Note: this is a cross-post from  The Realignment Project. Follow us on Facebook!

 

Introduction:

With the belated victory of Kamala Harris as Attorney General, the full results of the 2010 election are in for California. There many things that progressives can be proud of – a sweep of statewide offices, picking up another Assembly seat, defeating prop 23 and passing prop 25. On the other hand, there are also some major disappointments – the defeat of prop 19 (marijuana legalization), the defeat of prop 21 (a VLF to fund the state parks), the defeat of prop 24 (rolling back corporate tax breaks), and the passage of prop 26 (2/3rds requirement for fees). Prop 26 especially complicates what this victory means for California.

Indeed, our situation is a lot like the national picture after the 2008 elections – we have an executive who straddles the line between the left and right wings of the Democratic Party, a big legislative majority, but not the ability to break the fiscal deadlock and really be able to govern our state.

So where do we go from here?

 

Finance:

The rather comfortable million-vote margin by which prop 25 passes would make me rather optimistic about the possibility for the passage of a majority-vote revenue proposal. However the failure of every revenue increase – prop 19, 21, and 23 – are daunting evidence to the contrary. Granted that the outcome might be different in a presidential electorate (younger, more minority and working class voters, higher turnout generally), but I think this shows how difficult it will be to thread the needle of the “Program/Government Blindspot” and the prevalence of austerity thinking, even if we link taxation to spending.

In the mean time, California Democrats have a daunting task ahead of them – to balance the budget without doing any more harm to already brutalized public services, and to create the economic growth necessary to ensure that the budget stays balanced. In the short-term, there are four things we can do:

1. Going back to the Steinberg Maneuver – According to the California Budget Project, Prop 26 doesn't establish a blanket 2/3rd requirement for all fees. A number of fees, including “charges where the feepayer receives a service, product, benefit, or privilege…charges imposed for entrance, use, purchase, or lease of state or local government property, penalties, fines, or other monetary charges resulting from a
   violation of the law, charges imposed for “reasonable regulatory costs” and assessments and property-related fees,” are not covered by the 2/3rds requirement. Thus, it's still possible to raise revenue through a two-step process in which said fees are raised by a certain amount by majority vote, then taxes are raised and the fees are lowered by the same amount by a majority vote. The issue here is whether we can get Governor-elect Jerry Brown to sign such measures, given previous statements of his.
2. We can try again with Ballot Box Budgeting – there's some indication that Brown's approach will be instead to put the budget to a vote as a proposition in a special election. The tricky thing here is how to persuade the public to vote for said budget; Schwarzenegger tried this in 2009 and it was dramatically unsuccessful. Perhaps the 2010 election signals a more realist (and realistic) electorate, but it's a roll of the dice.
3. Banks – I'vewritten before about the potential that a state reserve bank offers. That was true before the 2010 election, but it's even more true now. Given the newly-created restrictions on raising revenue, a state reserve bank offers an entirely new possibility, both for resolving the current budget crisis, and for creating the economic growth necessary for California's future development.
   1. I believe that this bank would be even more likely to gain support if, within the state bank, there was created a series of Development Funds – a Green Development Fund, an Education and Innovation Development Fund, a Health Care and Medical Science Development Fund, and so on – that could make targeted investments into key sectors of California's economy, both public and private.
4. Jobs – with or without financing from a state reserve bank, a Job Insurance fund would fit under the exemption in prop 26 – since the “feepayer receives a service, product, benefit, or privilege,” namely eligibility for a job when unemployed. Ultimately, as I have said before, California cannot balance its budget with 12% unemployment because revenues will continue to decline, no matter how much spending is cut. What is needed is a sudden shock to California's labor market, and unemployment being cut in half is that shock – it will pump huge amounts of money into local retailers and other businesses, it will make employers see the ranks of the unemployed in their communities shrinking, and hopefully shift the “animal spirits” of both employers and lenders.

None of these steps is a total solution for the fundamental problem of revenues – given the problems we had with the budget even before the recession. But they will fill the gap so that we can debate the question of majority-vote revenues in an economic climate of balanced budgets, normal levels of unemployment, and higher economic growth.

Green Economy:

Now that AB32 and CEQA (California Environmental Quality Act) are safe from Prop 23, we need to do more to show the real possibilities of a green economy. This means making it fast and seamless to develop sustainability, through the creation of expedited approval and categorical permits for model projects. It also means establishing special zoning rules in transit corridors to allow for sustainable, energy-efficient, high-density development.

This doesn't mean dismantling regulations in the name of the environment, but rather shifting the direction of regulation away from NIMBY no-growth, which only encourages sprawl and wasteful development, towards in-fill building of affordable housing in already-developed areas while protecting undeveloped land. It also means – and here is where environmentalists need to reckon with the realities of class and race – getting rid of the tools of modern class (and racial) discrimination: zoning rules that limit building heights to two-stories or less, that ban unrelated individuals from living in the same house (to prevent renters and subdivision), that establish minimum lot sizes to mandate , or that mandate the construction of garages. In other words, ending exclusionary zoning and encouraging inclusionary zoning.

Finally, it means supercharging public investments into green energy, mass transit, and other sustainable ventures. A statewide version of LA's 30/10 plan, aimed at speeding up and extending High-Speed Rail and local mass transit would be a huge transformation, both in terms of creating jobs and spurring growth, but also in lowering CO2 emissions and pushing land-use away into energy-efficient high-density development. Large-scale alternative energy projects, like the Beacon Solar Energy Project, San Fransisco's tidal energy project, should be built under public auspices, making use of the newest forms of technology. The advantage to this approach is that it allows the public sector to act as a yardstick competitor to California energy companies, spurring innovation and providing a guaranteed market for green manufacturing firms under democratic auspices.

All of this links together. Without financing, there's not going to be a green revolution in California any time soon. Without new sources of economic growth that don't depend on housing bubbles, California won't get the revenue it needs. In the end, the fight over our budget is really about the future direction of this state – whether we will have a government that can help build a broad economy or a night watchman state that is powerless to prevent corporate greed from running wild.

So let's get to work.

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

Introduction:

In part 1 of a New Deal for California, I discussed why any effort to rebuild the state must begin with a frontal assault on high unemployment as the only reliable means of achieving budget stability – as opposed to self-defeating quests for balance via austerity. In part 2, I studied how the quest for a more perfect democracy is inextricably linked to a renewal of democratic control over the state's own revenues.

Today, I want to discuss two areas of policy that are among the largest spending categories in the California state budget, but which also represent two faces of the state, and two approaches to developing its youth, and two sets of values – namely, education and prisons.

Arnold's recent proposal to put a floor under higher education at 10% of the state budget and a ceiling over prisons at 7% of the state budget is only the most recent example of a long trend of discussing the two in the same breath. As I discussed in the linked article, Schwarzenegger's approach is fundamentally flawed, a mirage of egalitarianism masking a reality of utter callousness. A moral society cannot pay for the future of its most talented youth through the deliberate immiseration of its least advantaged.

However, a New Deal for California will have to grapple with the reality that California will either educate or incarcerate its young, and that the power to choose lies with us.

Higher Education:

In my previous posts on higher education, I've tried to get across the idea that the purpose of public higher education is to expand and improve the functioning of democracy, that higher education is a social and public good, not a private commodity, and that the way a public university is run speaks volumes about the values of the society. If there is an overarching theme here, it's that the choices a state makes on higher education both reflect and shape the nature of its society. A state where the children of the poor and the children of the rich are equally limited only by the boundaries of ambition and ability will be a society is genuinely one of equal opportunity and healthy, meritocratic competition. At the same time, states should also think of higher education as a social investment in a high-road economy, distinguished by high levels of skill and education, high wages, and high living standards.

A New Deal for California is absolutely about making that investment and choosing that high-road, but one of the things you see in public discourse about higher education in California in progressive circles is a certain fuzziness – when it's razor-sharp conviction that wins the day in politics. There's the required genuflections in the direction of the 1960 Master Plan, and perhaps even a statement about how “college should be free!” or how cheap it was to attend the U.C when they were young, but nothing about how we proceed from where we are to were we want to go.

By contrast, I think a New Deal for California had to start with a genuine commitment to a new Master Plan for California that charts a path for gradually reducing tuition to $0 for the U.Cs, CSUs, and Community Colleges over the next 20 years. We should be clear about how much this will cost: it will take about $1.7 billion a year to make the U.C tuition-free, about $2 billion a year to make the CSUs tuition-free (about $5,000 a year in tuition times 417,000 students), and about $1.78 billion a year ($614 a year times 2.9 million students) to make the Community Colleges tuition. Altogether, we're talking about $5.8 billion per year, or an extra $290 million per year.

Assemblyman Torrico's AB 656, which would establish a 10% excise tax on oil extraction to provide about $2 billion a year to higher education (a system already in place in Texas, which funds the University of Texas through an oil excise tax). That gets us about a third of the way to our goal. The rest could be assembled from a variety of revenue sources – this is not beyond the means of one of the richest states in the Union,  and one of the richest economies in the world.

One idea that has been suggested in the United Kingdom by Ed Milliband (Labour M.P, Shadow Energy and Climate Change Secretary) is to replace tuition costs with a “grad tax.” The idea would be that, instead of requiring students to pay tuition and go into debt up-front, which acts as a prohibitive burden for many working-class students and constraints the future career choices of graduates, that we instead ask graduates to pay a progressive surcharge of between “0.25% and 2% of their income over a 20-year period,” enabling graduates to contribute, according to their ability to pay, to higher education whether they work for a non-profit or a Fortune 500 company.

As I have said before, the ultimate goal that we should be thinking about is not 100% of the youth population attending university, but rather that 100% of the youth population being able to achieve whatever level of skill or training that their ability and ambition provides for. This means treating skills training- whether it comes in the form of a union apprenticeship, vocational or technical college, or a professional course in a community college – as just as important as any other form of education. It means paying more attention to helping students get employed as well as enrolled (such as is the case in the German and Japanese education systems). And it means making sure that students graduate high school able to take advantage of higher education/training.

A Word About K-12:

I'll only say a few words onK-12 education, since it's not an area of public policy that I've actually done much work on. As someone who's been a TA at the U.C for four years, I can certainly attest to the fact that California needs to do a better job at preparing students, both for college and employment, because it's quite surprising how many of the top 12.5% of high schoolers in California have real problems with constructing essays or interpreting reading.

Here's what I'll say – I believe that the “Educational Equality Project” reform community has over-emphasized college preparation, has tended to over-emphasize incentives over resources, and relies too much on an economistic model of corporate efficiency. I think primary and secondary schools should emphasize employment as well as college, and experiment with the German and Japanese model of partnering with employers to offer students additional paths for career development; in part, I think this comes from an approach to manifest class and racial inequalities that opts for individual, behavioral intervention (assuming that schools can “solve for” poverty without outside interventions on social conditions, and emphasizing college attendance without consideration for labor market conditions).

Moreover, I think reformers have under-sold the degree of resources that will be needed to correct inequalities in resources (which is why California needs to move to equalization of funding across school districts) as well as social and cultural capital. Things like increasing instruction time, providing tutoring to struggling students, and lowering class sizes are all well and good – I'd even add commitments to expand Head Start to 100% of those within 150% of poverty, and extend it, “Follow Through” style, to prevent “Head Start fade” in primary school –  but they will require a significant commitment of funds to work.

I think the rhetorical emphasis on incentives over resources comes from two sources: first, it comes from the unspoken recognition that a lot of the key policies adopted in heavily-promoted charter schools aren't costless, which raises questions about scaling. KIPP is lauded among EEP-style reformers, but a 60% longer school day/year, 24/7 teacher availability, and weekend work costs, and not just in dollar terms – 50%-plus turnover rates are common in KIPP schools. Second, it comes from what Matt Yglesias refers to as a “Green Lantern” theory about education – if teacher productivity and efficiency are what matters, then you don't have to deal with the fact that California schools are 43rd in the nation in per-pupil spending, because all you have to do is push teachers hard enough. At the end of the day though, resources are real and it is not impossible for California to commit to raising its commitment to the top 10 in the nation over a period of 10-20 years, similar to the commitment to tuition-free higher education as well.

Finally, as I've said before, I think the debate over accountability and results has become poisoned by the link between the models of accountability used by reformers and ideas about corporate efficiency, leading to a massive level of distrust among teachers and their unions. I've said it before, but it bears repeating – I'd be very interested to see how EEP reformers would react to an offer to have accountability and performance targets negotiated right into collective bargaining contracts, and put the unions in charge of and responsible for teacher quality.

Prisons:

All of this discussion of resources brings us to the piggy bank that both Schwarzenegger and I are hoping to use to improve the quality of education – California's overstuffed prison population, the second-largest in the nation. Right now, California imprisons 616/100,000 persons, and its prison population has been growing 500% over the last twenty years. This expansion has led to a growing budgetary burden, overcrowding, and a series of lawsuits over health and safety standards. No one particularly disputes that something needs to be done, but there are different ways to go about it.

Schwarzenegger's vision is to combine privatizationand outsourcing – essentially to shove our prisons off our books and avoid changing the way we deal with our offenders. This is morally unacceptable for any sane society. Private prisons are rightly notorious for corruption, abuse, and the further cutting of corners on medical care, living conditions, and safety standards. Shifting our prisons to Mexico is simply an attempt to do privatization without getting tripped up by lawsuits filed in American courts when the inevitable lawsuits alleging subhuman standards emerge. California should certainly commit to keeping prison spending below 7% of the state budget, but this is not a just way to do it.

However, there are ways to solve our prison problems. California's shift to drug courts and rehabilitation has paid dividends in the form of 10,000 fewer prisoners on drugs charges than in the 1990s, but there are still 30,000 prisoners on non-violent drugs charges who could be better dealt with outside the prison system. The bigger target is California's broken parole system – about 70% of parolees are re-incarcerated (the vast majority of cases being not new criminal violations but rather some technical violation of the terms of parole), at a rate that has increased six-fold in the last 20 years. As a result, about two-thirds of prison admissions are parolees rather than new offenders. There are better ways to handle our parolee problem than the current system of catch and release, and solving our parole problem would largely solve our overcrowding problem.

Dealing with these two factors would allow California's criminal justice system, including the police, courts, prisons, and parole systems, to focus on doing a better job with the prisoners we've got. This means more, not less, effort directed at deterring violent crime and higher rates of arrest; this means freeing up resources to separate out first-time and non-violent offenders from hard-core criminals and violent offenders, with an eye towards reducing our state's abysmally high recidivism rate. In the end, being smart about crime works better than toughness for toughness' sake.

On an ironic note, one of the few truly successful anti-recidivism strategies in the U.S has been the oft-targeted, poorly-funded college education programs. Expanding the commitment of college for all to the prisons might itself help to solve our prison problem.

Side-note – on Interdependent Parts:

In earlier segments of this series, I talked about the need for an overarching vision for California, beyond just the policy-specific pieces. To that end, it's important to see how education and prison policy fit as parts of a larger whole. For example, let's examine the impact of full employment policy and changes to democratic governance and revenue on these two areas of public policy.

To begin with, full employment would greatly increase the public revenues available for K-12 and higher education. It would also add on a crucial back-stop to our system of educational development, ensuring that U.C and CSU and CCC graduates who've received incredibly expensive training don't get thrown on to an overcrowded labor market (as is happening now) where they can't find work, leaving their training to go to waste. It also means that rather than focusing solely on college attendance as our only strategy for getting kids out of poverty that we can offer them a chance at high-wage full time employment. Prior to the unraveling of high-wage labor in the 1980s, a high school graduate who had neither interest nor aptitude for an academic career could get a job for life as a skilled, semi-skilled, or even unskilled worker and be assured of economic security and a middle-class standard of living. With full employment, there's no reason that we can't build our way to an economy that provides opportunity to those kids as well as the college-bound.

Full employment would also greatly reduce our prison burden. We know that anywhere from one-third to two-thirds of prison admissions are unemployed at the time of incarceration, that many property crimes are associated with unemployment, and that the increased difficulty of finding employment as an ex-offender is a major cause of recidivism. While certainly not a silver bullet (violent crime is not particularly correlated with employment rates), full employment can only help. (On a slightly more cynical note, one of the reasons why prison guard unions have resisted parole reform, decriminalization, and other efforts that might reduce the prison population is out of a desire to protect the jobs of their members. In a full employment economy, where workers could be assured of having a job, this political inertia could be more easily overcome).

A similar case is true for democracy and revenues. A more functional democracy, where legislators could more easily match our revenues to the level and kind of goods and services demanded by the people, is one where the kinds of commitments we want to make to both higher and primary education can be made, and where reforms to our prisons systems can be more transparently and directly debated and carried out.

Conclusion:

There are 159,000 students at the University of California. They are among the top 12.5% of our youth, the most talented, the best educated, with the greatest likelihood to succeed. There are 170,000 prisoners in the California prison system – they are disproportionately young, non-white, and less-educated. Even when they are released, they will find it more difficult to find employment, housing, and credit. To place the burden of the best prepared on the least prepared is to compound injustice with unfairness.

Introduction:

In the wake of the passage of the Affordable Choices Act into law, there are a lot of questions about how we go on from here. Obviously, one line of activism focuses on ways to improve the health care reform act. To some progressives so morally outraged at the defeat of the public option that they’ve given up on the Congress as hopelessly wedded to corporate interests, obviously, this isn’t so appealing.

However, if the progressive movement can be clever and strategic for a second, and is willing to work from within rather than to cry defeat, we can actually work on the state level to move the goalposts of the health care debate in the direction of single-payer before we even get to the next round of national legislation.

Movement on the State Level:

One of the shortcomings of the Affordable Care Act of 2010 is that instead of one national exchange (as progressives in the House had hoped to establish), we will have 50 state-level exchanges (possibly more if states decide to establish separate individual and group plan exchanges). While there are Federal standards applied to state exchanges (with the ultimate stick being that the Federal government will step in to create their own exchange if the state fails to meet the new standards), the double-edged sword of the bill’s passage means that a lot of political action now moves to the states.

We’ve already seen this starting on the right, with states like Oklahoma, Arizona, Mississippi and Tennessee acting to ban plans that cover abortions from their state exchanges. This is a terrible attack on the right of women to control their own health care coverage with their own money, and needs to be met with prompt resistance. However, while state exchanges are an opening for conservatives in the states in which they dominate, the reverse is also true.

There is an opening for progressives in deep blue states to act in ways not possible in Congress. While single-payer was completely boxed out in negotiations, and even a weak public option was ultimately thrown out at the behest of conservative Democratic Senators, there’s no reason why states where progressives dominate can’t take the lead and change the “facts on the ground.”

Step 1- Public Option and Single Payer in One State:

As I have repeatedly discussed, the single most important change that the Affordable Care Act made was to expand Medicaid to Medicare reimbursement levels (thus providing an incentive for most doctors, hospitals, and clinics to accept Medicaid patients) and to expand Medicaid coverage to everyone within 133% of poverty.  While most of the health care bill is not that historically revolutionary in nature, this is. Progressives who claim that this bill is worse than nothing cannot ignore the fact that 16 million out of the 32 million covered will be covered essentially through Medicare – while not Medicare for all, we have at least achieved “Medicare for half.”

Moreover, nothing in the bill prevents a state from increasing its eligibility standards above 133% of poverty, as many states have already begun to do with programs like SCHIP, or from expanding eligibility for “Medicare/aid” to groups who are interested in buying into public programs (like the labor movement, for example). Hence, there’s nothing that prevents states from establishing a single-payer system, either by expanding existing programs or by establishing entirely new entities.

At the moment, an entirely new system like California’s AB810, would likely run into a problem with ERISA (the Employee Retirement Income Security Act), which “supercede[s] any and all State laws insofar as they may…relate to any employee benefit plan.” (For example, AB810 bans the sale of duplicative private insurance plans) Progressives in the House and Senate tried to fix this problem, and the best that they were able to do was a provision that kicks in in 2017 for states to receive waivers from the Department of Health and Human Services as long as the new system is “at least as comprehensive,” “at least as affordable,” for “at least a comparable number of its residents.”

While one progressive objective in the next seven years will be to add an amendment to the law that either advances the timeline for waivers to the present, or that amends ERISA to explicitly allow for state single-payer programs, there’s a lot that can be done in the meantime. To begin with, state-level single-payer systems like AB810 can be drawn in such a way to avoid a conflict with ERISA (see here for the details). Alternatively, a state could pass a Medicaid For All law to cover the six year gap between the present and the time at which the new system could receive a waiver from HHS, or just pass a Medicaid For All law and stick with it.

Step 2 – Seizing the Commanding Heights of the Exchanges:

Even before 2017, there’s nothing that stops a state from placing a Medicaid-for-All plan on the state’s exchange as a public option. As the law is currently written, there’s already explicit provisions for states to put existing SCHIP programs on the exchanges (Title II, Subsection C, Section 2201) – and states are currently allowed to structure SCHIP within their Medicaid programs.

Thus at the very least, it’s possible to establish a robust public option on any state’s health exchange. Once such a program is on the state’s exchange, it can easily compete and win on price and quality. The robust public option envisioned by progressives in the House would have provided health care plans on the basis of reimbursement rates set at Medicare’s set prices plus 5%. Estimates of the robust public option suggested that premiums would be 11% cheaper than private plans – state public options would be 5% cheaper, at an average of $209/month for an individual and $443/month for a family. At the same time, the state public option would gain advantages of quality – providers would prefer to deal with payers that aren’t going to run up their administrative costs by trying to avoid paying its bills, whereas consumers would prefer to be covered by an insurer they know isn’t going to try to boost profits with premium hikes, rescissions, and fraudulent denials.

Once states either get waivers or are explicitly allowed to shift to true single-payer programs, premiums would likely fall even lower. AB810 envisions progressive premiums that vary by income, and further savings from administrative costs and bulk purchases, for example.

Step 3 – Uniting Across State Lines:

As other observers of health care reform (such as Ezra Klein) have noted, one major problem with state-run health care is the intersection between the costs of running their own health care systems and the budget limitations placed on them by balanced budget and debt limitation requirements, and the kind of massive declines in state revenues that come with recessions. Even in the case of cheaper single-payer systems, states are going to run into trouble unless they can capture revenues and budget counter-cyclically. This doesn’t have to be a problem – as I’ve written before, there are ways to make states capable of running a Keynesian counter-cyclical program either with or without Federal assistance.

One opening that the Affordable Care Act provides is explicit permission for states to combine their exchanges as early as 2013 (Title I, Subsection D, Part IV, Sec 1333), or to allow plans from other states onto their exchanges. This creates something of a domino effect – once one state establishes a Medicaid For All plan or a true single-payer plan, any other state that wants to have Medicaid For All or single-payer can do so through an inter-state compact. By sharing the costs of providing single-payer health care across a larger population and a larger revenue basis, states can reduce the overall fiscal burden on each state’s revenue system.

Obviously, conservative states that are rushing to ban abortion on their exchanges are unlikely to cooperate in this venture. Thus, what we are likely to see is a process by which the establishment of California OneCare or the New York State Health Plan leads to the union of states with progressive majorities, until we see something like “BlueCare” for everyone in the blue states. Now, I’ve written before that progressives who dismiss the red states or who envision either letting them or the blue states to secede are deeply wrong, because such an attitude ignores the millions of people who vote Democratic in those states, usually poor and minority voters.

A “BlueCare” system would still leave America grappling with enormous national health challenges, with Sweden in the Blue States and the Third World in the Red States. But what such a system would do is to change the political arithmetic of health care reform.

Conclusion:

From here on out, a huge part of the politics of health care reform will not be the establishment of new programs, but the capturing of territory and populations. We know that when people actually get public health insurance or single payer health coverage that they quickly learn to love it. Fears of government takeover of health care transform into “hands off my Medicare!”

Hence, the expansion of state public health coverage or single-payer coverage will (in addition to the immediate practical impact on health care outcomes in that state) will greatly change the expectations and thinking of the electorate. As significant populations shift from private health insurance to public health insurance, Congressional Representatives and Senators face a different electorate. Instead of a nation where the majority of the population have employer-based private health insurance and are afraid of losing it through some new government intervention, they’ll have to deal with a large and mobilized constituency of voters who are used to public or single-payer health care, who like it and want to keep it, and who will react with hostility to any attempt to limit it.

And that’s how we get to single-payer.

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:

(Note: finding precise figures and statistics about Blue Gold is not particularly easy. If my numbers here are off, I will gladly revise the piece)

My previous post about the U.C’s policy towards post-docs and other researchers whetted my interest in the travails of the public university, especially as it deals with the universal budgetary crisis faced by higher education during the recession and the underlying process of privatization faced by many public institutions.

The result is a new mini-series of posts about how to rebuild the public university going forward. And a good place to begin will be to make an important distinction about what isn’t a viable strategy for the renewal of the public university – the much-ballyhooed Blue Gold Opportunity Program that U.C President Marc Yudof has made his calling card.

Assessing Schwarzenegger’s Amendment:

Before I explore the nature of the Blue Gold program, it would be remiss of me to overlook the kind of late-breaking news that rarely happens in the world of policy blogging. In his State of the State Address, Gov. Schwarzenegger proposed a new constitutional amendment that would ensure that state spending on prisons would be limited to no more than 7% of the general fund budget and that state spending on higher education would be expanded to no less than 10% of the general fund budget. This policy would be gradually enacted beginning in the 2010-1 budget and culminating in the 2014-5 budget, by which point the transition from current spending would be complete.

It is unusual in the extreme too see a political 180° like this from the same man who created the 2004 compact with the U.C Regents that decreased state support for the U.C, increased student fees by 10% per year (directly creating the need for a Blue Gold program), and committed the U.C to privatizing its funding to compensate for the loss in state funding. More than 190,000 students and 103,000 faculty and staff no doubt wish that Governor Schwarzenegger had thought of his constitutional amendment six years ago.

So, what are we to make of Gov. Schwarzenegger’s road to Damascus moment? On one level, a commitment of this kind would be the profound change in public higher education in California since the creation of the Master Plan in 1960. As this chart notes, the state’s fiscal commitment to the Plan’s vision for universal, free public higher education has slipped inexorably downwards. For just this year alone, the proposed constitutional amendment would have meant $1.7 billion more for the University of California, easily outstripping the $813 million cut it received instead.

All is not sweetness and light, however.

• First of all, this proposed constitutional amendment does not answer the larger chronic revenue shortage that the U.C’s budget faces; 10% of a budget that has tumbled almost $60 billion since the beginning of the economic downturn, in a state in which revenue bills require a 2/3rds vote to pass the legislature, may not be worth very much.
• Second, a constitutional amendment that requires minimum funding would exacerbate California’s budgeting problems – given that Propositions 98, 49, and other so-called “auto-pilot” provisions such as Medicare spending and debt repayment eat up 90% California’s budget, carving out another 10%, even if that’s balanced by a reduction in prisons spending only further limits the ability of the state legislature to set policy priorities.
• Third, there’s a nasty little razor blade in the candyfloss: the privatization of California’s prisons. If you read the text of the proposed constitutional amendment, the California Department of Corrections is empowered to “contract with a private entity for the building of, operation of, transfer of inmates to or placement of inmates in private correctional facilities,” including staffing of all correctional facilities (both in terms of medical and security personnel), and the state is actually statutorily prohibited from reaching the 7% goal by releasing prisoners. Given the documented abuses committed in and around for-profit prisons, there is something morally monstrous with the idea that the futures of the top 1/3 of California’s young will be paid for by the destruction of the futures of its least successful youth. While this power is not mandatory – the Department of Corrections can choose to privatize or not – the text of the amendment does everything possible to make prison privatization an inextricable part of the whole.

In these circumstances, progressives cannot in good conscience support the privatization measures of the amendment as written – and even stripped of these measures, the measure remains a positive step but hardly a silver bullet either for higher education or the state budget. By contrast, conservatives in the Legislature are extremely unlikely to vote for anything that protects public higher education. Given that the governor knows this, it’s likely that this amendment (which Schwarzenegger has insisted will go through the legislature first) is but one more infuriating stratagem in a political career that has successfully alienated the left, center, and right of California politics.

Inside Blue Gold:

If something so seemingly progressive as a constitutional amendment that protects spending on higher education can turn out to be so complicated, what can we say about the Blue Gold Opportunity Program- a program designed to ensure that “”if your family makes less than $70,000 a year and you have financial need, scholarships and grants will cover your fees”? A free college education for poor and middle class kids, paid for by increasing fees on more affluent students sounds like an incredibly progressive thing – and people like William Bagley and Ian Ayres have argued the exact same thing.

The reality is that the Blue Gold Opportunity Program is nothing of the kind.

To begin with, it should be understood that the Blue Gold program doesn’t represent a commitment of the U.C to contribute more to less well-off students as it does a commitment of the U.C to shift as much of its costs onto outside sources as possible. The Blue Gold program is contingent on applying for Federal financial aid and state CalGrants – as their own website notes, “The plan combines all sources of scholarship and grant awards you receive (federal, state, UC and private) to count toward covering your fees.” The Blue Gold program only kicks in when all of your other sources of aid fail to cover the cost of education.

Second, Blue Gold only applies to covering the educational fees the U.C charges (over $10,000 after the rate increase) – which is only 37% of the estimated total cost of education, which the U.C estimates to be $27,000. The difference between the total cost of education and the fees works out to $17,000 a year or $68,000 over four years. However, the U.C may well be underestimating the cost of living – for example, U.C’s estimates for graduate student food costs ($5,000 per academic year) are twice what they estimate for undergraduates living off campus; likewise, transportation costs for graduate students are costed out at over twice what they estimate for off-campus undergraduates.

However, even if we assume that the U.C’s estimates are correct, their sample budgets for families are quite instructive. For example, a family earning $20,000 a year will have to come up with $9,100 a year (or 45.5% of yearly income), a family making $40,000 will have to come up with $11,600 (or 29% of yearly income), a family making $60,000 will have to come up with $16,100 (26.8%), and a family making $80,000 will have to come up with $22,600 (or 28.25%). A system where families making $20k or $40k a year are responsible for a higher proportion of their income than families making $60 or $80k a year is hardly progressive.

Supporters of the system will note that the same budgets assume a much lower family contribution for poor or working class families – but this hardly makes up for the fact that the difference will be made up for by their children. The U.C’s charts show that this model only becomes affordable if students find part-time work during the school year and full-time work during the summer, and take on loans of at least $5,000 a year. Thus, in the best circumstances, a U.C student will graduate with about $20,000 in educational debt, which takes years to pay back.

Should the student be unlucky enough to not find part-time jobs that allow them to save $266 a month during the school year, and $566 a month during the summer, over the cost of living, the actual debt load could soar much higher, potentially to $36-90,000 by graduation.  At a time when the state of California has a youth unemployment rate well in excess of 20%, assuming that students will automatically find employment is not realistic.

At the same time, the Blue Gold program only applies to in-state legal residents. This means that DREAM Act students (i.e, undocumented students) have to pay the full freight, no matter what their economic status. International students, who never become in-state residents, also have to pay the full freight whatever their economics status.

Beyond the Numbers:

While the under-the-hood statistics of the Blue Gold program are hardly progressive, the problem with with the Blue Gold Program runs deeper than just the financial issues. At its root, Blue Gold erodes the essential ideological justification of public higher education: that higher education is a fundamental right of citizenship because an educated citizenry is essential for a well-ordered republic, and because “Education, then, beyond all other devices of human origin, is the great equalizer of the conditions of men, — the balance-wheel of the social machinery...it gives each man the independence and the means by which he can resist the selfishness of other men.” In a republic, where the mental and material basis for independence are so important for empowering active citizens and where great concentrations of wealth can easily become anti-democratic concentrations of power, public higher education is essential.

By emphasizing higher education as an economic good with a market rate, where the benefit accrues to the individual wage-earner, Blue Gold undermines the case for why the public should support higher education at all. In its own literature, the Blue Gold program analogizes paying for education with paying for automobiles, and emphasizes that the major objective of a college education is a higher salary. If a college degree is the same as a car, just another consumer good, there is no public purpose for providing it. (Although a more radical argument might be to say that perhaps consumer goods should be publicly provided/subsidized.)

At the same time, by setting the middle class who must pay Blue Gold’s costs against the working class and poor who benefit from it, Blue Gold erodes the cross-class political coalition that is essential for shepherding public higher education through the legislative process. In this fashion, Blue Gold resembles not a progressive tax (which benefits the poor, the working class, and the middle class alike) but targeted welfare programs that superficially benefit the poor but in reality create huge political vulnerabilities that turn programs for poor people into poor programs.

Finally, we must understand what political role the Blue Gold program plays for the U.C Regents. It’s hardly an accident that the U.C’s 32% increase was paired by an increase in the Blue Gold program’s eligibility and funding; the Blue Gold program functions as political cover, allowing Yudof and the Regents to portray an unprecedented fee increase as essentially painless – look, poor kids aren’t going to get hurt, and we’ll even help out the middle class. Nevermind that in an environment of declining resources, higher tuition creates an incentive for the U.C to enroll rich out of state students who can pay the full freight over poorer students who will require extra resources to attend the U.C, Yudof says he’ll raise an extra billion for financial aid!

In other words, Blue Gold is the “human face” for the privatization of the U.C. A tuition-free institution meant to provide a right of citizenship is becoming an institution that approaches charging a market rate for a private commodity, but Blue Gold provides the appearance that nothing has changed. That’s why it’s wrong.

An Alternate Route:

As an inveterate optimist, I don’t like to condemn any structure without providing a blueprint of what we should put up in its place.

My suggestion is this – we should replace Blue Gold with a new Master Plan designed to gradually reduce tuition to $0 over a period of ten to twenty years, eventually re-establishing the social contract of public higher education in California. This would amount to decreasing tuition by a thousand (or five hundred) dollars a year, which is hardly a small order – it means that each year, we need to come up with an additional $159 million in revenue (to make up for $1,000 in tuition less per student) from somewhere. In other words, in order to make the U.C tuition-free, we need to find $1.59 billion a year in additional financing.

In the grand scheme of things, this isn’t impossible. For example, a constitutional amendment that established a 10%/7% requirement without Schwarzenegger’s privatization poison pill, even after compensating for the $813 million cut this year, would have provided an additional $887 million in revenues, or 55% of the total needed to make the U.C tuition-free. In future years, an additional $1.7 billion a year would easily set

Assemblymember Torrico’s AB 656, which would establish a 10% excise tax on oil (California is the only oil-producing state that does not tax oil) to fund higher education, would raise $1 billion a year for higher education and the U.C’s 1/3 share of that would come out to $300 million a year (or 18% of the total needed to make the U.C tuition free). That’s enough on its own to drop U.C tuition by almost $2,000 a year. While that’s obviously not enough on its own, AB 656 does show that it is possible to make the U.C a free public university by creating some form of independent financing stream.

Ultimately, the re-establishment of the free public university is an ideological statement about the kind of California we want to have. The resources are there – the question is whether we have the political will.

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.

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.