21st Century Unemployment Insurance

L. Randall Wray has a post up at New Deal 2.0 which puts forward an idea which is pretty innovative. I would label it a private sector replacement for unemployment insurance. It’s the kind of thinking that might bring Obama out of a policy cul-de-sac as the economy hemorrhages jobs.

Let me present an excerpted version and mention a few concerns one might have with this idea. The link to the full post is at the bottom:

The latest jobs report shows that the official unemployment took a huge jump to 10.2% –15.7 million jobless workers. If we add to those numbers involuntary part-time workers, plus those who have given up looking for work, the unemployment rate is 17.5%. Even that seriously undercounts those who would be willing to work if decent jobs at decent pay were readily available–a number I put at 25 to 30 million…

I am advocating… a universal job guarantee available through the thick and thin of the business cycle. The federal government would ensure a job offer to anyone ready and willing to work, at the established program compensation level (including wages and a healthy benefits package). To keep it simple, the program wage could be set at the current federal minimum wage ($7.25 an hour), and then adjusted periodically as that is raised. The usual benefits would be provided, including vacation and sick leave, and contributions to Social Security.

Let’s call this the Job Guarantee (JG) program.

… A permanent and universal JG program should be decentralized, with projects created and administered locally–where the workers are, and for the benefit of their communities. The federal government would provide the wages, plus a portion of capital and supervisory expenses (perhaps capped at 25% of total wages paid for each JG project). Local governments and nonprofits would propose projects and cover the rest of the expenses. State unemployment offices would be converted to employment offices, helping to match workers and projects.

This is definitely outside the box thinking. It is basically a decentralized counter-cyclical works program to largely replace the unemployment insurance program we presently have.

The benefits I see are that it maintains full employment by putting to work those that would be idle and collecting unemployment insurance. We have an enormous number of unemployed people who are drawing significant social welfare payments (five million are drawing unemployment insurance according to my latest post). Why not use a lot of that same money and deploy them.

This approach also would employ a huge slew of longtime unemployed workers that have benefits expire and skills languish, making them harder to employ and increasing structural unemployment. The job guarantee could then reduce the level of structural unemployment that results from a steep downturn (see Mark Thoma’s recent piece on structural unemployment for a cogent explanation of that issue).

In my view, full employment is compatible with free market capitalism. In this approach, a job guarantee is there for anyone who wants it. Any structural unemployment will be largely voluntary.

Here are my questions. I am going to present what I consider the standard questions using the standard terminology – not because these are the exact questions I have but because these are the questions I would anticipate. I have run these same questions by a few economists to generate some answers. I have incorporated most of their answers. But, I still would like to hear your thoughts as well.

1. Isn’t this just an attempt to expand the state i.e. be a move toward big government? Why shouldn’t we expect ‘mission creep?’ Since the idea is designed to fluctuate with changes in the economy, it seems less of a concern. Yes, this is the not-for-profit private sector. But, we would still need to flesh out the safeguards to make sure that it didn’t crowd out investment in the for-profit sector. (You should expect this program to increase the pie and expand investment in aggregate, so that certainly mitigates these concerns as well.)
2. Won’t this misallocate resources and create malinvestment? Since it is designed to be an automatic stabilizer i.e. countercyclical, it doesn’t necessarily appear so. But, it still might create misallocations by increasing the propensity to spend excessively on infrastructure. Infrastructure spending in the U.S. is probably too low at present. But, at some point in the future, this will be a concern. The fact that much of it can be administered in the private sector locally is important in this regard.
3. How much will this cost? How do we pay for this? As I understand the idea, it is designed to replace unemployment insurance entirely – and that means we will recoup in taxes lost output from cyclical and structural unemployment. But, as the Federal Government is paying not just wages but benefits, it does not seem to be a deficit neutral strategy in a employer-provided health-insurance world. If health insurance became detached from employers that would be less of an issue. But, that’s not going to happen. (I should also point out criminality and imprisonment associated with lack of job opportunities would be reduced, so that certainly decreases any costs – both social and monetary).

Personally, I am not especially keen on the ‘New Deal’ terminology in the original piece. That goes to political/philosophical predisposition. So I have stripped it of that language here.

As an aside, of 1920s and 1930s Democrats, I find Al Smith, the Governor of NY and 1928 Democratic Presidential candidate, far more interesting than FDR. Smith and Roosevelt had a very antagonistic relationship in no small part due to FDR’s co-opting of all of Smith’s 1928 ideas for FDR’s 1932 run. Al Smith was a first-generation Irish Catholic who grew up poor on the lower East Side of Manhattan and owed his rise to Tammany Hall. Prejudice is a big reason he lost to Hoover in 1928. Roosevelt was a blue-blooded Harvard-educated Aristocrat who was much more palatable to early 20th-century Americans. Try “Al Smith and His America,” or better yet “Empire Statesman,” for a good read on Smith.

I suspect Wray’s idea will gain more traction if it can be examined it in a politically-neutral frame.

Economists I have talked to who have studied this idea inform me all studies indicate the proposal has a 1-2% of GDP price tag.

Right now, President Obama seems like he is banking on a recovery that will bring unemployment down. But, this may not end up being so. From a purely political perspective, Wray’s suggestion is the direction Obama should go if he wants any traction on the unemployment issue should recovery not bring unemployment down. But, Wray’s idea also deserves more discussion irrespective of the political ramifications because it keeps a buffer stock of skilled, employed people ready to hand for the for-profit private sector to employ.

Source

Navigating the Jobs Crisis: Time for a New ‘New Deal’ Jobs Program – L. Randall Wray

Comments

[Leftfield:]

A program like this is what I expected politicians steeped in New Deal FDR folklore to enact early, not a disgusting display of handouts to the rich, greased by pork promises to favored constituencies to get them passed.
That said, mandates, first often funded, then, unfunded, are routinely handed down from higher to lower governments. It's an area of enormous abuse, as overspending is now excused at local levels because it's "out of their hands."
If you let the devil come along for the ride, next he'll want to be the driver.

Nov 13 07:24 AM

[John Galt:]

A problem with giving everybody a job instead of unemployment benefits is time.

Rather than looking for a new & permenant job, they'd be working on some temporary job they probably wouldn't want to be doing. Instead of updating skills or sending out resumes, they'd be working.

Do you think these short term workers doing something they don't want to be doing might shirk? I do.

and YES, it will provide malinvestment. I like the brainstorming, I like the thinking outside the box, but it isn't practical in my opinion.

Nov 13 09:32 AM

[WS1835:]

Although the concept has some merit in pure (and I mean only) cyclical economic terms, it would be disasterous in political/social terms.

First, a universal jobs program would be hideously wasteful judging from the fraud and waste seen in current government jobs programs. For the unmotivated chronically unemployed who have relied on government assistance for years, this program would just be a perpetual welfare payment. After all, what are you going to do if they don't work, or only show up half the time, fire them?

Second, you are dreaming if you think such a program would be able to keep pay at minimum wage. Public agencies and their HR folks are the wellspring of the 'living wage' chimera. Just take a look at how pay skyrocketed for airport screeners when they switched from being private contractors to being public employees under TSA. And if you include benefits, all bets are off. The level of benefits and associated expense could be as costly as the wages.

Third, public employee unions will ensure that the only projects selected are those that don't compete with existing civil service programs, which means the program will be dreaming up completely new public works boon-doggles. In addition, since these projects would probably be directed by local politicos, there would be huge opportunity for local political factions (i.e., political parties) to use program resources in support of favored local projects or patrons.

Fourth, how exactly would an entry level employer compete with such a program for minimum wage employees? Would you work for Burger King scraping ketchup and dealing with rude customers when for the same (or better) pay/benefits you could be working for the government doing piddle projects? I think it is pretty obvious that private empoyers would be hard pressed to pull workers away from the government program. In very short order, you would have vitrually no entry level private employment if the program provided unlimited guaranteed employment.

Fifth, it would be the next to last step on the road to communism in the country. Universal government healthcare is the step before, and outright control of prominent production assets (you know, dictating policy to entities like banks, auto makers, steel mills, power plants, etc) is the final step. Oh wait, maybe I got the last two steps mixed up.....

Nov 13 01:04 PM

[bob adamson:]

Thinking outside the box is important at times like these and discussion fora such as SA should be a focus for such discussions, Thank you, Edward Harrison, for again bringing forward an interesting but unorthodox topic for discussion. I am not sure, however, why you describe Randall Wray’s proposal as a “private sector replacement for unemployment insurance”. Rather, this proposal appears to be the 1930s Civilian Conservation Corp writ large; writ large in that it would not cover only male youths and would not focus only on rural environment and Park improvement.

Many SA participants may well have philosophical issues with a massive program proposal for “a universal job guarantee” as proposed by Wray, I do not. However, there are grounds for concern that this proposal is simply to large and vague to be implemented in a concrete and specific way that would be coherent. A sound case (one heard too rarely at present) can be made that there is a fundamental need in the US (and in Canada where I live) today for the development of efficient and effective enhancements to the public sector not only to serve needs that the private sector is not intrinsically focused on serving well but also to (a) provide the countercyclical role referred to in your article, (b) operate in support of and not in completion with the private sector and (c) provide locally based productive employment in a globalized economy. The key though, it to get out of the classic bureaucratic organizational mindset in envisaging how such programs would be established and operated as they must truly be efficient and effective and well focused on a clear set of attainable goals. Unfortunately, Mr. Wray’s proposal currently lacks these necessary qualities.

This is not to dismiss that proposal out of hand. Rather, in response, we should be envisaging a number of specific focused programs (examples – forced retirees with skills funded to work for domestic and foreign service NGOs, unemployed youth to do inner city work with kids and clean up, post-secondary grads doing work for NGOs and on special projects while the job market in their fields is soft etc.). The intake for such programs could adjust quarterly to reflect the local job markets etc.

While the forgoing would have some countercyclical impact, it is doubtful that this would be quite what Wray envisages. Hopefully a stress on forward planning during good times to prepare ‘shovel ready’ projects or project expansion for implementation during downturns would help with that.

How about some of the Guaranteed Annual Income ideas from the early 1960s as well?

Nov 13 02:54 PM

[John Galt:]

Fantastic response by WS1835. If anybody had any leanings towards such a project, you shattered them completely and systematically. Great post!

Nov 13 03:27 PM

[User 504395:]

Excellent idea. I think that this culture concentrates too much on punishing the lower ranks with the corollary of overcompensating upper management. I think that providing a better security net would actually encourage entrepeneurship and invention. Inventors, small business people and the people who work for them shouldn't have to suffer so much. If their plans go awry, if the business cycle is against them, if they can't get funding, they should have a fall back job available. In the cycle of business creation and destruction, there's no need for people to be crushed. This would also smooth out the need for frenzied, outsize stimulus legislation each time there's a crash.

Nov 13 03:29 PM

[mna:]

If such a program is implemented, it should be punishing enough so that people would not want to stay in the program if it's at all possible. This means mandatory work hours (and not receiving benefits if you don't show up or are lazy).

But as this is a government social program, pretty soon it will morph into a gigantic mess with overbudget benefits and huge bureaucracy. In other words, I think such a program sounds nice on paper, but will be ineffectual in practice.

Nov 13 07:04 PM

[bob adamson:]

mna -

You will be interested to note that your analysis is an almost exact duplicate of that given by Liberal reformers in the 1830s and 1840s in the UK to justify the establishment of Work Houses and the maintenance of harsh conditions for inmates therein.

Charles Dickens had a few observations to make about all this.

bob adamson


On Nov 13 07:04 PM mna wrote:

> If such a program is implemented, it should be punishing enough so
> that people would not want to stay in the program if it's at all
> possible. This means mandatory work hours (and not receiving benefits
> if you don't show up or are lazy).
>
> But as this is a government social program, pretty soon it will morph
> into a gigantic mess with overbudget benefits and huge bureaucracy.
> In other words, I think such a program sounds nice on paper, but
> will be ineffectual in practice.

Nov 13 07:43 PM

[mna:]

Charles Dickens was writing fiction. We're dealing with real life. The term "harsh" is relative; no one in his right mind is advocating slave labor. However, the program absolutely needs to be tough to prevent crowding out of private sector investment. If conditions are too comfortable, it will most definitely result in people staying in and abusing the public sector program. The goal of the program is to provide a social safety net and keep job skills fresh, not to guarantee easy employment for life.

Bottom line is, Most workers at private businesses don't get paid when they don't show up for work. The public programs should be no exception.

On Nov 13 07:43 PM bob adamson wrote:

> mna -
>
> You will be interested to note that your analysis is an almost exact
> duplicate of that given by Liberal reformers in the 1830s and 1840s
> in the UK to justify the establishment of Work Houses and the maintenance
> of harsh conditions for inmates therein.
>
> Charles Dickens had a few observations to make about all this.<br/>
>
> bob adamson

Nov 15 10:41 AM

[bob adamson:]

To mna -

We would both agree that whatever job program were to be implemented along the lines discussed in the article or in comments on the article, there would be a core assumption that those employed would be expected to show or be developing good work habits and a commitment to perform the tasks for which they are employed with due diligence. To me, however, that is something quite different than saying that the job “should be punishing enough so that people would not want to stay in the program”, which was your description.

People work and learn best when they are treated with respect and are given real work to do and expected to do it as well as reasonably possible. The fact that most jobs in question are intended to be transitional to enable and encourage employees to move on to better jobs with other employers doesn’t change this need to engender two way employer/employee respect.

I say ‘most jobs’ in the preceding paragraph because in programs designed to give employment to pre-retirees who have lost their jobs most jobs would be transitional to retirement rather than to other employment in many cases. The respect issue, naturally, is no different for these jobs than targeting younger people.

While Charles Dickens wrote in a style that we today find melodramatic and sentimental, his fiction was intender to expose attitudes and conditions of his time. His descriptions relating to work houses and debtors’ prisons, while harsh, were not inconsistent with the reality of the times.


On Nov 15 10:41 AM mna wrote:

> Charles Dickens was writing fiction. We're dealing with real life.
> The term "harsh" is relative; no one in his right mind is advocating
> slave labor. However, the program absolutely needs to be tough to
> prevent crowding out of private sector investment. If conditions
> are too comfortable, it will most definitely result in people staying
> in and abusing the public sector program. The goal of the program
> is to provide a social safety net and keep job skills fresh, not
> to guarantee easy employment for life.
>
> Bottom line is, Most workers at private businesses don't get paid
> when they don't show up for work. The public programs should be no
> exception.
>
> On Nov 13 07:43 PM bob adamson wrote:

Nov 16 12:43 AM