Among other things, the Obama era will be known as a bad time for savers. Now the president is proposing to go from a policy of malign neglect to actual punishment.
To understand the depth of the recklessness in President Obama’s proposals — including an end to preferential tax treatment for 529 college savings plans and Coverdell Education Savings Accounts and a tax increase on capital gains and inheritances — you have to understand how and why things are so bad for savers already. And that is directly tied to his presiding over the slowest-burning economic recovery in decades.
America’s economic growth, such as it is, has been financed in largest part by the Federal Reserve’s loose monetary policy. Besides that and higher fossil-fuel production (which is why Texas has provided such a disproportionate share of the nation’s growth), there hasn’t been much to write home about for the past several years.
The Fed’s loose monetary policy is the reason savings accounts and CDs, tools the middle class has historically used to build and hold wealth, have paid such paltry interest rates for years. It’s also a major reason money has flowed back into equity markets, as the rises in the Dow Jones Industrial Average, S&P 500 and other benchmarks show. Liberals love to tout these increases as evidence Obamanomics has been working (in between tirades against Wall Street) but in fact the major stock market indices remain at or below the levels of the late 1990s when adjusted for inflation. Putting money into the stock market has been more or less a way for savers to tread water. Those seeking higher yields have pushed many commodities, as well as housing in some markets, up (and in some cases, back down) in a way that isn’t necessarily supported by the health of the broader economy. These moves come with higher risks, which the truly wealthy can afford to take but middle-income folks can’t. That’s one prime reason the much-lamented wealth gap continues to grow.
And yet here comes Obama threatening to tax away the decent options we still have.
I want to focus for now on the educational programs. The 529 college savings account (my wife and I have one for each of our sons, just as the Obamas have accounts for their daughters) is essentially a bet that the medium-term strength of the U.S. economy and the magic of compound interest will overcome or at least keep pace with the staggering rise of college tuition. It uses the incentive of tax-free withdrawals (deposits are made with after-tax money) to encourage thrift, forward-looking behavior and taking responsibility for one’s own needs. Middle-income Americans have responded: The data show that about half the people investing in 529s, Coverdell ESAs and other education-savings tools didn’t finish college themselves. About half earn less than $100,000 per year; about a quarter make less than $50,000.
If the government is going to subsidize higher education — and I see no plausible future in which it doesn’t, to at least some degree — the cheapest, most efficient way to do so is to give people tax incentives to save and spend their own money for college. People are more careful with their own money. They keep their options open. They may devote more or less to one type of expense than another. In short, their thriftiness affects the behavior of colleges. That’s how markets are supposed to work.
But a market in which the government intervenes heavily isn’t a true market (see: k-12 education, health care, housing). Government actions tend to create distortions, perverse incentives, rent seekers. It is no coincidence that the soaring increase in college tuition has coincided with the rising number and generosity of state and federal financial-aid programs. Those aid programs have set an artificially high floor for the price of college, and colleges have responded quite rationally by keeping their prices above that floor.
Obama’s response? Double down. Take away one of the biggest incentives available for thrift and competition, and let the government intervene even further into the market. If you think community college tuition is high now, just wait until it’s “free.”
The other possibility, of course, is that community college goes the route of Medicaid, with government dictating price controls that result in lower-quality services and/or rationing. “Free” community college thus becomes an extension of high school to six years — when it would be smarter route to do the reverse, and try to help more students complete some college courses while in high school. That, or an increasingly devalued experience that wealthier families simply skip right past.
None of these possibilities is good news for middle- or lower-income families.
Take this analysis, apply it to retirement, and you have a pretty good idea of where the left would like to take us tools such as Roth IRAs. With similarly dreadful prospects.
And what is the reason for this exercise? The clearest effect, anyway, is to push the point of purchase of educational goods and services closer to the government. That serves no good purpose.