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.

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.

Note: This is a cross-post from my group blog, The Realignment Project, and part 2 in a series about how to bring Keynesian economic policy to the state level.

Introduction:

In this post, I'm returning to a theme I initially explored in June, back when California was grappling with its budget crisis.

Now, after nearly two months of additional struggle, we finally passed a bill that cut $26 billion and raised no new revenue, and now we learn that the governor has possibly illegally cut a further $500 million, taking the axe to children's welfare ($80 million), health care ($400 million), Cal Grants (cut in half), HIV/AIDS Prevention and Treatment ($52 million), and domestic violence shelters (cut by 80%). In addition to the moral insanity of attacking the most vulnerable of our citizens at a time when they are most in need of support one must add the economic insanity of believing that you can reduce government spending by $31 billion in the course of a single year (including both the February and July cuts)  and not effect the state's economic recovery.

Lest this be seen as merely a California problem, a recent report by the National Governors Association notes that the collective budget shortfalls of the fifty states comes to a collective $200 billion shortfall. Given that the total Federal economic stimulus for this year only comes to about $400 billion, we are forced to recognize that our system of state government budgeting and finance is creating a massive economic undertow, weakening the impact of Keynesian stimulus by cutting spending and raising taxes (although they've been doing a lot more of the former than the latter).

Background:

Why is it the case that America's state governments have become so strongly pro-cyclical? The basic reason is that all but one state in the Union (Vermont being the exception) have some form of a balanced budget or debt limitation requirement, which makes it impossible to deficit spend during recessions.

Many of these requirements date back over a hundred years, following the Panic of 1837, which caused nine states to default on their “internal improvement” (i.e, transportation infrastructure) related debts in 1842, which prompted a wave of anti-debt measures. The state of New York, for example, adopted a new constitution in 1846, which required a 2/3rds vote for appropriations bills and a 3/5ths vote for any bill that would raise taxes or incur debts. Illinois' 1848 constitution required a 2/3 vote for appropriations, a balanced budget requirement, and a $50,000 cap on state debts. Similar waves of constitutional redrafting tended to follow other major recessions in which states suddenly were unable to finance their debts, such as the Panics of 1857 and 1873 (triggered by the failure of banks that had over-speculated on railroads).

The question is why we allow a “hobgoblin of little minds” over a hundred and seventy years old to continue to rule over us? Why, when even a total economics amateur like myself can pick up Keynes and learn about the “paradox of thrift,” do we continue to allow the political cliche that “well, families have to balance their budgets, so the government should too” to be the conventional wisdom of the stump speech? (Incidentally, given the fact that most American families are horribly in debt and are relying on their credit cards to make ends meet, this couldn't be less accurate).

A 50-State Solution:

One of the things that's often puzzled me about the progressive movement is our lack of willingness to use the initiative process to our advantage in both achieving policy ends and mobilizing the electorate – consider the way in which the Republican Party used anti-gay marriage propositions in 2002 and 2004 to gin up their right-wing base, change the political debate from economic issues to their wedge issues, and attack the civil rights and civil liberties of queer Americans. In 2006, we saw a little bit of this strategy on the progressive side, using minimum wage initiatives to increase working class turnout in states like Ohio, but to the best of my knowledge it hasn't become a standard part of the Democratic Party political toolkit.

Hence, the first step in establishing “50-state Keynesianism” is to promote, state-by-state an “Anti-Recession Budget Reform Initiative.” (if anyone has a better name for it, I'm open to suggestions). This initiative should amend the state constitution's balanced budget requirement to allow the state, when the economy is in recession (i.e, two quarters of negative economic growth) to run a limited deficit (two years maximum) for the purposes of funding counter-cyclical stimulus programs (limited to say, 5-10% of state GDP).  We should begin our push in those areas which are deep blue states and which tend to have weaker balanced budget requirements – New England would be a good starting place, especially with Vermont as the lone non-balanced budget state sitting there as a model for how deficit spending won't destroy western civilization. The Rust Belt states that have been especially hit hard, like Michigan or Ohio, would probably be receptive to a message that it's better to spend money to create jobs than to balance a budget by throwing teachers and other state workers out of their jobs. As usual, the major prizes would be New York and California, given their size and political weight.

Second, in order to build state capacity for Keynesian economic policy, we should also push for the creation of State Reserve Banks.  Here, I really have to credit Ellen Brown over at the Huffington Post for promoting this idea and bringing it to my attention. This amazingly simple yet powerful idea takes its example from, of all places, the state of North Dakota, which has operated the Bank of North Dakota since 1919. It works like this – the state charters a public bank, and instead of placing its reserves, tax revenues, deeds for public lands, and so forth in a variety of state banks (as most states do), it puts all of them in the public bank to act as the bank's capital base. (Note: as long as the bank only circulates U.S dollars, it's perfectly constitutional, avoiding the Article I, Section 10 bar against states issuing coin or bills of credit) The bank then acts like a reserve bank, using the power of “fractional reserve lending” (i.e, that a bank can generate much more money in loans than it keeps in its vaults, thus multiplying many times over its actual reserves, as long as it keeps back a portion to redeem deposits) to generate loans, act as a local “lender of last resort” (thus buttressing the work of the Federal Reserve and FDIC during credit crises), and (this is the key bit) allowing the State to borrow money in order to deficit spend in a recession without relying on the ideologically-biased bond market and the credit agencies who've taken a hammer to state bond ratings while maintaining A ratings for AIG and Lehman Brothers. The State could then use these loans (which would be much cheaper than ordinary bonds, given that its essentially paying interest to itself) to maintain public services and fund public works and other stimulus measures in a recession.

Third, as I've suggested before, one of the best ways to fight a recession is to create jobs directly. Hence, with all this new fiscal and monetary muscle, we should set up a WPA-like system of State “Job Insurance.” While the Federal government is best suited to this task, in that it has superior powers to deficit spend and print money, state governments could run their own permanent job insurance systems, establishing State J.I Funds, contributions from workers and employers, and assistance from the general fund. The idea would be to create short-term jobs (say 6-month duration, with a right to re-apply after a job search at the end of 6 months) at $10 an hour – the number of jobs directed at reducing unemployment by whatever proportion (say, 50% in the example below) needed to keep unemployment at or below a specific level. As the economy turned around, these jobs could be gradually eliminated (at 1/2 the rate of job growth, for example) in order to not damage the recovery as happened when the WPA was suddenly downsized in 1937-8. In return for a monthly contribution, workers would have a right to one of these jobs, as allocated by some fair procedure (order of application, random lottery, etc.).

Let's take California as an example. The state has a normal workforce of 18.5 million people, of which 2.146 million are currently unemployed (a rate of 11.6%). The objective of a new job insurance system would be to create enough jobs to bring the rate down to an acceptable level – say, by 50% down to 5.8%. (Note, while I would consider 5.8% unemployment to be unnecessarily high, and while we may want to consider ultimately lowering the official “acceptable rate,” for the moment, let's consider simply meeting the immediate crisis). In order to create 1,073,000 jobs, the state would need to spend approximately $40 billion (taking into account wages, payroll taxes, and non-labor costs such as equipment, materials and land – although the state would probably require counties and localities to put up at least part of the latter two items).  Now, if we were simply to fund this off of Job Insurance contributions, you’re looking at $200 a month, which is quite high, although I imagine that it would be affordable for middle class folks and up. However, if you were to split the costs between contributions and State Reserve Bank lending (and/or general fund contributions), you could drop it to $100 a month (50-50), or $33 a month (say, 33/66 or, 33/33 and 33 from general fund).

Note that this is the cost if you have to do it all in one go – if we think about this a system to prevent the next recession, you can implement the Job Insurance system in economic good times, and build up a reserve, which would allow you to run the system on still lower job insurance premiums. Moreover, if you create a target for jobs to be created when unemployment grows to a certain level, the lower the level, the cheaper the program. If, for example, California had done this back in October 2008 when unemployment was only 8%, it would only have cost $29.6 billion to reduce the unemployment rate down to 4%, which would have buoyed consumer spending, forestalled foreclosures, and prevented further job losses in the private sector.

Now, I fully acknowledge that this would be a radical transformation of state economic policy, and that certain elements, especially the Anti-Recession Budget Reform Initiative, would be politically tricky to thread the needle on. But I would say that if you can't sell the public  job insurance that costs $33 or less a month, can't persuade people that freedom from economic uncertainty is within their grasp, can't tap into people's desperate desire to be free from the fear of destitution, you shouldn't be in politics.

“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.