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

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 ...