Banks, and the wonders of compounding, can do more for people than tax committees can.
For their first encounter with the principle of compounding, many Americans have Walt Disney to thank. It is his and the Sherman brothers' 1964 version of the musical Mary Poppins that includes the song "Fidelity Fiduciary Bank". A row of senescent bankers, led by Dick Van Dyke playing an asthmatic in a false beard, conjure for the child Michael Banks what the tuppence in his hand can generate if left to grow undisturbed. "Railways through Africa," the men and Michael's father tell the boy. "Dams across the Nile," and, most evocative of all, "plantations of ripening tea."
Never mind that the Shermans and Disney made sure to offset that lesson in markets with another number, "Feed the Birds," so manipulatively redistributionist that it could have been scored by Thomas Piketty himself. What matters is that young people got some exposure to the rhythm of markets. They take in, after a while, that money growing 9 percent a year takes only eight years to double, a mysterious expression of the so-called Rule of 72. And that as they stare at their screens and move about their mutual funds, they can mutter Van Dyke's famous line to themselves: "Tuppence... [pause to wheeze] will [pause to wheeze] comPOUND."
These days that balance is gone from Poppins. Producers of the recent Broadway show kept "Feed the Birds" and the compelling near-vagrant lady who argues for spending today. The "Fidelity Fiduciary" number, however, is omitted. The recent film Saving Mr. Banks, about the making of Disney's Poppins, does reference "Fidelity Fiduciary," but it spends much more time reminding us that the author of the original Mary Poppins book, P. L. Travers, herself didn't care for money.
The missing compounding principle in the Broadway Poppins in turn reflects the absence of this principle in our political culture. Compounding and redistribution used to be conveyed in tandem. Now, our culture pounds the theme of redistribution 24/7 and skips the rest.
This tilt cannot be blamed entirely on left-wing commentators. Left-leaning policymakers will argue, as Piketty does, for the wealth tax. The gentle Left will natter on about the Earned Income Tax Credit (EITC). But the soft Right also talks about taxes, focusing on the mortgage-interest deduction. True free marketeers talk tax, too, pushing for the flat tax. In short, our national economic discussion is relentlessly fiscal, and mostly redistributionist. Until he or she goes to a genuine Fidelity (or State Street, or even a TIAA-CREF) himself, the younger adult is much more likely to learn about the benefits of the EITC and the home-mortgage deduction than what compounding can bring.
This situation arises in part because the fiscal war is so intense, and someone has to rebut the redistributionists. But it is itself compounded by embarrassment over 2008. Since then, free marketeers have been more or less frozen in a defensive crouch, and the suspicion of bluestockings such as Travers has become received wisdom. After all, banks did turn out to be unreliable. As a result, friends of markets have become timid. Most free marketeers these days don't spend their time coming up with displays of compounding's magic, even though compounding has proven pretty magical in the years since 2008. Instead, policy types spend their hours rebutting the Pikettys. Or, at their very bravest, they make behavioralist arguments about tax arbitrage, as if investment or compounding did not exist. The result is deeply unfair: The children of the wealthy still get herded quietly to the bank and learn about the Rule of 72. But the rest of the children in the country learn only about fairness, tax breaks, and evil plutocrats. Whatever is wrong with banks and banking law, and there is plenty, and whatever is wrong with markets, they still have the power to do for people much more than any tax committee can.
To restore the tarnished bank in the American mind requires more resources, political, legislative, and financial, than 1,000 Disney musicals. Banks should be allowed to fail, as "Fidelity Fiduciary" nearly does in the Poppins film. But a first step in the right direction might be to provide a little exposure of the compounding principle wherever possible, highlighting the historical record. Compounding, after all, is such a powerful engine of social mobility that it leaves the tax code in the dust. No one ever became rich from the EITC.
One small but interesting sign of hope is that banks and schools, as well as the regional Federal Reserves, run banking games for young people. At a conference of the Association of Private Enterprise Education this week, professors from across the country presented their versions of "Fidelity Fiduciary Bank" – new ways to reach new generations. An online toy many of us have been waiting for is Art Laffer's Save Taxes by Moving calculator. The site does what several others do: It shows young people exactly how many thousands ($6,760 on an income of $90,000) they save by moving from New York to Austin, Texas. But the site also shows how well that money will compound if it's saved, which is more important.
This is all a way of saying that it's a good thing tax season is over. Taxes matter, but not per se. Without knowledge of investment, younger Americans will indeed become the losers in a zero-sum game that the cartoonists of redistribution depict. When times are tough, America shouldn't redistribute. It should compound.
Amity Shlaes chairs the board of the Calvin Coolidge Presidential Foundation.
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