TomPaine.com asked two economic policy experts to address new a new idea aimed at ending poverty: children's savings accounts. Responding to Reid Cramer's proposal, Sawicky argues that CSAs were borne of poor analysis and offer redundant and less-effective services to low-income Americans.
Max B. Sawicky is an economist at the Economic Policy Institute. He has worked in the Office of State and Local Finance of the U.S. Treasury Department and the U.S. Advisory Commission on Intergovernmental Relations. He also serves on the at-large national board of the Americans for Democratic Action.
With the latest surveys showing 12.5 percent of Americans in poverty and President Bush promising to cut more federal programs, it's time to address the nation’s failing anti-poverty efforts. One of the few efforts underway in Washington is the bipartisan push for Children’s Savings Accounts. But CSAs are not up to the task.
Children’s Savings Accounts are a form of Individual Development Account, a concept borne amidst disappointment in the nation’s anti-poverty efforts and political skepticism as to the future of the welfare state. In contrast to the benefit scheme of the old welfare program that provided cash to the poorest Americans, IDAs seek to provide a benefit to the working poor in the form of government deposits to private accounts.
But IDAs implicitly accept a deeply conservative analysis of the sources of and solutions to poverty. In an important sense, if you don’t buy this conventional analysis of the welfare state, CSAs are a distraction.
What is that conventional analysis? You could boil it down to two big claims: Public assistance—Aid to Families with Dependent Children—did not raise incomes, because welfare recipients substituted benefits for work effort and earnings; and the 1996 reform of welfare stimulated a huge increase in work effort and standard of living for the poor. I dispute both of these appraisals strongly. True or not, they have provoked what I would call defensive responses from some anti-poverty advocates, and what others described as innovative “Third Way” thinking that transcends the hoary dichotomies of left and right.
In light of this conventional, possibly unfounded view of the old welfare system, IDAs’ claims to encourage thrift, work and self-reliance are responsive. One might infer that lack of old-fashioned virtues is the root of economic distress. But if you believe that poverty results not from lack of thrift, but from employers' power to squeeze wages and to defund social insurance—Galbraith’s private affluence amidst public squalor—then irresponsible personal behavior is not the problem. IDAs do not address fundamental class questions of inequality and power.
As an aside, there is something a little absurd about the implication that the poor’s problems are founded on inadequate saving. The federal government is spending much more than it takes in, and the United States is buying much more from other countries than it sells. Budget and trade deficits are at record and unsustainable levels. Pity the poor—if only they could squander as much as the rest of us, how much better off they would be.
A better argument for IDAs is pragmatic and political: Merits and behavioral effects aside, the politics of benefits to able-bodied persons who fail to work are untenable. Work-conditioned benefits could enjoy broader popular support.
IDAs could be helpful. They typically entail subsidies. In the case of the children’s savings account, there is an initial contribution from the government of $1,000, and matching for low-income persons as they add to the account from year to year, all tax-favored. In this way, IDAs redistribute income. The ASPIRE act makes possible a stake of about $20,000 by the time a child graduates from high school.
So far, so good. But if politics makes redistribution via public assistance untenable, would it be different for IDAs? I suspect yes, since there is the presumption that a family is financing its savings with labor earnings. For the same reason, other work-conditioned benefits are feasible as well, such as wage supplements, health insurance and child care. We have them already.
What sort of benefits deserve the highest priority? IDAs encourage working and saving. Other benefits encourage work—but not necessarily saving. At the same time, the tax code offers subsidies to saving. Making tax benefits for saving—in addition to work-conditioned benefits—available to low-income families could do the same job as IDAs.
How great are IDAs, in and of themselves? Will they change the behavior of youth? I can’t say for sure, but I’m skeptical. I love kids, but face it—they’re goofy. They’d take a dollar this year before two the next. But there are still the parents, who would probably know enough to take advantage of the good deal that the accounts would be. So the next question is, high-school diploma in hand, what can you do with $20,000? It’s not chopped liver.
The most logical use is to finance post-secondary education. So we’re really talking about aid to education, for which we already have programs that I would be happy to expand. What are the extra benefit of IDAs, in contrast to knowing that ample subsidies to higher education will be available to benefit the person diligent enough to take his or her studies seriously? I don’t see any. There is still the politics. Imagine the news coverage of kids squandering their IDA. Such stories are less likely in the case of aid to education.
Not everybody ought to be in college. A second logical use for an IDA is to launch a small business. This is a very dubious destination for public monies, given the high failure rate of business start-ups. Think of the failure rate for start-ups by young people. If the public sector was bursting with resources, there would be more of a case for such an enterprise. But of course it isn’t.
A third use is to finance the purchase of a house. I see no point in this at all. The tax code already provides large subsidies to homeownership. In urban areas, renting often makes much more sense, especially for low-income families.
You could argue that subsidies for college students but nothing for those who don’t attend are unfair, and I would agree. For this reason I like both IDAs and the stakeholder proposal of Bruce Ackerman and Anne Alstott. The latter dispenses with the savings requirement for families by simply awarding every youth at age 18 the lump sum of $80,000 (if used for college, it is awarded in $20K portions over four years). This raises the likelihood of dissipation noted above with more force, since it is not funded by money the parents have been squirreling away. On the other hand, it does not make children the hostage of their parents’ decisions or financial resources.
In summary, IDAs are nice, but not necessarily as helpful or politically doable as other work-conditioned benefits. Their influence on behavior is doubtful, and their impact on the poor’s standard of living is elliptical and delayed.
Simple and direct rewards for work are clear responses to the threat of deregulating capitalism. Parables of thrift and individualism do not point the way to economic progress. A genuine social contract—one worth buying into, so to speak—would be founded on a commitment to full employment and ample social insurance. I regretfully conclude that IDAs are at best a sideshow. The main act is elsewhere.
