July/August 2012 Michael Sherradden’s Compounding Interest

Two decades ago an obscure academic revolutionized thinking about poverty. Now his insights might just save the middle class.

By Mark Schmitt

In 1991, a professor of social work at Washington University named Michael Sherraden published a book called Assets and the Poor. Sherraden was neither a big name nor a natural self-promoter, the book was published by an obscure academic press, and his topic was not earth-shattering—he proposed a new approach to ameliorating poverty by helping poor families save for the future, as an alternative to programs that simply provided enough income for day-to-day sustenance. But the book caught on quickly in Washington. In a city susceptible to intellectual fads, what’s even more remarkable is that Assets and the Poor sparked the emergence of something that has lasted, and that has come to be known over the ensuing twenty years as the asset movement. Its adherents grew to include dozens of academics, policy entrepreneurs in nonprofits and foundations, mayors, governors, and members of Congress. The story of Sherraden’s book shines an unusually clear light on an often obscure part of the policymaking process. Everyone knows how a bill becomes a law. But how does an idea become a cause?

It started in 1991, when William Raspberry, then a columnist for the Washington Post, latched on to the ideas in Sherraden’s book. According to Bob Friedman of the Corporation for Enterprise, Raspberry’s column led Jack Kemp, then secretary of housing and urban development under President George H. W. Bush, to seek out the book, and “wave his dog-eared copy around at speeches.” The converging enthusiasm of Raspberry, a liberal columnist; Kemp, a free-market conservative with an unusual interest in poverty and race; Friedman, an innovator working to develop self-employment opportunities as an anti-poverty strategy; and Will Marshall of the Progressive Policy Institute, the moderate Democratic think tank that had published Sherraden’s early work, showed the broad appeal of the idea.

Sherraden made four points: First, poverty was characterized not just by a lack of income, but by a lack of assets, such as small amounts of savings that could cushion a financial setback. (Disparities in wealth by race were, and still are, far wider than disparities of income.) Second, poor people, with help and encouragement, could save and would be far better off if they did. Third, the existing safety net contained significant traps, in the form of asset limits that prohibited recipients from saving much or even owning a reliable car without losing food stamps or other benefits. Finally, he demonstrated that government programs to encourage assets were not new, but were overwhelmingly tilted toward the middle class and above, in the form of the home mortgage interest deduction, Individual Retirement Accounts, and dozens of other policies.

These four themes resonated on different parts of the political spectrum. Kemp and a handful of creative conservatives saw the possibility of “empowerment,” or what would later be called “the ownership society,” to bring more people into the world of capitalism, as owners and investors. For many Democratic politicians—particularly with the party’s likely nominee, Bill Clinton, promising to “end welfare as we know it”—any kind of new idea about poverty reduction was welcome, especially one that treated poor people as capable of making their own way out of the cycle of poverty. Liberal antipoverty advocates worried, to be sure, that the focus on assets would distract attention from the pressing need to repair the income-maintenance safety net. But most agreed that asset limits had created a trap. And by revealing the enormous subsidies for assets provided to better-off Americans, Sherraden gave liberals a comfortable universalist language. Providing similar incentives to the poor, they argued, was not a targeted program like welfare, but simply a matter of providing the same things to everyone.

Sherraden’s ideas had broad implications for policy, but they were distilled into a specific proposal, the Individual Development Account. Modeled on Individual Retirement Accounts, IDAs would help low-income families save by using public or philanthropic dollars to match small savings in accounts that could later be used for homeownership, self-employment, or education.

Enthusiastic politicians from both parties introduced IDA legislation in the House and Senate in the early 1990s. The Assets for Independence Act created a very small demonstration program, funded at $25 million a year, in 1998. President Clinton called for a $500 billion program in his 1999 State of the Union address. Although nothing of this scale was enacted, Ray Boshara, who crafted the original legislation while working for Representative Tony Hall, chair of the House Select Committee on Hunger, says that at the time “the politics were way ahead of the practice”—that is, the political enthusiasm for IDAs as a policy far outpaced any actual experience with designing or implementing them. If something as expensive as Clinton’s proposal had been enacted, it might well have been a disaster.

Instead, patient development of Sherraden’s ideas came from philanthropic foundations. Benita Melton of the Charles Stewart Mott Foundation, which along with the Ford Foundation was an early and central promoter of asset policies, notes that there is a classic model for the role of organized philanthropy in American social policy: Foundations are, in effect, “the research and development arm for government.” They support policy development, demonstration projects, research to test results, and refinements of policy design, which government then picks up and takes to scale.

In recent decades, this classic model has atrophied as government, driven by ideology, has shown little interest in objective information about what works. The Obama administration, however, through its Social Innovation Fund and other initiatives, has taken a renewed interest in the social sector and the innovations it has tested. The role of foundations in developing the field of asset policy is an example of the classic model at its best.

Twelve foundations, coming to asset policy for different reasons, much like the political supporters, backed the American Dream Demonstration project. Running from 1997 to 2002, the project established IDAs with matched savings for 2,364 people through community organizations. The ADD, one of the most thoroughly evaluated social experiments of recent years, proved Sherraden’s core insight that the poor could save. On average, participants saved $228 a year, which, with the match, led to total savings averaging $1,543.

Nonetheless, two-thirds of participants took some money out of their accounts for purposes other than homeownership, education, or launching a business, surrendering some of the matching funds. One lesson of the experiment, Boshara says, was that families “need unrestricted assets also, to make the accounts work.” When all the funds were restricted to a specified purpose, they were of no use to families facing emergencies. But without some restrictions, families would never build up the funds needed to pay for a first home or other large assets. Political considerations also argued for some limits on how much families could drain their accounts for any purpose, since the programs that subsidize assets for the middle class are for restricted purposes, such as homeownership or retirement.

Mark Schmitt is a senior fellow at the Roosevelt Institute.


  • Rabbler on July 26, 2012 11:32 AM:

    So how many have actually purchased a home solely with money saved via this approach? What kind of matching is reasonably going to be available on a large scale in a future with cutbacks being faced across the board? Is turning $228 into $1543 annually even remotely possible? What powerful interests are going to quietly accept that participants funds can not used to pay debts owed to them? If, conceding a lot, large numbers of the poor save enough to put a down on a house what is that going to do to the price of houses? What % of entrepreneurial attempts collapse early on in strong economy? The cost of education is going to level off?

    Is this just another attempt to sell an American Dream, now on life support, to those who statistically barely had a chance even when things were good? Is this cosmetic surgery on a system with cancer?

  • Joseph on October 22, 2012 2:07 AM:

    Well, ok, they saved the $1543 within 5 years. Now what? What they going to purchase with those money? Fayetteville dentist.