Introduction:

The current state of California politics can be summed up in a simple comparison: in the Republican gubernatorial primaries, we see one candidate promising that their first action upon becoming governor is to put 40,000 people out of work and the other complaining that this isn’t enough; in the Democratic convention, we see a party divided over whether to fight for majority rule for budgets or for budgets and taxes.

As a state, California seems caught between the scissors of an increasing need for public services to provide a basic level of social protection for the sick, the elderly and the poor and to restore our high-road, high-wage economy based on superior public education and green technology, and a paralyzed, undemocratic, and irrational political structure that is unwilling and unable to take the necessary actions to meet those needs.

We know that the strategies proposed by the GOP’s gubernatorial candidates won’t work because they are essentially a retreat of the last seven years of failed policies – Schwarzeneggerism without a human face.

Yet Democrats lack a forceful message about what we want to do beyond the immediate issue of the budget.

What Won’t Work:

Contrary to conservative spin, government spending is not out of control in California. Especially when you take into account the fact that the California Price Index (i.e, the rate of inflation) has gone up 72% in the last 20 years, and that the population has increased 28% in that time, government spending is flat or declining. As the California Budget Project notes, thanks to rounds of drastic budget cuts, current spending is $16.9 billion below the previous year, and next year’s budget is projected to $20 billion below 2007-8 levels. As a share of the economy, California state government is down to levels we haven’t seen since the 1970s.

In this situation, regressive tax cuts to wealthy corporations is only going to make things worse. Meg Whitman’s proposed $10 billion dollar capital gains tax cut would increase our current deficit by 53%, and the savings that she proposes to make from unspecified but supposedly gargantuan amounts of “waste, fraud and abuse” wouldn’t come close to filling in this hole. Poizner’s proposals are equally ludicrous.

Moreover, the proposals by either candidates to eliminate tens of thousands of workers make the same elementary mistake that all anti-government activists make: public sector workers are real workers. 40,000 workers laid off means that California’s unemployment rate will rise from 12.6% to 12.84% at the very least, because it will also mean the loss of $1.59 billion in consumer spending, mortgage payments, and local tax base.

Simply put, the theoretical basis behind right-wing economic policy only makes sense in rare occasions in which government taxation is so soaringly high that businesses can’t make a profit, government borrowing is “crowding out” demand for credit in the private sector, and we’re in full employment so that a higher public sector workforce is causing a “substitution effect” which lures people away from the private sector. Now, even in those rare occasions, it’s not a slam dunk case (you have to take into consideration the increased provision of public goods and services, how much of private sector demand is for useful investment as opposed to speculation, and whether employers compete by offering higher wages) – but that’s not what the situation is right now.

Taxation in California is relatively modest (19th out of 50 states), and isn’t that progressive (the poorest fifth of Californians pay 11.1% of their income in taxes, the richest 1% pay 7.8% and 2,000 people who made more than $200k a year paid no taxes). Far from crowding out private investment, interest rates are basically at zero percent thanks to the Federal Reserve, and the private sector isn’t lending out of fear of losses. As far as unemployment goes, California’s 12.6% unemployment rate is one of the highest in the country, and our underemployment rate (including discouraged workers, part-time workers who want to be full-time, and so on) is even worse at 24%.

Where We Need to Go:

The Democratic Party is clearly correct in beginning with majority rule, because it will be impossible for California to do anything about our current fiscal or economic situation without the ability to pass budgets and raise revenues on a democratic basis. To that end, I heartily support the California Democracy Act (majority rule ballot initiative) being sponsored by George Lakoff and the progressive movement – and so should you.

However, I do want to make the point that Democrats need to look beyond the 2/3rds issue, no matter how hard this might be – because we cannot address the budget crisis (or any other of California’s pressing needs) without addressing unemployment. Even if we had majority rule, if we don’t act to bring down the unemployment rate, trying to balance the budget in our current economic climate is chasing a moving target over a cliff. Only when we get more people employed, so that they have paychecks to spend (which brings in sales, income, and payroll taxes), so that they can pay their mortgages (which will at least staunch the bleeding from declining property values and assessed taxes), and so that employers respond to increased consumer spending by expanding their inventories and expanding their payrolls (which in turn brings in more sales taxes, corporate income, property, payroll, and capital gains taxes), will we be able to solve our budget crisis once and for all.

Hence, job creation needs to be made a central part of the Democratic Party message, in the same way that single-payer health care for California (AB810) or historic climate change legislation (AB32) should be the core of the Democratic Party message about what we want to do to fix California.

Step 1 – A Jobs Program as a Tourniquet:

As I’ve discussed in previous posts, it is well within the fiscal capacity of California (or indeed, of most states) to create a jobs program on its own. In order to bring California’s economy and job market into normality, we need to create about 1 million jobs – which would bring our unemployment rate down to 6% (that’s not full employment, but it’s a start). It costs approximately $35 billion to put 1 million people to work for a year.

By structuring our jobs program as a form of social insurance – funding it by the equivalent of a 1% payroll tax, which would raise about $5.7 billion a year, and then using that as collateral for either a Federal or state reserve bank loan – a jobs program could be passed on a majority vote basis. Social insurance premiums are fees by any rational definition of fees, and therefore aren’t subject to the 2/3rds rule.

The reason why we need to pass an immediate jobs program is that it acts like a defibrillator applied to someone in cardiac arrest – especially if we target the jobs to areas where unemployment is concentrated (due to the downturns in the construction and agricultural industries, areas of the Inland Empire have underemployment rates of 40% or more), a jobs program that suddenly cuts unemployment in half not only has a direct impact in terms of fewer people unemployed, more paychecks flooding into depressed local and regional economies, fewer foreclosures and improved property values, but it also has a powerful effect on the “animal spirits” of employers and investors. No matter how low the taxes, employers and investors are not going to increase their payrolls or their inventories if they lack confidence that there’s going to be enough consumer demand to support expansion – by making a sudden and dramatic shift in employment levels, the public sector can radically reboot the expectations of private sector employers and investors. Then and only then will we see private sector employment recover – and with it, California’s tax base and budget.

Long Term Thinking – Full Employment for CA:

Getting back to 6% unemployment isn’t full employment, although it really helps. With a normal unemployment rate and sustained recovery in consumer spending, private-sector employment, and so forth, we can get the fundamentals of California in order. With a stable economic outlook, we can make budgetary decisions that will have a long-term impact – instead of cobbling together fixes that become undone a few months later as revenues continue to fall. With more resources flowing into state coffers, we can begin again to make the investments in public education, mass transit, and alternative energy.

However, there is a big difference between a California that averages 5-6% unemployment and a California which guarantees full employment (i.e, unemployment is kept below a “frictional” level of 3%). For one thing, that 2-3% of the workforce means $43.2 billion a year in production of goods and services that never happen, as well as about $13 billion in wages that won’t be earned, spent, and taxed, and it means increased costs for Unemployment Insurance, CalWorks, Medical, and other social services for the unemployed. In the same way that a single-payer health care system will make California a better place, both by ensuring that everyone has access to health care, but also that employers, start-ups, and other ventures won’t be burdened by heavy health care costs, full employment will mean that California will be a state where no one goes without work (frictional unemployment refers to the temporary periods of unemployment caused by people moving between jobs), with much lower poverty, and many more resources to make the kinds of investments we make.

In its own right, full employment is an investment in a better California. Like any blue-chip investment, it’s not free. In addition to using labor market policies to create incentives for employers to keep their workers on the job instead of laying them off, we’d also need a reserve of about 330,000-500,000 jobs in order to keep unemployment below 3% if the private sector falls down on the job. That costs about $11.7 to $17 billion a year, which the equivalent of a 2-3% payroll tax would cover without the need for regular loans from the Fed or a state reserve bank – which would be reserved for emergency situations in which a sudden recession causes a sharp spike in unemployment.

Conclusion:

A state jobs program isn’t sufficient by itself to create a “New Deal for California” – but it is a necessary prerequisite for the rest of the progressive agenda. Full employment will put us on the path to a high-road, high-wage economy, and from there, it will be much easier to get to single-payer or a green economy than it would be with a 12% unemployment rate.

Note: this is a cross-post from The Realignment Project. 

Introduction:

In part 1 of this series, I discussed the possibility of creating state economic recovery bonds that the Federal government could buy to lend its ability to deficit-spend in recessions to the state governments to counter-act their natural pro-cyclical tendencies. In part 2, I expanded on how we could adapt state governments to Keynesian economic policies by passing anti-recession budget reform initiatives allowing limited deficits during times of economic recession, establishing state banks to provide borrowing capacity for state governments, and establishing state job insurance programs.

So what remains to be done for Keynesian economic policy to be brought to the benefit of state government?

Investment Function:

Historically speaking, the economists who followed John Maynard Keynes can be grouped into two camps: fiscal Keynesians, who created a synthesis between Keynes and standard neoclassical microeconomics, and emphasized the power of aggregate spending and monetary policy, and social Keynesians, who emphasized the more heterodox elements of Keynes’ thinking, and argued that the government had to be a more dynamic actor in the economy. One of the chief arguments of the social Keynesians was that fiscal Keynesians, in their attempt to fit Keynes’ theories into the free market orthodoxy, had neglected the great man’s denunciation of the market as a tool for investment. Less well known than his arguments about aggregate demand, John Maynard Keynes had argued in the General Theory that the stock, bond, and money markets were terrible ways to distribute capital for investment, likening them to a giant casino, in which people made bets on what they thought other people would think the average man would think. Keynes argued that this process inevitably led to excesses of fear and exaltation that led at various times to over-investment, under-investment, maldistribution of capital, and general inefficiency – the government, he argued, would have to take over the investment function. And so the social Keynesians argued that it was insufficient merely to boost the level of Federal spending in recessions; the government had to use its spending power to invest counter-cyclically in those needed areas (infrastructure, for example) over the long run.

So, what do we need in order to make sure that 50-State Keynesianism can handle both the short-term consumption function (boosting aggregate demand in recessions, dampening things down in bubbles) and the longer-term investment function?

To begin with, as mentioned in part 2, the establishment of state reserve banks are a critical structure for developing a stable and counter-cyclical source of financing during recessions, both to fund the consumption function programs , and to provide the capital to keep necessary public investments running in times when the private credit markets have frozen up. However, it is only once “fractional reserve lending is combined with an agile use of the power to tax (as opposed to the 2/3rds rule in California) and a temporary suspension of balanced budget rules that individual states can muster enough financial muscle to be able to run counter-cyclically.

The second part of establishing a capacity to do long-term investments is to set up mechanisms for state planning. A State Full Employment Budget, modeled after the process outlined in the Full Employment Bill of 1945-6, would require governors to send to the state legislature an economic projection of the labor market for that year, estimating the total number of jobs that will be created by private industry, and recommending public programs to create the necessary shortfall. This would create the necessary political infrastructure for doing Keynesian policy on a regular basis, create a framework for infrastructure development and jobs programs, and incidentally is a major policy accomplishment that any progressive governor could accomplish for free. Similarly, establishing the bureaucratic organization necessary for carrying out a Swedish-style labor market policy is also a way to develop the institutional mechanisms for doing long-range, counter-cyclical investment projects.

Consumption Function:

All of this fiscal capacity to do long-term investment in recessions (in order to keep the pace of job creation, technological improvement, and the like on pace) must also be matched by an equally-strong capacity to use effective and efficient “consumption function” policies to boost incomes and employment in the teeth of a recession. As I have discussed, a Job Insurance system (backed up by state bank lending, a state Full Employment Budget, and a Labor Market Board system) can provide an extremely efficient form of such Keynesian stimulus: a job insurance system, unlike standard Keynesian spending (where money is plugged into spending, and then a multiplier effect is supposed to generate additional employment), adds to aggregate employment in the first place, and then again when the wages generated by that employment create a multiplier effect on the rest of the economy. Similarly, a state-level Unemployment Insurance program that actually covers all workers and provides a decent pension would provide a truly effective “automatic stabilizer,” rather than the sad, crippled thing we have today.

Moreover, the expansion of state EITCs (earned income tax credits) into a system of guaranteed minimum income for workers can serve as a third line of defense. In addition to re-distributing wealth to the working poor (and thus, abolish working poverty), such a system could be made into a counter-cyclical program by providing temporary boosts in recessions and then freezing the EITC during “overheats.”

Sadly, if one looks at the state of California, where the state has dramatically accelerated withholding to counter-act falling tax receipts and fill up the deficit, one sees the illogic of states following balanced-budget policies in a recession. By increasing withholding, the state partially recoups some of its lost revenue, but directly reduces the monthly take-home pay of workers, further depressing consumer purchasing power, which in turn hammers retailers, manufacturers, transport, and so on, who in turn reduce employment and order, which further reduces spending. Alternatively, with a sufficient financing system (as outlined in the previous section), one could counter-cyclically adjust state income tax withholding to boost or lower monthly income.

Fitting The Pieces Together:

With the potent array of economic policy tools outlined above, state governments should have the “state capacity” to do Keynesian economic policy in recessions. However, as critics of Keynesian policy used to point out (and it’s the rare “honest cop, guvna”), Keynesian policy is supposed to be applied in economic boom-times as well as recessions: governments are supposed to raise taxes and slash spending when overly rapid economic growth pushes inflation too high.

Naturally, this tends to be somewhat politically unpopular. However, as I’ve argued in “Linking Taxation and Spending,” I don’t think it’s automatically the case that increasing taxes and freezing spending has to be a political killer, as long as it’s done in the right way. By linking tax increases to specific policy areas – boosting the “education tax” or the “transportation tax” – and thus framed as making investments for the future, I think we can short-circuit anti-tax politics by shifting the debate towards public priorities. Similarly, freezing spending can also be reframed as saving for future initiatives, such that the public knows that spending on popular programs is not being miserly forgone, but rather delayed, can also have a positive effect.

The same institutions that could make Keynesian policy easier and more successful in recessions can also have the same effect in boom-times. For example, the Swedish Labor Market Policy system involves rebating taxes on profits if companies agree to sequester the money in restricted accounts in the state bank that are set aside for infrastructure investments (and released during recessions). When investment is running too high, these accounts can be re-frozen and the tax rate on profits can be boosted – again, reframing the issue from taxing business to laying aside money for the future (since the businesses aren’t actually losing the money, just having it sequestered, it’s not even really a tax).

Conclusion:

As the thrust of this series has pointed out, the question of whether states can pursue Keynesian policy is not ultimately a question of ability. There are many different, tried-and-tested methods for conducting Keynesian economic policies that states can make use of (especially if states can get themselves out of the crippling legacies of supermajority and balanced budget rules). Ultimately, it is a question of political will, whether progressive  politicians at the local and state-wide level are willing to take up the banner of activist governance and challenge the orthodoxies of modern statecraft, and whether the voters who decry the mass firing of teachers and the closure of state parks – to say nothing of double-digit unemployment, millions of foreclosures, and falling levels of health coverage – are willing to take control of their economic destinies.

Introduction:

In part 1 of this series, I described how a Job Insurance system could work if it was organized nationally by the Federal government. However, as I suggested in 50 State Keynesianism, Part 2, it is also possible to run job insurance systems on a statewide basis if the Federal government balks at establishing a job insurance system.

Given the severity of the unemployment situation, and the likelihood that even should economic recovery begin in the second quarter and continue unabated that we will have persistent high unemployment, I believe that action on job insurance is necessary regardless of whether the Federal government can act.

State-Level Job Insurance:

State-level job insurance programs are more difficult to organize than national systems, largely because you’re dealing with a lower number of premium payers per re-hired workers. A national program creating four million jobs for example, would have 37.5 payers per worker, whereas a California state program creating 1 million jobs, would have only 18.5 payers per worker. Nonetheless, the fiscal capacity is there for states to create jobs – it’s a question of finding revenue sources (such as job insurance premiums, state reserve banks, etc.) and passing legislation.

The task becomes somewhat easier if states could re-purpose their existing Unemployment Insurance (UI) systems to finance their job insurance system. While many states have been under-funding their UI systems in order to keep taxes low, it’s still worth noting that state UI systems, with their dedicated taxes on employers, can raise significant revenue. The state of California, for example, raises about $5 billion a year in UI taxes – combine that revenue with a job insurance program that generated $4 billion a year in premiums (see the example in the second-to-last paragraph at that link), and you could easily build up a $40 billion reserve in about four years (or a $20 billion reserve in about two years, if you assume the state could kick in for 1/2 the cost). This would allow the state Job Insurance (JI) program to create 1 million jobs immediately in the event of a future recession the size and scale of this one (without any other state financial assistance)- which would halve an 11.6% unemployment rate down to 5.8%.

However, we are in a recession right now, and we need jobs right now. And while financing a massive jobs program without the luxury of several years to build up reserves is more complicated, if you expand the range of fiscal tools at your disposal, the task becomes more manageable, even for a state like California. Let’s take the task of coming up with $40 billion in new spending and break it up: potentially $9 billion could come straight from the JI system, $15 billion could come from a California Reserve Bank loan, and another $15 billion could come from the state itself (or $9 billion could come from JI and $31 billion from the Reserve Bank), or any other combination. There are additional ways that the state’s contribution could be made easier by the Federal government, but more on this later.

Blue State Job Insurance:

Another way to thread the needle of Job Insurance financing is to follow the basic logic of insurance systems, by seeking to enlarge the pool, by establishing an inter-state job insurance compact. While gaining acceptance from states dominated by conservative Republicans who are ideologically opposed to extending Unemployment Insurance to temporary and part time workers would probably be impossible, if you restrict yourself to just the “blue states,” you can build a quite big pool indeed – the 2006 “blue states” alone held 168 million people.  With a larger pool, you can create more jobs with lower premiums.

Furthermore,state compacts would also have other benefits – they would allow for important regional projects to go forward (like improving Amtrak’s Northeast Corridor, for example, or beautifying the beaches along the Pacific Ocean, or interstate bridge maintenance and repair), they would decrease the already low likelihood of “footloose” corporations (although a $10/month/worker tax is so low that businesses would barely notice it), and they would also decrease the equally unlikely chance of mass migration to find jobs in other states (but if eligibility depends on contributions, it’s probably not going to happen).

Federal Assistance:

While at the outset I said that Federal action on Job Insurance would be preferable to trying to build programs state-by-state, it is still the case that even if Job Insurance can’t pass through this Congress, there are a number of measures that Congress could take to help the states establish job insurance systems:

• Allow States to Experiment With UI – as you can see from the example above, the fiscal task of establishing and operating a job insurance system becomes much easier if states can re-purpose their Unemployment Insurance systems. Since unemployment insurance in America is a Federal-state joint program, a Federal waiver would be crucial to making this new system work. It’s a similar idea to the so-called “state option” on health care reform (which would allow states to experiment with single-payer systems under the proposed new health care system) – one circumvents political blockages in the national legislature by allowing states with progressive majorities to move ahead and hopefully shift the “Overton window.”
• Guaranteeing/Purchasing State Bonds/Loans – as I suggested in 50-State Keynesianism, Part 1, one of the ways that the Federal government could “lend” its capacity to deficit-spend to the states is by acting as an alternative to the volatile and politically-charged bond markets and rating agencies in dealing with state debts is by agreeing either to guarantee or to purchase “economic recovery bonds” specifically targeted at preserving and creating state jobs. When you combine the establishment of state reserve banks (see part 2 of that series) with the establishment of state job insurance systems, you create a potentially quite powerful mechanism for transfering Federal fiscal assistance directly into job creation.
• Federal Contributions – while joint Federal-state programs in other areas of social welfare have not always worked out as well as the proponents of Social Security might have hoped (AFDC or “welfare,” Old Age Assistance, Unemployment Insurance, and Medicaid are all examples of how state-run social programs without state fiscal capacity to deficit spend inevitably run into crises in recessions), if progress any other way is blocked, you could have the Federal government pay something along the lines of 30-50% of the cost of hiring new workers, which would greatly accelerate the establishment of job insurance systems.

Conclusion:

Ultimately, I believe that job insurance must and should be a Federal program – in 2009, the U.S economy is nationally integrated, and we are all affected by world-wide recessions that make unemployment a national concern. Moreover, there is a major shortcoming to the state-run system that should give progressives pause before they too-casually accept the old notion of the states as fifty “laboratories of democracy.” In the end, progressives should and do care about helping everyone who needs it, not just the people who are lucky enough to live in states with progressive majorities – indeed, the regional disparities in poverty and other conditions means that it really is impossible to fully grapple with national problems without assisting those who need it in specifically those conservative states which will refuse to act on their own. It is wrong to protect unemployed workers in California while leaving unemployed workers in Texas to go without work – an accident of geography should never be the basis for social protection.

Nevertheless, the severity of the situation demands that any option for positive action must be taken.

Note: This is a cross-post from my group blog, The Realignnment Project.

This is a more thorough examination of the job insurance concept, done on a national level, but you can easily scale it to California or any other state. 

 Introduction:

In my previous posts about unemployment insurance reform and 50-state Keynesianism, I made brief reference to something called “job insurance.” Several people requested a fuller explanation, which is only fair considering that I had rather tacked on the idea without fully developing what I meant.

So here is a blueprint for how job insurance is supposed to work, as a major solution to the problem of declining job growth and increasing economic insecurity. To start with, let me explain what job insurance is not – it is not the temporary “transition trade assistance” (inadequate and ill-conceived at the best of times) referred to by most workers as “burial insurance.” It’s not the “wage insurance” that semi-penitent neoliberals have dreamed up to compensate for the fact that the new jobs being created by their post-industrial economic order pay less than the blue collar factory jobs of the past.

What job insurance is, in reality, is the missing link in our Social Security system.

Background – The Committee on Economic Security, 1934

As I discussed previously, the idea that the current Social Security system was handed down on granite tablets from on high is quite wrong. As with any piece of legislation, the Social Security system emerged as a compromise measure from a series of competing alternatives, one of which was an idea for job insurance, developed by the Federal Emergency Relief Administration (FERA) staffers who were alumni from the Civil Works Administration (which had employed 4.27 million men for the previous six months) and who would go on to lead the Works Progress Administration (WPA). They proposed “three different systems of “job insurance:” option one “involves the use of contributions for protections against unemployment for a work program — employment not restricted to those making the payments. This conception regards the funds collected as an additional source of revenue collected and is based on the belief that employees will willingly make payments in return for the protection offered them by a large work program when unemployed,” essentially replacing unemployment insurance altogether, while combining contributions from a payroll tax with general Federal funding. Option two contemplated “wages on a work program as a means of paying all unemployment benefits,” in which a public job would be “a matter of contractual right to…wages paid for work performed.” Option three envisioned a combination of UI with job insurance, in which workers who exhausted their limited UI benefits would then become eligible for a public job, dividing responsibilities between short-term and long-term insurance.”

At the heart of their arguments for why Job Insurance would be superior to Unemployment Insurance was an understanding of the social meaning of work. It’s not something we think of very much, but work is a central part of our modern identities – the first question you’re likely to ask someone when you meet them (after their name) is the ubiquitous “so what do you?” Our social status is highly determined by the kind of work we do – do we do manual work or work in an office? Are we classified as unskilled worker or professionals? Do our wages allow us to afford a “middle class” lifestyle? Beyond this, even in our politics, we associate being a good worker as being a good citizen, productive, taxpaying, self-providing, and those who do not work are labeled implicitly as bad citizens. The welfare cheat, the malingerer who fakes injury to get on worker’s comp, the deadbeat debtor – these are the stock characters of our modern morality plays.

And as social investigators like E. White Bakke in the United States or William Beveridge in the U.K demonstrated, and as the FERA administrators as former social workers turned welfare bureaucrats knew intimately, there is a social disconnection and degradation that comes from unemployment, even if you have unemployment insurance.  Think about how your work structures your life – you wake up in the morning at a time designated by your commute, you read the morning paper to learn about things going on that might be relevant to your life, you make your commute and engage in a mass experience, surrounded by thousands of other people doing the exact thing whether you’re walking down the sidewalk, sitting on the train or the subway, or stuck in traffic on the freeway. And this is where our public is created, with the flash of the morning headline, with the chatter of pamphleteers and the railing of drive-time radio hosts, a sensation of being part of the world. Then you arrive at work, and you’re again part of a group. The workplace, with its office gossip and politics, with friends and enemies and acquaintances all jostling alongside , the idle chatter around the coffee machine or the water cooler, a shared smoke or lunch – this is where solidarity begins, where you develop an identity of yourself as a worker.

To be cut off from that is to be left behind as residential neighborhoods empty out. As Beveridge put it, “The worse thing we can do to an unemployed man is to heap indignity upon indignity, because the loss of work in itself is a bad thing. I have seen fine, brave men reduced by continuous, enforced unemployment to a state in which they feel they are forgotten, unwanted, thrown on the scrap heap.”

So in 1934, the expert-activists of FERA tried their level best to give the unemployed more than just a check. For eight years, until 1943, they were brilliantly successful. In 1945-6, they came within an inch of making their endeavor permanent.

A Proposed System of Job Insurance:

In 2009, we could finish the job.Here’s how.

The Concept In a Nutshell – to establish a permanent fiscal structure for public employment programs, provide workers with the genuine protection against economic crisis, and move towards the ultimate goal of the government serving as “employer of last resort” in times of crisis. How to Finance It – a $20 per month contribution, split 50-50 between employer and employee, from all 150 million people in the American workforce would generate $36 billion per year (roughly the equivalent needed to directly create 1 million jobs), which in good times could be saved in a Job Insurance Fund operated by the Federal Government (probably by the Social Security Administration, since they already know how and would avoid duplication). This $36 billion, if saved over five good years, would turn into $180 billion, which is enough to put 4.5 million unemployed back to work and probably a sufficient reserve level that could be spent in times of rising unemployment and cover all but the most extreme of job losses, even without additional Federal contribution (a Federal contribution of $18 billion a year, for example, would reduce the premiums to $10 a month, or provide for a full reserve in three years rather than five).

Scenario – Implementing It Now: Obviously, in our current recession, we lack the time necessary to build up a reserve at the same time as we have lost more than five million jobs. In order to reverse our current job losses and bring unemployment down from 9.5% (officially) to 6%, we’d need to spend $200 billion to put those five million newly unemployed to work for a year. However, with a job insurance system, you could pay that off in 10-11 years (if the fund payed back the government at $18 billion a year, allowing it to continue building up funds), making a potential Jobs Bill deficit-neutral. In this scenario, it would still be useful for the Federal government to kick in $18 billion a year to keep the Job Insurance Fund filling up on pace.

What Do You Get for $20: in return for $20 a month, you would get the right to a public job at any point in the future when you were laid off. This job would pay about $20-24k a year, with a six month contract (renewable if, after a job search at the end of  six months, you’re unable to find a new job). That’s not great, but it is enough to keep a family out of poverty, especially if there’s a second earner. Eligibility would be automatic the week after your last FICA payment, and application for a job should be convenient, consisting of no more than a questionnaire about your work experience and skills that could be done over a toll-free call, or over the Internet, or at any government office. In most recessions, you should be able to move directly from your previous job to your new job, but even in a very sudden and sharp recession, you could give people work in some fair fashion (order of date of unemployment, random lottery, order of application, etc.) and people would have UI to cover the temporary gap.

Economic Impact – Job Insurance would thus function as a new “automatic stabilizer,” kicking in at any time when when a recession pushes unemployment above some level determined by our democratically-elected government as acceptable – 4% has been considered a healthy rate for the last twenty years, but we could probably follow Beveridge’s suggestion of 3% or less as “full employment.” When this rise in unemployment occurred, the Job Insurance Reserve would begin to release funds to be spent employing workers on public projects, in step with the pace of layoffs to prevent a sudden surge of layoffs and the attendant drop-off in demand.  In most recessions, if it was able to act in a timely fashion and catch the economy in the early stage of a recession, you probably wouldn’t need to hire more than 2-3 million people. The resulting Keynesian stimulus from new wages as well as the strong market signal sent to retailers and their suppliers should be able to either avert an oncoming recession, or at least make it shallow and short enough for more traditional Keynesian methods to be applied in a less dire scenario than they were in January 2009.  As the economy improved, the six-month term and required job search could be used to gradually downshift the number of public employment project workers at less than the speed of job growth (an important point, you don’t want to see another 1937).

In essence, what job insurance would create is a new social contract, both between citizens and the government, and among citizens. The individual worker is assured of protection from unemployment as long as they contribute to the fund and are willing to work in return for their paycheck; the society is assured that the government will provide for full employment and full economic growth. And citizens, both the employed paying in their contributions and the unemployed working for their paycheck, will assure the other that their monthly contributions will serve, not only to protect them against job loss, but will also enlarge the commonwealth and beautify the public square.

“Unemployment compensation, as we conceive it, is a front line of defense, especially valuable for those who are ordinarily steadily employed, but very beneficial also in maintaining purchasing power. While it will not directly benefit those now unemployed until they are reabsorbed in industry, it should be instituted at the earliest possible date to increase the security of all who are employed…”
– Report to the President, Committee on Economic Security (1935)

In a previous post, I discussed the need to improve the payroll tax, and noted that one of the reasons we need to do this is to fix the unemployment insurance (UI). Our current UI system is fundamentally broken. As I wrote on the 12th, “at a time when nearly one in ten American workers are unemployed, only half of them qualify for Unemployment Insurance, to the extent that the program no longer adequately functions either as a safety net or an “automatic stabilizer.””

If I didn't have the time and the space to say it at the time, let me say it now. The fact that a majority of workers are no longer protected, nearly seventy-five years after the passage of an act that was meant to protect every worker from” one of many misfortunes” of economic life, is a moral failure of the highest order. The idea that governors in America would reject stimulus funds in the middle of a recession because those funds would make it easier for temporary or part time workers to gain access to UI suggests the total moral bankruptcy of the American conservative movement. Not for nothing did FDR say:

“Governments can err, presidents do make mistakes, but the immortal Dante tells us that divine justice weighs the sins of the cold-blooded and the sins of the warm-hearted on different scales. Better the occasional faults of a government that lives in a spirit of charity than the consistent omissions of a government frozen in the ice of its own indifference.”

Background:

Seventy-five years ago, UI was probably the most important, the most important, and legally and politically the most difficult piece of FDR's agenda that the Committee on Economic Security (CES) wrestled with. The sheer burden of the task was daunting – twenty million Americans were living on Federal relief, so demand for UI would be high, but unemployment was still at 14% and wages had been badly hammered so where would the funds come from to establish a reserve? Politically, the right thundered against creeping socialism and an un-American dole and the left visions of plenty if we “shared the wealth. Legally, the Supreme Court had set its face like thunder against the New Deal and all its works. And the progressive movement was split.

At the core of the CES's divisions over UI was a struggle between two halves of the progressive spirit -on one shoulder, its conservative, sober, evolutionary side, wary of government handouts, suspicious and somewhat fearful of an unruly working class, and confident in the ability of educated regulators to force the market into acting morally;  on the the other, its visionary, expansive, and radical side, impatient with the old nostrums of laissez faire and limited government, firm in their faith in the liberatory capacity of an activist state, and deeply hostile to all malefactors of great wealth. From each side came a plan:

• The Wisconsin Plan – the Wisconsin Plan was the result of one of the most creative and productive experiments in state-leel progressivism in American history, marked by the political and policy alliance between progressive economists at the University of Wisconsin lead by Professor John R. Commons and the LaFollete political dynasty, including the legendary “Fighting Bob” LaFollete and  his sons, Progressive governor Philip LaFollete, and  Senator Robert LaFollete Jr. In 1932, Wisconsin adopted the first unemployment insurance system in American history, drafted by John R. Commons. Under the Wisconsin Plan, each corporation was required to build up its own UI reserve, paid for out of a payroll tax. The rate of the payroll tax would vary company by company depending on how successful the company was in maintaining a stable level of employment and not resorting to layoffs – in this manner, the Commons school of economists hoped to tame the business cycle by re-shaping employer's incentives, making it good business to be a good employer.

• The Ohio Plan – the Ohio Plan was established the same year as the Wisconsin Plan, but differed from it in two regards. First, the Ohio plan instead of setting up individual factory plans established a single, statewide plan, which pooled contributions from all employers, thus allowing the strong and the big to subsidize the weak and the small. Second, the Ohio plan, unlike the Wisconsin Plan, required contributions from both employers and employees (the Wisconsin Plan only taxed employers). The kernel of the Ohio plan was picked up by several progressive economists, including Abraham Epstein of the American Association for Old Age Security, future Senator Paul Douglas of the University of Chicago, and I.M Rubinow of Columbia University.

In the political struggle within the CES, the Ohio plan was easily defeated. Frances Perkins, the Secretary of Labor and Chairwoman of the CES appointed a number of Commons-trained Wisconsin economists to staff positions, including Edwin E. Witte (later called “the father of Social Security”) and Arthur Altmeyer (the future first chairman of the Social Security Board. Under their leadership, and with the political support of many other New Dealers, the CES was persuaded to support a system whereby a re-funded Federal payroll tax could be used to push other states into establishing Unemployment Insurance systems on the lines of the Wisconsin Plan. The advocates of the Ohio Plan, shut out from direct participation by their Wisconsin rivals, lobbied the CES' Advisory Board on behalf of a single, national pool run by the Federal government.

In the end, neither side totally won out. The UI system would be state-run, in part merely to get around objections from the Supreme Court, but on the other hand, the insurance pools would be single, state-wide, and not the factory-level plans envisioned by John R. Commons. In this way, however, a deadly weakness was built into the system.

Situation:

The fact that only 46% of workers are eligible for UI is not an accident. The more workers are eligible for unemployment insurance, the higher a payroll tax must be levied to cover them, and thus states perversely compete to lower coverage to attract employers with their low cost of doing business. The fact that the majority of gubernatorial opponents to taking the stimulus and the attached strings of UI reform come from low-wage, low-tax, Republican/corporate dominated, Southern states shows the way in which the politics and economics of state-run unemployment insurance combine. If you've been paying attention to the news, not only would you see that some governors had to be bullied into doing what is not merely morally right but economically necessary in a recession, but you would also note that many states have drawn down their UI reserve funds to the point where they are a few months or a few quarters away from running out of money.

This is simply untenable. We have nearly 10% unemployment. Our recoveries are becoming increasingly long and jobless recoveries. We have to have a functioning unemployment insurance, and we need it now.

Solutions:

So how do we get this done?

1. Fixing UI Means Nationalizing UI – the National Employment Law Project's proposal for a “New National Economic Security Plan for the 21st Century” is a good start: it combines state level reforms (coverage expansion, 12 weeks of paid family and medical leave, subsidized COBRA insurance, a home protection fund, and credits for education/training) with federal reforms (expanding trade assistance, a permanent Federal Extended Benefit system tied to national recessions, establishing disaster-related unemployment insurance, and creating “transitional jobs”). Ultimately, however, the state-run model of UI is simply outdated and ill-designed and needs to be replaced. From the beginning, the state-level program was created to get around Supreme Court doctrine against Federal economic intervention that is no longer good law. State-run systems create perverse incentives to deny coverage and underfund the system, and in general, states lack the counter-cyclical capacity to deficit spend in recessions that UI should enable. The current system, whereby supplementary Extended Benefits are passed by Congress during recessions, has shown itself to be too slow, too prone to political delays, and too limited in scope. Unemployment is a national problem, it requires a national solution. We already have the administrative structure in place to make the transition. There is no excuse for delay.
2. Wage Insurance Is NOT the Answer – there are some who counsel the creation of wage insurance as a means of dealing with the additional problem that, when the unemployed do find new work, often (especially in the case of older, skilled workers) their new jobs tend to pay much lower wages than the declining, industrial, and unionized jobs they once held. This is a fundamentally flawed and compromised idea, an undeclared recognition that the jobs being destroyed and created by free trade, globalization, and outsourcing are not of equal quality, and a surrender to the epidemic of wage stagnation that is the underlying cause of America's long-term economic weakness. Creating a system that pays 1/2 the difference of lost wages simply creates an incentive for employers to fire their workforce en masse, rehire them later at lower wage rates, let the Federal government pick up the tab, leaving workers to suffer continually if only gradually declining wages. We do not need Speenhamland for the 21st century.
   
3. Job Insurance IS – Luckily, we do have another way to deal with the shortcomings in UI, one that was designed within the Committee on Economic Security, present at the moment of creation. In addition to the Wisconsin and Ohio economists, there were also a group of policy advocates from  the Federal Emergency Relief Administration (FERA), who were busy designing what would become the WPA (of which I have often written). In a series of running bureaucratic battles, FERA staffers like Jacob Baker, Emerson Ross, Corrington Gill, Aubrey Williams, Alan Johnstone, Nels Anderson, Eveline Burns, and Josephine Brown argued for the establishment of a system of “job insurance” to replace the Wisconsin school's “unemployment insurance.” In a memo titled “A Public Work Program As a Means of Economic Security,” Emerson Ross proposed three different systems of “job insurance:” option one “involves the use of contributions for protections against unemployment for a work program — employment not restricted to those making the payments. This conception regards the funds collected as an additional source of revenue collected and is based on the belief that employees will willingly make payments in return for the protection offered them by a large work program when unemployed,” essentially replacing unemployment insurance altogether, while combining contributions from a payroll tax with general Federal funding. Option two contemplated “wages on a work program as a means of paying all unemployment benefits,” in which a public job would be “a matter of contractual right to…wages paid for work performed.” Option three envisioned a combination of UI with job insurance, in which workers who exhausted their limited UI benefits would then become eligible for a public job, dividing responsibilities between short-term and long-term insurance.

Either of the three proposals would be superior to our existing system of unemployment insurance. Critically, by establishing a separate and dedicated tax and reserve fund for job insurance, the Federal government could create a permanent fiscal structure for a jobs program, which would form the nucleus of a Federal commitment to full employment for all.

“O reason not the need! Our basest beggars
Are in the poorest thing superfluous.
Allow not nature more than nature needs,
Man’s life is as cheap as beast’s.” (Lear, II iv)

The Problem:

If there is any one area of American life that best expresses the adage “poverty in the midst of prosperity,” it must be housing. Even as thousands upon thousands of homes now stand empty, vast swathes of speculative suburban developments along the highways and hills of California turned into ghost towns, homelessness has increased. In Washington D.C, the number of homeless families has increased in the last year by 15%, with similar figures being reported in New York City and other metropolitan centers. Even when the sub-prime boom was spreading home-ownership wide and far and actually beginning to make headway against the unequal distribution of housing in America, in 2006, 8.8 million households were paying more than half their income in rent (I was probably one of them). Major systemic problems (the lack of affordable housing and workforce housing near where people work, the need to in-fill versus sprawl, racial and class discrimination) were not being addressed, even when the market was flush.

It isn’t flush now. If ever there was a need for proof that “spatial mismatch” and “credit discrimination” exist, we can find it in the fact that at a time when thousands of houses are empty rotting shells, that people who want and need housing are being turned away by banks who have suddenly become paragons of fiscal rectitude.

At the same time, the national unemployment rate currently stands at 9.4%. Within the construction industry, unemployment stands at 21%. Within California, the situation is even worse, with an overall unemployment rate of 11.5%, and a construction industry that’s down 150,000 jobs from last year. While I fully expect that the stimulative effect of the American Recovery and Reinvestment Act of 2009 will begin to ameliorate this situation within the next six months, I personally was calling for an even larger jobs bill at the time.

I think we can tackle both problems at the same time.

The Solution:

Public employment programs – like the Works Progress Administration (WPA)- have a special affinity for has been called “light construction.”  In its eight year existence, the WPA built nearly 40,000 public buildings, and rehabilitated or improved another 80,000, despite the fact that most WPA workers actually did road construction. Those 120,000 buildings included 6,000 new schools, 2,170 school expansions, and 31,000 school modernizations, 322 new or improved hospitals, and 6,400 public office buildings. Even if you divide it up yearly, it still comes out to 15,000 buildings a year, done with only a fraction of its 3.5 million strong workforce. In my own research, I have found that the one thing that the WPA wasn’t able to do, that administrators and experts within the WPA like Emerson Ross, Jacob Baker, Alan Johnstone, Nels Anderson and a handful of other almost completely forgotten New Dealers wanted to do, was build housing.

As you can see in the above memo written by Jacob Baker, the plan to expand the New Deal’s employment program to 3-6 million men (far bigger than the WPA eventually managed),  also went hand in hand with an attempt to deal with the chronic market failure to provide affordable housing in the city core. This insight, the drive to kill two birds with one stone, is one that we should follow today.

My suggestion would be for the Federal government, along with the state and local governments, to go into areas where the housing market has failed (large proportions of renters paying more than 50% of income in rent, housing values far out of sync with median incomes, large numbers of abandoned foreclosed properties, or a lack of affordable housing in general) and do three things: first, to restore and rehabilitate derelict housing and second, to build new housing units where new housing is needed in central cities, and third, to destroy “ghost towns” that are now nothing of blight in such a way that as much of the materials can be saved as possible.

If we were establish a Housing Progress Administration (HPA) to employ 5 million unemployed workers (many of whom would no doubt be former construction workers) to do this, and we paid $24k a year (assuming an overhead rate of 30%, which is actually 10% higher than the WPA”s historic 20% rate), making a deal with states and localities to pitch in for the cost of land and materials, it would cost approximately $155 billion per year. If we kept the program going for the next two years, at which point economic growth would start to transition into employment growth, it would cost $310 billion – less than half the cost of the stimulus bill. And it would create at least 5 million jobs, nearly the total number of jobs lost in this recession.

Now the question becomes, what do we do with this new housing? I have a few suggestions:

• Selling At/Below Cost – the wonderful, undiscovered virtue of the public sector is that it doesn’t have to make a profit. If we were to sell the new/reclaimed housing at or below the cost of construction, we could begin to reverse the impacts of the sub-prime collapse, by getting low to medium income families back into housing with low-rate, FHA-backed mortgages, instead of crooked, ballooning loans. Moreover, by moving thousands or even millions of people back into housing would help defray the cost of the construction program, pushing it well below $155 billion.
• Giving Away Housing – in cities with high rates of homelessness, one of the most successful recent programs has been to simply give homeless people housing for free. For the 17% of the homeless who work, it simply gets them over the obstacle of putting together first-and-last plus security deposit; but for many more, getting a mailing address and a phone number, a place to clean their clothes, and so forth is a huge helping hand towards getting a job and staying off the streets. Even if we don’t make any money back on giving away housing, we would be solving a major social problem and a major human crisis.
• Establishing Rental Co-ops – finally, we should recognize that home-ownership is not the only route to economic security, and that our public policy needs to do more to ensure that renters get the same kind of government assistance that home-owners get from the FHA, HOLC, tax breaks, and other public policies. Thus, in addition to providing new housing for sale, the HPA should also create a variety of apartment buildings and single homes for rent, working with local housing groups (yes, like ACORN) to establish local rental co-ops who would operate and maintain the units.

In the face of manifest human need and the gross waste of our current system, what else can we do but help?

This is crossposted from my new California High Speed Rail blog

As those of you who have been reading me for the last year know, I love high speed rail. And you’d also know that I am deeply skeptical – to put it mildly – of public private partnerships (P3). So what am I to do when they are joined together in a shotgun wedding? From a press release put out by the California High Speed Rail Authority:

California High-Speed Rail Authority Executive Director Mehdi Morshed, joined Governor Schwarzenegger Tuesday in participating in a roundtable discussion at the State Capitol regarding the importance of investing in California’s infrastructure and maintaining the state’s economic growth through public private partnerships.

Mr. Morshed noted the California proposed system of high-speed trains offers a unique opportunity to develop a new model for “P3” or public private partnership financing….

Mr. Morshed noted that high-speed trains are attractive to private investors because California’s proposed system will bring a $1 billion annual profit or surplus, once built.

Now it’s not as if this is totally new. The 2002 Implementation Plan always envisioned that private financing would play some sort of role in the HSR project, although at the time it was expected to be limited to the bonds.

But what exactly is meant by “private financing” – and how bad might this really be for HSR?

The Authority’s finance team anticipates public-private partnership opportunities will include project debt financing, vendor financing, system operations and private ownership.

I can live with private involvement in debt and vendor financing, even though government can always borrow more cheaply. System operations is iffy at best – government runs the French, Spanish, German, and Japanese lines quite well, and when system operations were privatized in Britain, the results were deadly. Private ownership, however, is a line we must not cross – public ownership of infrastructure is key to an effective, safe, and affordable transportation system for Californians. High speed rail is an economic catalyst and an environmental and sustainablity necessity. It needs to be held in public hands for public uses, and not hollowed out for private profit.

And that $1 billion is a very, very enticing figure, especially for private companies and investors, who likely see in public infrastructure the kind of profit opportunities that they are now being denied in real estate and financial speculation. But that $1 billion would also be incredibly useful in building out the full HSR network envisioned in the 2002 Implementation Plan – or extending the service beyond its current routing (building an Altamont Pass alignment, for example).

In Europe, those operating surpluses are regularly plowed back into expansion of the HSR network. Spain’s first HSR line, the AVE train from Madrid to Córdoba and Sevilla, proved so profitable that RENFE (Spain’s government-owned rail network) was able to plow that money into recent extensions to Malaga, Valladolid, and Barcelona. France’s state-owned rail network, SNCF has been able to do the same with expansion of its TGV lines as well. The operating surplus alone does not pay for these projects, but it helps reduce the added bond or tax monies needed to construct the new lines. Or, the surplus could be used to pay the bonds off ahead of schedule.

So there is a strong incentive to use those operating surpluses for HSR upgrades and extensions or bond repayment, instead of handing it over to private investors. But it seems clear that P3 is the price of obtaining Governor Arnold Schwarzenegger’s support for the plan. From the press release:

The bond measure, which is within the Schwarzenegger Administration’s current debt capacity guidelines, will also provide nearly $1 billion for improvements to local and regional passenger trains projects that complement and connect with the high-speed train system. The bond is also a significant component of the Governor’s Strategic Growth Plan as described in his proposed 2008-09 budget.

That section, especially the language about “debt capacity guidelines,” seems a very clear signal to me that Arnold is going to throw his weight behind the November HSR bond – but only because it promotes his goal of P3 for public works.

It’s a shotgun wedding, and the question is, how should we react? Is HSR worth the price of P3? Already we’re having to accept a lot of tough things to get this project moving. The Pacheco Pass alignment seems less ideal from a ridership and environmental perspective. And the plan floated by Fiona Ma and Cathleen Galgani to drop the insistence that LA-SF be the first line to open risks building a system that contains a missing link.

But neither are these poison pills. As I noted above, the Implementation Plan always called for private investment, to leverage the state, local, and federal funding. What seems more worrisome here is that Arnold is using HSR to advance a privatization agenda that is already being implemented in our state. HSR is too important a project to force into a shotgun wedding with Arnold’s privatization push.