to be providing global leadership on critical matters such as Iranian instability and Asian ambition. 

Beyond this, though, I think Wilson's spiritual enterprise point is significant. It gets at the heart of the relationship between incentives in economic policy and incentives borne out of our habits of aspiration, which form the bedrock of entrepreneurship.  

That people are motivated by more than economic reasons, as David Brooks so aptly puts it today in his column, is a central tenant of ConservativeHome that we'll be returning to in the future.

The silver lining in that $600 billion Fed decision

Ryan Streeter

The Federal Reserve's recent decision to buy $600 billion in bonds - another example of the mysteriously-named "quantitative easing" - may have the unintended effect of solidifying GOP policymakers behind an economic growth agenda. House GOP Conference Chairman Mike Pence immediately issued a release, as did Republican study committee Chairman Tom Price, claiming that the decision was the wrong thing for America. It would devalue the dollar, retard growth, and make us less competitive overall. 

In an unanticipated development, Sarah Palin burst onto the scene decrying the decision, earning the praise of the Wall Street Journal's editorial board this morning for her articulate encapsulation of the problem. Palin pointed out that American households will pay more for basics such as food and oil as a result of the Fed's decision, which - to paraphrase her - will end up working against any recognizable set of economic growth policies.

But the most interesting perspective on the Fed's decision, I think, comes from the team over at e21. In an incisive and informative editorial this morning, they argue that the Fed's decision is based on an effort to avoid repeating Japan's mistakes - which is itself a mistake. We should be looking at Italy's past instead. Unlike Japan, the United States has profitable, cash-rich non-financial sector businesses but is struggling with account deficits, public leaders who want to spend their way out of recessions, and expansionary monetary policy. Just like Italy in the 1970s. Remember those pre-Euro days in Italy when one dollar bought what seemed like a gazillion lira? Italy has never really recovered as it never really learned the fundamentals of growth. America, on the other hand, knows something about growth and needs to remember what she knows rather quickly. She needs public leadership on a new growth agenda.

The Fed's own Kevin Warsh opined in yesterday's Wall Street Journal that a clear set of economic growth policies is exactly what we need right now, and that monetary policy is limited in what it can do. Reforming the tax code, regulatory clarity so firms can make decisions, ousting the rent-seekers in favor of the new and entrepreneurial - these are all necessary to get the economy on a growth path.

These are a good start, and it's somewhat ironic that they come from one of the Fed's governors. Given the overall American mood right now, the Fed's decision has likely had a way of training our eyes on the need for a growth agenda. The mid-terms were a referendum on the idea that we can spend our way into recovery. More people seem to be realizing that we cannot mint our way to recovery either. The only path is growth balanced by a healthy measure of austerity - and now it's time for some GOP leadership on what the essential set of policies looks like.