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statemarket relations

for a globalizedeconomy

jeff madric

william milberg

melissa mahone

Apr il 2006 no.4www.newschool.edu/cepa

POLICYnote


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Te Schwartz Center or Economic Policy Analysis, made

possible through a generous git rom Irene and Bernard

L. Schwartz, is the economic policy research arm o the

Department o Economics at Te New School or Social

Research. Te Schwartz Centers research and public

programs explore conditions under which a more stable,

equitable, and prosperous economy is possible, both in theUnited States and globally. Te Center works to develop

domestic and international policies necessary to bring

about these conditions. Current research ocuses on debt

sustainability in the United States, trade and deindustrial-

ization, and employment and economic growth.

Lance Taylor, Director

Jef Madrick, Director o Policy Research

William Milberg, Program Coordinator

Chelsea Mozen, Assistant Director

Copyright 2006 Te New School

Schwartz Center or Economic Policy Analysis80 Fith Avenue, 5th Floor

New York, NY 10011-8002

el. 212.229.5901

Fax 212.229.5903

[email protected]

www.newschool.edu/cepa


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statemarket relations for

a globalized economyjeff madrick, william milberg, and melissa mahoney*

1 introductionTis paper explores the relationship between government and society in

an era o deindustrialization, globalization and rapid innovation. We nd thatcurrent protection or workers is inadequate, corporations are overburdened with

the provision o services that should be a social responsibility, and the system,as inadequate as it is, lacks unding. We explore the easibility o an expandedand more exible set o social programs to promote innovative activity andtechnological change, to insure adequate investment in human capital, and toprotect workers to a greater degree rom the costs o technological change andglobal competition.

We argue that it is time to sever benets related to health insurance,pensions, child care and other institutional needs o single parents and two-worker amilies rom jobs or employment status. Instead, these benets shouldbe made portable as people move rom job to job and even rom work to non-work. Tese would be treated as public goods. A universal health insurancesystem is designed to expand coverage to all, as a central American right, but also

to relieve business o some o the immense cost o private insurance. At the sametime unemployment insurance should be broadened and extended in an era osignicant job dislocation, and the minimum wage should be raised.

We maintain that the cost o this more secure and exible labor orceshould not be shouldered entirely by corporations, but it should be spread morebroadly across society, including employers, workers, consumers, and the wealthy.Tus we outline a broad tax reorm plan that would leave the program on soundscal ooting, but require an additional i moderate rise in taxes. Until the nationrecognizes this need or more taxes, we believe we will not solve our problems andwill reduce our long-term potential or growth.

* Je Madrick is the Director o Policy Research at the Schwartz

Center or Economic Policy Analysis. William Milberg is

Associate Proesso r o Economics at Te New School or So cial

Research and a Faculty Research Fellow at the Schwartz Center

or Economic Polic y Analysis . Melissa Mahoney is a Resea rch

Associate at the Schwartz Cen ter or Economic Polic y Analysis .

Correspondence or the authors can be sent to


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Te main thrust o the ormulation is a socialsaety net that (a) provides rms more exibility andlower costs o new hiring and investment, (b) is morecomprehensive in its coverage, (c) gives workers moreexibility in the sense that they would not oregosocial protection upon losing a job or switching

to another job, and (d) can be nanced ully andequitably over the long term. Tis paper constitutesa rst look at the possibilities. But we hope that itis the beginning o a process we think urgent i theUnited States is to grow optimally in a changingworld. We believe the nation can aord thesechanges. More important, we believe the nationcannot aord to delay undertaking these changes.

Te tax increases needed to nance the newprogram could have net disincentive eects. Tealternativea positive eedback between broaderand more exible social protection, on the one hand,and higher productivity, on the otheris also a

distinct, and we argue more likely, possibility. Giventhe irresponsibly inadequate ocus on education andhuman capital development over the past 25 years,an intelligent program o investment in healthcare,education, and childcare can improve the rate oeconomic growth through higher uture productivity.Tere is signicant research supporting this view,as we discuss below. Neglecting such investmentis a serious disservice to the nations children andgrandchildren. We believe most o the programsproposed will pay or themselves over time.

Te paper has six sections. In the next sectionwe set the stage by describing important changes

in the structure o the U.S. economy over the past30 years. In the third section we show that the roleo the government has not adjusted in response tothese shits. Even our broad brush review revealsthat protection or workers is inadequate and notcomprehensive, that corporations are overburdenedwith the provision o services that should be a socialresponsibility, and that the system, is not on soundscal ooting. In the ourth section we proposea new social saety net with universal healthinsurance and childcare, a strengthened educationalsystem, and a broadened unemployment insuranceprogram. In the th section we explore plans orraising the revenue needed or a new social saetynet. We conclude with a discussion o the broaderimplications o our proposal and a plan or utureresearch.

2 the new economyAmerican capitalism has undergone

considerable transormation in the past 30years. A key eature o this transormation is

deindustrialization. Manuacturing now represents11%1 o employment and 13%2 o output, downrom 22% and 21%, respectively, in 1975. Te riseo services in U.S. employment and output is notjust a quantitative shit but a qualitative one, whichaects the economys labor markets, its nancialsystem and its links to the rest o the world. Even theremaining manuacturing rms have been aected,as the shit rom traditional mass production tomore customized manuacturing has requiredgreater exibility in the organization o productionand has increased the demand or certain businessservices. Te transormation has been associatedwith rising per capita income, technologicalinnovation, especially in inormation technology,a transormation o industrial relations, policies oderegulation and liberalization, the rise o highlycompetitive manuacturing, and, recently, moreservices producers abroad.3

Te stagation o the 1970s brought thebeginning o the end o the post-World War IIagreement between management and organized laborto link wages to productivity gains. Even earlier,ination brought the end o the Bretton Woodsagreement, which supported ree trade more than

ree capital mobility. Ination, slow growth, and thealling dollar put downward pressure on real wages,but the institutions that supported nominal wagegrowth were also breaking down, as unionizationrates began to decline and rms looked to increasetheir exibility in hiring and sourcing. Pioredescribes this era as one o increasing instabilityo American companies, in which rms sought toreduce their commitments to labor in the name oa strategy o greater exibility and lower costs.4 Inaddition, the international response, epitomizedby oyota, was to provide many more products toconsumers at reasonable prices and good quality. Te

number o new and dierentiated products availableon world markets increased dramatically betweenthe mid-1970s and the mid-1990s. Tis createdenormous competitive pressure on productivity.5Wal-Mart today represents the extreme in this trendtowards inexpensive, broad consumer choice basedon the use o actory work rom China and elsewhereand the use o part-time and non-union workersat home. Tere were other changes, including


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the deployment o assets to nancial services intraditionally production-oriented corporations (e.g.General Motors, General Electric), and o coursethe expansion o international oshoring andoutsourcing that we consider below.

echnological change, especially advances and

cost reductions in data processing, communication,and inormation technology, has created newindustries and led to labor-saving advances acrossmany industries. Tis was in part a constructive andimpressive response to new competitive pressures.Firms such as Microsot, Google, and Cisco, whichdid not even exist in 1975, are now near the top othe Fortune 500 companies.

Digital technology has also made morepossible the ragmentation o processes whereby theproduction o goods and services can be broken intoparts, each o which can be located in a dierentplace, including abroad. Tus, while U.S. output

is now dominated by services, including educationand healthcare, U.S. industrial output also generallycontains more imports, as manuacturers increasinglyuse imported parts and outsource more processes.For every dollar o GDP produced in 2004, therewas over 15 cents o imports. Tis compares to justour cents o imports in one dollar o GDP in 1965.U.S. exports have also risen as a share o GDP (rom5% to 10%) but have become more concentrated inhigh-technology manuacturing and services.

Te consequences o these changes areenormous. Americans today have a higher GDP percapita than ever beore in history. Tis in itsel is

ar rom a standard o success: No developed nationsince the industrial revolution has ever had a allinglevel o GDP per capita over a 30-year period. Moreto the point, despite leaner business managementand ongoing innovation, the trend rate o economicgrowth is signicantly lower, as productivity growthhas slowed. In act, the rate o GDP growth overthirty years has been historically very low in theUnited States, even including the boom o the late1990s. With this slowdown has come a number oproblems, some o them simultaneously causes andconsequences o slower productivity growth. Teseinclude the stagnation o real wages, the rise inthe average duration o unemployment, the rise oincome and wealth inequality, and the emergenceo unsustainable macroeconomic imbalances, inparticular a trade decit o 5.2% o GDP and a scaldecit at 3.4% o GDP in 2004.

In addition to these unsettling trends, ourhealth insurance and education systems, two keyaspects o our competitiveness and well-being, arehighly inecient and unequal. (Te system o

pensions, which we do not take up in detail in thisproposal, has also become unreliable or recipientsand excessively burdensome on rms, to the pointwhere private plans are massively underunded andsubject to deault.)

Te United States spends ar more per capita

on health care than any other country. Yet the stateo our health, in terms o inant mortality and lieexpectancy, ranks below that o many industrializedcountries. More than 45 million Americans lackhealth insurance, and many o them hold jobs. Tenations health system is superior in the treatment osome diseases and conditions but inerior comparedto other nations in some other key areas. For thoserms that provide health insurance, coverage isincreasingly restricted regarding new drugs andtreatments. And these corporations are passing onmore o the rising costs o employee health insuranceto the workers. Recent studies have associated

skyrocketing health care costs with slow wageand employment growth and even with the risingU.S. current account decit.6 Given in particularwhat the nation spends or its healthcare, theAmerican health insurance system is ailing both thepopulation it serves and the companies that supportit.

Despite the obvious necessity o moreaccessible and higher quality education, the U.S.public education system remains irresponsiblyunequal, and high-quality public preschool programshave not grown despite studies showing their vitalimportance or uture American productivity and

competitiveness. As costs o higher educationcontinue to rise aster than incomes and ination,access to higher education has been reduced,especially or lower-income Americans. Also,institutions protecting low-skill workers haveweakened, as reected in reduced union density,the all o the minimum wage in real terms, andthe increase o illegal immigration. Meantime, theglobalization o production eectively enlarges thepool o labor, especially o low-skill workers, availableto American corporations.

Tese systems o capacity building andsocial protection are ailing workers and rms. Teailure is particularly acute in times o slow growthor weak recovery, and the stagnation o real wages,the rise in economic inequality and poverty, andthe growing macroecconomic imbalances can allbe tied in part to the weaknesses o the old socialcontracts in the ace o a new economy. Heightenedoreign competition, rst rom Europe, then Japan,then East Asia and Latin America, and now Chinahave contributed to U.S. deindustrialization. Te


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collapse o the Soviet Bloc, the emergence o Chinaas a major world producer, and the technologicaladvances in oshoring work to educated work orcesin nations like India have been primary sourceso the expanding worldwide workorce o lowerwage workers and have put downward pressure onU.S. wages through rising low-priced imports andoutsourcing. At the same time that technologicalchange reduced the cost o communications andtransportation, governments worldwide reducedbarriers to international trade and investment.Import competing sectors rom textiles and apparel,to electronics, steel, semiconductors, and arminghave aced intensied international competition.7

More recently, attention has turned to theproduction o services, previously thought to be

immune to the orces o globalization. Te U.S.now routinely purchases rom overseas services osotware development, nancial reporting, and callcenter operations. Its surplus in services trade, whichor years served partly to oset the decit in goodstrade, has shrunk over the past seven years. Mostdisturbing about this trend is that it is increasinglyaecting higher-skill, white collar workers in sectorsthat have been expected to generate the new, goodjobs in the uture.8

3 the old social safety netTe purpose o this essay is not to call simply

or an expansion o government spending on socialprotection, but to outline a comprehensive planor social protection that will spur innovation,encourage economic growth, and provide the saetynet to encourage such dynamism and to protectthose hurt by such change. Beore we can begin tolay out a reasonable proposal or a uture social saetynet, it is essential that we get a sense o the currentsituation.

Te transormation o American capitalismhas not brought signicant changes in the U.S.welare state. As a share o GDP, the overall level

o ederal spending on social programs rose steadilyater War II until 1973. Since 1973, however,spending has attened as a share o GDP, andnow uctuates around 16% (see Figure 1). Tebreakdown o public social spending in the U.S. isshown in Figure 2.

Direct social spending in the United Statesis signicantly lower than it is in European states.Te summary in able 2a shows a total outlay o

Figure 1:

Nondefense federal

government spending

as percentage of GDP,1951 to 20040

2

4

6

8

10

12

14

16

18

20

2003

200

1

199

9

199

7

199

5

199

3

199

1

198

9

198

7

198

5

198

3

198

1

197

9

197

7

197

5

197

3

197

1

196

9

196

7

196

5

196

3

196

1

195

9

195

7

195

5

195

3

195

1

Source: U.S. Ofce of Management and Budget, Budget of the United States Government: Historical Tables Fiscal Year 2006

Table 3.1. http://www.gpoaccess.gov/usbudget/fy06/hist.html

Nondefense

FederalOutlays


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$1.6 trillion in 2004. But the United States alsohas an unusually large share o social protectionprovided by the private sector, including themassive private health insurance industry and theprivate pension system. Tese are encouraged bythe government the system o tax expenditures,payments that are typically deducted rom taxableincome and thereore result in a loss o tax revenuesto the government. Tese tax expenditures include

home mortgage interest, corporate pension andhealthcare contributions, and the earned income taxcredit. In 2004, a rough total o these expendituresalone equaled $350 billion. Including such taxrevenue losses in the total social net raises theAmerican allocation o public resources to socialwelare to levels closer to Europes on average. Butsuch tax expenditure, with the notable exceptiono the earned income tax credit, are largely directedat middle and even more so, upper middle incomeAmericans, and typically represent a highly regressiveuse o ederal subsidies. Figure 3 shows the incomelevel o the beneciaries o various tax expenditures.

Consider now the main eatures o the socialsaety net today.

3.1 RetiRement Pensions

Old-age pensions in the U.S. come rom Social

Security and the private pension plans o the corporate

sector. Te Social Security system went into eect in

1947 and today provides retirement income to 47 million

Americans.9 Te estimated average replacement rate or

retired workers was 42.5% in 200410. Payouts are linked

to contributions so that pensions reect the wage struc-

ture o the retiree s when they were working. otal social

security payouts in 2003 were $471 billion.11 Te system

is nanced through social security taxes, which average

12.4% o wages.12 Te current working populations taxe

nance the current retired populations benets. As a

result, there is considerable concern about the nancial

diculties the system will conront when the large babyboom generation retires and the smaller, next-generation

workorce is required to support them. We return to

this issue below, but or now we note that alarm over the

systems uture nancial shortall is exaggerated. By som

estimates the system at current tax rates is nancially

sound until 2035 and would require only a 1% tax rate

increase to remain sound at least until 2050.13 Tis esti-

mate is based on a conservative orecast or the long-term

growth o productivity.

Private pensions grew side-by-side with theSocial Security system beginning in the 1950s. In1999, the total assets o these unds reached a value

o $4.4 billion, with annual payout o $3.15 billion,101.7 million total participants14 and 73 millionactive participants.15 But it would be wrong to de-scribe the private pension system and Social Securityas complementary. For one, all those who receiveprivate pensions also are eligible or Social Secu-rity. Tus, it is a supplement to them. Moreover,since private pensions largely resulted rom eectivebargaining by organized labor, it is those workers

Figure 2a:

Selected components of

the U.S. welfare state,

19702002 (in billions

of dollars)

1. Social Security Administration,Annual Sta tistical S upplement ,Various Years. Compiledtable available at http://www.socialsecurity.gov/OAC/SAS/table4a4.html (Accessedon July 13, 2005)

2. U.S. Departmen t o Labor(2004). Private Pension PlanBulletin: Abstract o 1999Form 5500 Annual Reports.

Employee Benefts SecurityAdminist ration . No. 12. ableE14

3. U.S. Bu reau o EconomicAnalysis , Regional Accoun tsData, Annual State PersonalIncome; ; (accessedJuly 13 2004). Da ta reers topersonal current transer rece iptsin the orm o unemploymentcompensation

Calendar

year

Total

benefts or

old age and

survivors

and

disability

Unemploy-

ment

insurance

compen-

sation3

Healthcare4Income maintenance

benefts5

Total

Total

public5

Medicare Medicaid Total6Family

assistance7

1970 38 4.2 27.6 7.7 5.3 9.9 4.8 80.7

1980 156.3 18.7 104.8 37.4 26 34.3 12.5 314.1

1990 356.5 18.2 282.5 110.2 73.6 63.5 19.2 720.7

1995 514 21.8 456.8 183.3 144 100.4 22.6 1,093.1

2000 625.1 20.7 592.4 224.5 203.4 106.6 18.4 1,344.7

2001 672.9 32.2 654.6 248.8 223.7 109.4 18.1 1,469.0

2002 714.8 53.7 718 267.7 250.7 119.4 17.7 1,605.9


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with the higher Social Security benets that receivethe largest pension benets. Replacement rates orprivate pensions, just like Social Security, rise withretirement year salary levels. ax deductions orprivate pension payments amounted to $94.7 billionin 2004.16

3.2 Disability

Te Social Security program does not onlyserve the elderly but also the disabled. Tese outlaysaccount or 15% o social security payments in 2003,or $70.9 billion.

3.3 HealtH insuRance

Once again, in this crucial area o socialprotection, the American system is a combination opublic and private support. In this case, the privatesector plays a bigger role than the public sector insupporting the working-age population. Health

insurance is provided through employment. Butagain, business healthcare expenditures are largely taxdeductible. So there is a very signicant i indirectgovernment component. Te GAO estimates therevenues loss resulting rom income tax exclusionso employer contributions to medical insurancepremiums and medical care was $102.3 billion in2004.17 Te public sectors direct role in the provisiono health insurance is or the elderly (Medicare)

and the poor (Medicaid). In a system driven by theprivate sector, two major problems arise. One isthe well-publicized act that more than 45 millionAmericans do not have health insurance since theyare either not employed or working or employersthat provide health insurance. While the rate ogrowth o the private sectors spending on healthinsurance has increased rapidly, so has the publicsectors. Overall, America spends more than 15%o GDP on healthcare, approximately $1.6 trillionin 2003. Tis is higher than any other developednation in the world, but there is no evidence that theperormance o healthcare in America on average issuperior. In some areas it excels, in others it lags. Byconventional measureslie expectancy and inantmortalitythe United States ranks near the bottomamong OECD countries.

3.4. unemPloyment benefits

Te unemployment insurance system inthe United States was created in 1935 to oerincome security to workers who became involuntaryunemployed. It is a joint ederal and state programin which each state develops its own guidelines orthe administration o the system within a minimumset o standards established by ederal law. o beeligible or benets a worker must have worked acertain number o weeks during the year, must haveearned a certain amount in the past year, must beactively looking or work, and must be out o work

Figure 2b:

Selected components of

the U.S. welfare state,

19702002 (as % of

nominal GDP)

4. National Health Expenditure(NHE) Amounts by ype o Ex-

penditu re and Source o Funds:Calendar Years 19652014 inPROJECIONS ormat Down-

loaded rom http://www.cms.hhsgov/stati stics/nhe /deault .asp onJuly 12, 2005

5. otal public healthcare expen-ditures composed o other subcategories in addition to Medi-care and Medicaid which are notshown in this table

6. otal income maintenance ex-penditu re composed o o ther subcategories in addition to amilyassistance which are not shown inthis table

7. Trough 1995, consists o emergency assistance and aid to

amilie s with dependent child renBeginning with 1998, consistso beneftsgenerally known astemporary assistance or needy

amilie sprovided unde r thePersonal Responsibility and WorOpportunity Reconciliation Acto 1996. For 199697, consists o

payment s under all thre e o theseprograms

8. Components may not sum to totadue to rounding errors.

Calendar

year

Total

benefts or

old age and

survivors

and

disability

Unemploy-

ment

insurance

compen-

sation3

Healthcare4Income maintenance

benefts5

Total

Total

public5

Medicare Medicaid Total6Family

assistance7

1970 3.75 0.4 2.66 0.74 0.51 0.95 0.47 7.77

1980 5.6 0.67 3.76 1.34 0.93 1.23 0.45 11.26

1990 6.14 0.31 4.87 1.9 1.27 1.09 0.33 12.42

1995 6.95 0.3 6.18 2.48 1.95 1.36 0.31 14.78

2000 6.37 0.21 6.03 2.29 2.07 1.09 0.19 13.7

2001 6.64 0.32 6.46 2.46 2.21 1.08 0.18 14.5

2002 6.82 0.51 6.85 2.55 2.39 1.14 0.17 15.31


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Tax ExpendituresTotal

($ billions)

Percentage o Total Claimed by Income Class

$100K

Mortgage Interest Deduction 70.2 0.03 1.98 8.46 34.37 55.16

Untaxed Social Security and

Railroad Retirement Benefts22.3 0.04 18.37 34.26 43.34 3.99

EITC 38 17.45 68.71 13.65 0.19 -- -

Charitable Giving Deduction 34.4 0 0.48 3.48 19.13 76.91

Medical Deduction 7.6


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0

services targeted to needy amilies. It also establisheda 5-year eligibility limit or amilies with an adultreceiving Federal ANF benets and set minimumwork participation standards or participants in theprogram. ANF has our main purposes: assistingneedy amilies so that children can be cared or intheir own homes; reducing the dependency o needyparents by promoting job preparation, work, andmarriage; preventing out-o-wedlock pregnancies;and encouraging the ormation and maintenance otwo-parent amilies.21 Eligibility criteria and benetlevels are set by individual states.

In FY 2002, combined state and ederalspending was $25.4 billion, o which $14.6 billionwere ederal expenditures and $10.8 billion wererom state Maintenance o Eort (MOE) unds.States spent 41% o their total ederal ANF andstate MOE unds on cash assistance, 10.7% on work

activities, 2.3% on transportation and other worksupports, and 32.14% on administrative and otherexpenses. Child care spending totaled 13.8% o allspending in 2002.22 Tere were a total o 5.5 millionrecipients o ANF and state MOE unded benetsin September 2002.23 Te all state average monthlyANF benet or a amily o three was $412 in July2002.

3.6 PRescHool cHilDcaRe

In the United States, early childhood careand education remain primarily the responsibility ohouseholds. It is estimated that on average amilies inthe United States spend approximately 9% o theirmonthly earnings on substitute childcare.24

Federal unding or education and childcare

Source: Committee for Economic Development (2002), Preschool for All: Investing in a Productive and Just Society, New York, NY.

Program Expenditure Recipients

Federal

Head Start $6.2 billion (appropriation in 2001)857,664 children enrolled in

FY2000 aged 0 to 5.

CCDF

GAO estimates that approximately

70% of the $4.5 billion federal

budget authority or $3.15 billion

went to these children.

GAO estimates that 1.3 million

children under age 5 participated

in CCDF in FY 1999

TANF $1.3 billion in FY 1999350,000 children under age 5 in

FY 1999

Special Education $835 million1.1 million children under age 5 in

FY 1999

Title 1 grants 300,000 under age 5 in FY 1999

Tax credits

State

Prekindergarten $1.7 billion in 1998-99 750,000 children

Match funds for CCDF

and TANF plus other state

expenditures

$8 to $10 billion in 1999

Figure 4:

Preschool childcare

programsexpenditures

and recipients


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comes rom a number o sources: Head Start; theChild Care Development Fund (CCDF); ANFblock grants; special education programs; and itle1 o the Improving Americas Schools Act. It isestimated that Head Start and the CCDF accountor about 75% o the available ederal unding.25

Most o the state unding or early childcare comesrom match unds or the CCDF and ANFblock grants. In addition, 42 states including theDistrict o Columbia und regularly-scheduledstate prekindergarten initiatives. Some estimates othe expenditures and number o recipients o theseprograms are shown in Figure 4.

3.7 suPPoRt foR HigHeR

eDucation

otal ederal aid or post-secondary educationwas $90.1 billion in 2004-05.26 While averagegovernment nancial aid per ull-time studentincreased by 40% over the past decade, this increasehas not oset the increase in the average price otuition and ees at our-year colleges. Te CollegeBoard estimates that the real net cost o tuitionand ees per ull-time student at our-year publiccolleges increased by 15% over the past decaderom 1,900 to $2,200, whereas the real net priceper ull-time student o tuition, ees, and room andboard increased by 30% rom $6,800 to $8,800.27Net price is the total tuition and ees less averagegovernment grant and education tax benets per

ull-time student. At private our-year colleges, thereal net price per ull-time student o tuition and eesincreased by 22% and the real net price o tuition,ees, and room and board increased by 21% over theperiod.

Te growing burden o college costs has beenalling increasingly on amily budgets. According toCollege Board estimates, the proportion o amilyincome required to cover the net tuition and eesor ull-time dependent students enrolled in publiccolleges increased by one to two percentage pointsrom 199203 to 200304 in each income quartile.Te proportion required to cover the net tuition,

ees, and room and board grew the most or thelowest income quartile (six percentage points) andthe least or the highest quartile (one percentagepoint).

3.8 tRaDe aDjustment

assistance

Te rade Adjustment Assistance (AA)program was established under the rade ExpansionAct o 1962 and bolstered in 1974 in order to

provide temporary income support or workers wholose their jobs as a result o import competition.Since 2002, the program is unded at up to $2billion annually but eligibility requirements arestrict and actual outlays are ar below undedlevels. Workers in certied rms can apply or upto one year o assistance beyond that provided byunemployment insurance and an additional sixmonths beyond this i they enroll in a certiedtraining program. In 2003 only 204,000 workerswere certied or AA benets, with only 47,000o these receiving the retraining supplement. Te2002 adjustment also included a wage insurance

plan, but eligibility is so restrictive that as o June2005 only 800 workers were receiving it. Te AAprogram serves only manuacturing rms and themajor recipient industry is the automotive sector.28

3.9 eaRneD income tax cReDit

Te Earned Income ax Credit (EIC)was enacted by Congress in 1975. Te aim othe reundable ederal tax credit is to reduce theburden o taxes, supplement earnings, and tomake employment more attractive than welare

to low-income working amilies. Depending on ataxpayers tax liability and the size o the EIC heor she qualies or, a qualiying taxpayer may have areduced ederal tax burden, none at all, or may geta reund rom the ederal government. Numerousresearch studies have highlighted the eectiveness othe EIC. It has been shown that the EIC has hada signicant impact on employment, most eectivelyor low-income single parents. In addition, the EIChas been shown to reduce poverty. An estimated 4.4million people were lited out o poverty in 2003 byreceiving the EIC.29

o qualiy, a working taxpayer with children

must earn less than $30,338 to $35,458 dependingon marital status and number o qualiying children.A working taxpayer without children must earn lessthan $11,490 and $12,490 depending on maritalstatus. A qualiying taxpayer may pay less ederaltax, no tax, or even get a tax reund rom the ederalgovernment. In 2003, approximately 40.8 millionpeople received about $38 billion rom the EarnedIncome ax Credit.30


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3.10 How tHe system is

financeD

In 2004, roughly $1.9 trillion ederal taxeswere raised. O that, 43% are personal incometaxes. Some 40% are Social Security and otherpayroll taxes. Some 10% are corporate income taxes.Other taxes, such as excise taxes, account or a ewpercentage points. Tis distribution is shown inFigure 5.

4]

a new social safety net and

cost estimates

We begin this section with a rough estimateo the cost o our proposed New Social Saety Net.In the next section we propose a tax reorm thatraises adequate revenue to cover the costs o theprograms over the course o the normal businesscycle.

4.1 univeRsal HealtHcaRe

We believe the costs o the current healthcaresystem are simply unsustainable. Te nationhas eectively been able to distract itsel romthis impending crisis. Moreover, the healthcaresystem, even at its current high level o unding,is inadequate. Tere is a widespread myth in theland, oten reprised by President Bush, that wehave the best healthcare system in the world. Tereis very little evidence to support this. As noted,by conventional criteria, our health outcomes,including mortality rates and lie expectancies, ranknear the bottom o the OECD nations. By more

sophisticated measures, we are ahead in some areasand well behind in others.31 Evidence is also amplethat eective health practices are not ollowed.32o take one specic example, it is estimated thati proper care were provided or diabetics, thetotal cost o this condition could be reduced by50%. Stunningly, one in ten dollars o healthcareexpenditures is accounted or by diabetes relatedillnesses.33

Figure 5:

Federal receipts by ma-

jor category, FY2004

Source: Economic Report of the President: 2005 Report Spreadsheet Table B-80

Individual Income Taxes

Other

Social Insurance and Retirement Receipts

Corporation Income Taxes

39%

8%

10%

43%


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Despite the inadequate process and outcomes,we spend ar more o our GDP on healthcare thanany other OECD countrysome 15%. Te nextclosest is Switzerland, which spends 11.7% onhealthcare. France and Canada spend closer to9%. All o these nations produce health outcomes

equivalent to the United States, or better. Areasonable estimate made by the Center or Medicareand Medicaid Services is that at current rates, thenation will spend nearly 20% o GDP on healthcareby 2015.

Aside rom cost and ineciency, healthcarecoverage is tragically low in the United States. Some45 million Americans have no coverage, even thougha majority o them work. Tis lack o coverageis likely to be exacerbated as healthcare costs riseand corporations reduce and make more expensivethe coverage they oer. Te poor healthcare orthe uninsured is well-documented. Some 18,000

Americans a year die due to lack o insurance. Inact, lack o insurance is the seventh leading causeo death in the nation. Moreover, in any one year,even though they have access to public hospitals,one third o the uninsured do not receive treatmenteven when sick. o take but one example, 270,000children with asthma do not see a doctor.34 Telack o proper healthcare results in high costs or thenation, placing a large burden on public hospitalsas well as on Medicare and Medicaid. Tis expensemay total two to three percent o annual healthcareexpenditures. 35 Poorer health is also extremely costlyin terms o lost worker productivity. One group, the

HR Policy Association, puts the economic losses dueto poor healthcare between $87 billion and $126billion a year.

Meantime, the costs o existing healthinsurance or individuals will keep rising rapidly.Healthcare premiums rose at double digit ratesbetween 2000 and 2004.36 One reason is thecurrent American medical systems ineciency.According to an analysis by the sta o SenatorEdward M. Kennedy, it costs $12 to $25 to processa single transaction, compared to pennies or less inmany industries. Some 13% o premium dollarsin the private sector are directed to marketing andadministration; only 3% o Medicare spending is oradministration. Insurance premiums are again risingat double digit rates.37

Finally, the cost to business o providinginsurance is debilitating. A Canadian auto workercosts our dollars an hour less because o cheaperhealthcare.38 It is widely reported that GeneralMotors spend approximately $1500 per car itmanuactures on healthcare costs or its workers.

A survey by economists Sarah Reber and Laurayson, privately published, ound businesses didreduce hiring in response to rising healthcarepremiums.39 Indeed, the average employersponsored healthcare plan is likely to cost $14,500 in2006.40

In addition, reduced job tenure has madehealthcare less reliable or Americans working ingood jobs. Not only are premiums and co-paymentsrising, but the United States is losing many jobswith adequate healthcare coverage. Given alling jobtenure and the rise o temporary and part-time work,a large proportion o Americans are not coveredat some point or other. In 2002 and 2003, orexample, one out o three Americans had no healthinsurance or a period o time.41

We propose a universal healthcare systemnanced by the ederal government that severshealthcare benets rom the job and reduces overall

healthcare costs per employee to business. Ourproposal is based on a study by a leading scholarin the eld, Kenneth Torpe, proessor at EmoryUniversity, that was done or the National Coalitionon Health Care, a non-partisan group based inWashington, DC.

Te underlying conclusion o most analyseso this subject is proound. A universal systemnanced and overseen by the ederal government willmore than pay or itsel. It will reduce administrativecosts, promote better healthcare practices, and makeit easier to adopt a universal inormation technologysystem that will also save billions o dollars a year.

Torpe considers a model o a system inwhich all Americans are entitled to a healthcareprogram similar to the one oered by Blue Cross-Blue Shield. Tus, coverage is not linked to a job.Tis would be a traditional insurance program withco-payments and complete patient choice o doctors.Torpe assumes that such a program will yieldserious savings in terms o reduced administrativecosts and reduced costs due to the adoption oinormation technology. In our idealized proposal,all Americans would be eligible or this program. Itcould be ully implemented in three years. Medicareand Medicaid would remain in orce, but their costswould also all as the healthcare delivery systembecomes more ecient.

Torpes analysis shows, by the year 2015,the nation would spend $180 billion a year lessannually on healthcare, even as all Americans arecovered.42 Such a program could be nancedin several ways. We believe the most crediblenancial proposal would be to impose a higherpayroll tax on business to nance the largest part


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o the program. Tis is justied because businesswould no longer be required to pay or healthcareinsurance or their employees. Torpes analysisassumed that business would pay 75% o the costs.Te ten-year cumulative cost to business would benearly $8 trillion. A reasonable estimate is that in

2005, had such a plan been implemented, the costwould be $600 billion. Tis is based on a similaranalysis Torpe undertook or a proposal by SenatorKennedy.

As an example, the program could benanced by imposing an additional 6.5% payrolltax on business. Employees would be chargedan additional 2% payroll tax. For most largebusinesses, the imposition o the new payroll taxwould represent a substantial savings. Te averagehealthcare plan now costs business 13% o payroll.43Tus, such a plan reduces hiring costs or most large,internationally competitive businesses. On the other

hand, it would impose an additional cost on themany small businesses that do not provide healthinsurance today. Tere are alternative potentialsources o revenue to support the program, includingsales taxes and higher income and corporate taxes.Te main objective is that the United States wouldpay less as a proportion o GDP or a better systemo healthcare that includes all its citizens.

4.2 cHilDcaRe anD otHeR family

PRogRams

Although policy proposals vary in theliterature in terms o their recommendations or thetypes o educational and care services to provide andthe population to target, it is strongly agreed amongexperts in the eld that the system o early childhoodeducation in the United States is inadequate andrequires public intervention to expand coverage andto improve the quality o services and eciency.A number o reasons have been cited or whyintervention is a necessary measure, including thepositive relationship between early education withthe cognitive and social development o children.A national system o early childhood education

would extend these opportunities or qualityearly education to more children. In addition, thedevelopmental benets o early childhood educationhave been associated with broad social benets,including reduced crime and increased productivityo the labor orce.44

An additional argument in avor o nationalearly childhood education is the reality that thestructure o the American labor orce and the typical

amily in the United States has been changingdramatically over the past ew decades. Between1970 and 2003, the labor orce participation o allwomen in the United States increased rom 43.3%to 59.5%, while the labor orce participation omarried women with children under six years old

increased rom 30.3% in 1970 to 59.8% in 200345

.Te number o amilies with children under six yearsold that are maintained by one employed parentwith no spouse present increased rom 13.8% in1995 to 17.1% in 200346 (No. 581). Tis rise todominance o the two-worker and single-parentamily is one o the signicant changes o our time.

Tere are three consequences to this generaltrend:

1. Tere is less time to nurture and educate youngchildren.

2. Women typically eel pressure to be thecaregiver and cannot pursue careers or ullyinvest in and exploit their personal humancapital.

3. Tere is prejudice at the workplace againstwomen because they are expected to leave theirjobs or truncate their careers.

In view o these trends, we see three needsthat should be addressed in a national amilypolicy. Tere must be rmer laws that allow parentslonger paid leave ater childbirth and a guaranteedjob on return. Tere also must be universal ullday schooling or children three to ve, expandedkindergarten (many o them are not ull-day) and

more available out-o-home child care or thoseunder three. Based on the research done by Meyersand Gornick, these measures can be accomplishedor approximately $150 billion.47

Meyers and Gornick recommend a universal,nationally unded early childhood educationprogram that provides part- and ull-time childcareor children up to age three and ull-day universalpreschool or children age three until they enterkindergarten, usually at age ve.48 Te remainderwould be paid or by parents on a sliding scaleadjusted to amily income. Te additional costs togovernment or this part o the amily plan program

are estimated to be $95 billion or all children and$68 billion under the assumption that only 50%o children less than three years old participate.Based on the average share o expenses nanced byEuropean governments in similar programs, Meyersand Gornick recommend that 82% o the cost othis program would be unded by the governmentrom general tax revenues.

In addition, Meyers and Gornick propose


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a scheme o parental paid leave that includes the

ollowing elements: six months o paid leave availableto both employed mothers and athers ollowingthe birth or adoption o a child at a 100% wagereplacement; employed mothers and athers havethe right to take their paid leave ull-time or sixmonths or in some type o part-time scheme thatcan stretch the length o the six months o leaveuntil their child is three years old (with amplenotication to employers o employees plans); andemployed parents are entitled to 24 hours o paidleave to attend to other amily obligations, such asmedical appointments. Te cost is estimated at $45billion assuming that the 100% o employed parents

completely use their entitlement. Te costs woulddecrease to $22.5 billion i approximately 50% oemployed parents use their entitlement to six monthso paid leave at 100% wage replacement.49

Combining these two components, the totalcost o Meyers and Gornicks proposal or a morecomprehensive amily and work policy would allbetween $107 billion and $156 billion dependingon the take-up level. Figure 6, taken rom Meyers

and Gornick, provides a complete breakdown o

the estimated costs o their amily and work policyproposal.A number o cost-benet studies o early

childhood education programs nd that over timetargeted intervention programs, such as the PerryPreschool Program and the Abecedarian EarlyChildhood Intervention Program, have producedpositive social benets that well exceed the costs oimplementing the program.50 Lynch extrapolatesrom the ndings o a series o studies documentingthe outcomes o participants in the Perry PreschoolProgram to assess benets and costs o a high quality,publicly unded early childhood education program

that provides education services to all childrenaged three and our years living in poverty in theUnited States through 2050.51 He nds that thetotal estimated benets o such a program to theparticipant and the public will outweigh the costs bya ratio o nine-to-one over time. Te benets o theprogram come rom reductions in costs over timedue to decreased grade retention, reduced publiceducation costs, increased participant earnings

Figure 6: Estimated

costs of the Meyers-Gor-

nick proposal for family

and work policy in the

United States

Source: Meyers, Marcia K. and Janet C. Gornick (2004), Work/Family Reconciliation Policies for the United States:

Lessons from Abroad, Table 2, p. 28.

Billion o dollars Share o U.S. GDP

Paid amily leave

100% take-up $45 0.43%

50% take-up $22.50 0.22%

Early childhood education and care

100% of children $111.10 1.07%

50% of children under 3 years $84.40 0.81%

Total

100% take up on both

components$156 1.50%

100% take-up on family leave,

50% of children under 3 years$129 1.24%


100% of children $134 1.28%


50% of children under 3 years$107 1.03%


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and employee benets, reductions in crime, andreductions in welare payments.

A study by Currie calculates the costs andbenets o the national Head Start program, ocusingonly on the short-term and medium term benets othe program. She nds that the benets o the Head

Start program will oset the costs o the program by40% to 60%.52 It is clear rom these estimated coststhat the implementation o a universal system oearly childhood education would require a signicantincrease in public nance over current governmentexpenditure. However, the ndings o the benet-cost studies suggest that the investment would yieldsignicant uture benets that would outweigh thecurrent expenditures on a national program.

4.3 unemPloyment insuRance

bRoaDening

As lay os become a traditional response toglobal competition and technological change, it isimperative to broaden unemployment insurancecoverage. I we are to allow our corporations suchexibility, we must provide a saety net so that thepenalties o such policies are not unairly borne bythose who lost their jobs through no ault o theirown. We must also extend unemployment insuranceon a pro-rata basis to the increasing number opart-time and temporary workers, as well as to theseveral million low-wage workers who do not qualiynow. Current unemployment benets should also be

extended by 13 weeks, at a minimum. Te numbero long-term unemployed has increased. Te averageduration o unemployment was 18.4 weeks in 2005compared to 16.6 weeks at the same stage o the lasteconomic expansion.53 We believe there should bean added extension or those who go actively intonew job training.

Te annual costs o such broadening or 2005are estimated in Figure 7.

4.4 college foR all

Just as the United States once establishedree primary school, then ree high school, and,nally, signicant subsidies or college, it is timeto make college ree or all who are qualied. Achanging world simply demands it. Rising tuitionand ees or public colleges over the past 10 yearshave made higher education an increasing burdenon the budgets o many American students and theiramilies. Te College Board estimates that tuitionand ees at our-year public colleges increased by an

average 51% rom 199495 to 200405. For two-year public colleges, the increase was 26% over theperiod.54 Te extent o the burden that these risingcosts place on American amilies becomes moreapparent when we consider the slow growth othe real median amily income over the same timeperiod. Real median amily income increased byonly 6% between 1995 and 2004.55 One o the mainreasons or these rising college costs is the manycuts in state appropriations to public institutionsresulting rom budgetary shortalls and the shit o

state unds to other scal priorities.56

Student aid rom the ederal government isthe largest source o external unding available tostudents to help nance higher education. While thetotal college assistance to undergraduate students hasrisen by 117% (in real terms) since 199495, thecomposition o this assistance has shited away romgrant aid towards loans. Unlike grants, loans mustbe paid back upon graduation.57 In 19992000,64% o students had ederal loans and graduatedwith an average cumulative ederal student debt oabout $17,000. In 199293, in comparison, 42%o students graduated with ederal loan with an

average debt o $9,188.58 Te prospect o large debtburdens rom college education costs may serve as asignicant barrier to enrollment and completion ohigher education because it may inuence studentdecisions as they weigh the burdens o student loansagainst the income benets o a college education.It may also have signicant implications or studentchoices in terms o the time rame and location ostudy as well as decisions on subject areas o ocus

Source: Emsellem, Maurice and Andrew Stettner,

Unemployment Insurance Safety Net Project, National

Employment Law Project,

Cost

Part-time workers 0.8Temporary workers 1

Low wage workers 1.5

Extension of 13 weeks 7

Extension for those in

training2

Total 12.3


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and career choices.Federal aid and work study programs do

not generally provide enough assistance to cover allcollege costs. Subsequently, students seek assistancerom their amilies or take on part- or ull-timework, which limits the amount o time they can

devote to their education. Te lack o nancingis an important consideration or students romlow- and middle-income amilies that cannot relyon amily support to help nance their education.Tese unmet costs are likely to serve as a signicantbarrier to college or these studentscontributingto the economic stratication o the highereducation system in the United States. Te AdvisoryCommittee o Student Financial Assistance ndsthat college-qualied high-school students rom low-income amilies with high unmet nancial needs areless likely than their high income counterparts tobe enrolled in any institutions o higher education

within two years o graduating (73% versus 95%)and are more likely not to enroll in college (22%versus 4%).59 Limiting the analysis to qualiedhigh-school graduates is an important attributeo this study because it isolates the eects o highunmet nancial needs on enrollment (and also oncompletion) rates rom the eects o actors such asacademic preparation and parent preparation.

Te benet o higher education to individualliving standards is quite clear. In 2003, the medianincome o a college graduate was 86% higher thanthe median income o an individual holding onlya high school diploma.60 Having a highly educated

population also carries increasingly signicant socialand economic benets. Since college graduateshave higher income they will contribute more intaxes. In addition, unemployment rates are loweramongst those with a bachelors degree or higherthan those holding only a high school degree.61In 2004, the unemployment rate was 2.7% orthose with at least a bachelors degree and 5.0%or high school graduates. In particular, in a globalworld o more sophisticated technology, a moreeducated population is a simple requirement or themaintenance o competitiveness.

Te G.I. Bill, which made higher educationavailable to soldiers returning rom World WarII until 1987, is an example o a similar type olegislation enacted by the U.S. government. Tislegislation not only succeeded in increasing theaccess to higher education or many soldiersit isestimated that 40% o those that went to collegeunder the bill would not have done so otherwisebut also contributed positively to the U.S. economy.By 1987, it is estimated that the additional taxes paid

by those who participated in the program more thanpaid or the programs cost and added signicantly tolevel o the U.S. output in goods and services. 62

In light o these concerns over the largeincreases in tuition at public colleges, the increasingindebtedness o college students, the economic

stratication o higher education attributed tonancial barriers, and the individual and socialbenets o higher education, we advocate agovernment-nanced our year college-or-allprogram, ollowing the recommendations o theDebs-Jones-Douglas Institute.63 Although theinstitute does not provide a rigorous model derivingthe added government costs o providing our yearso college or all qualied students or a descriptiono what attributes o the program the governmentwould nance, they do suggest that the cost o sucha plan may all between one and two times thecurrent total tuition and ees at all public degree

granting institutions. According to the Departmento Education, these totaled $31.9 billion in 200001. Tus, the cost may be between $32 and $64billion.64

4.5 ongoing social net issues

Social Security

Te nancial gap in Social Security can besolved through raising additional revenue. Makingradical reorms on the basis o a 75 year projectiono the economy is not sensible. It is entirely possible

that the economy will grow aster than currentlyprojected by the Social Security Administration.Immigration patterns will also aect the long-termoutcome. Tis is not to say that eorts should notbe made immediately. Te costs o these eorts havebeen exaggerated, however. Rather than discussinghow much will have to be raised in payroll taxes or towhat degree benets must be reduced, we think it ismore useul to estimate total annual cost. Based onthe analysis by the Social Security Administration,it would require approximately $100 billion inrevenues and additional revenues o one percent oGDP onward.

Medicare

Tis is a more dicult issue and involves notjust the Medicare system but the complex root causeo rising healthcare in the nation. Medicare costswill be a signicant drain on uture ederal revenues.According to government orecast, the Medicaresystem will be more costly than Social Security by2024.65 Te same orces will increase healthcare


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expenditures or business, however, and they willlikely be able to aord less. While more study isneeded, it is clear to us that such trends in healthcarecosts make a single payer system with controls overprices more appealing. Future research may showthat a single payer system will control uture medical

costs with such eciency that the Medicare andMedicaid gaps may well be eliminated, or reduced tomanageable levels. otal expenditures on Medicareare estimated at $333.0 billion dollars in 2005. Tisamount increases to $748.0 billion in 2014.66

Private retirement security

We do not believe as yet that the governmentcan contribute urther to private retirement security.One possibility is tax exempted savings in additionto Social Security. Another possibility is to mandatebusinesses to provide additional pension benets.

Our main concern, however, is to develop a systemin which private pensions become ully portable. Wewill research these issues in a uture discussion.

4.6 otHeR social net issues

Equalizing the quality of public schools

By many measures, the quality o educationis ailing in America. Much o this has to do withunequal availability o education. Equalizingnancing o such schools in states is a requirement inorder to undo the inequality o the system. It may

require signicantly more ederal investment in K-12education.

Raising the minimum wage

Te real minimum wage in 2005 wasnear a post-World War II low. As a proportiono the average wage, the current minimum wagestands at its lowest level since the 1950s. Te lowminimum wage accounts or a good share o therising inequality o incomes at the lower end othe spectrum. We believe it is mandatory to raisethe minimum wages substantially or the sake oequity. Tere are two other benets. Higher wagesmotivate employers to adopt better managerialand technological practices and to invest in workerabilities. Higher wages increase demand or goodsand services without incurring borrowing thatmay well also contribute to productivity growth, agenerally neglected source o growth in current U.S.growth theory.

Figure 8 summarizes the estimated cost o ourproposed New Social Saety Net.

5] Potential sources of revenueA new social saety net such as the one

proposed above would require approximately $930billion in additional government spending in 2006.Tis is a signicant number, some 9% o GDP. Butthe largest sharesome $600 billionwould replacecurrent private spending on healthcare. Net newspending is roughly $330 billion. Figure 8 shows themain components o the program and their expectedannual cost in 2005 dollars.

A changing world requires not only a newapproach to social protection, but also a changein the way the ederal government raises revenues.On the one hand, exibility or business requires

reductions in employment costs. On the otherhand, a sustainable social saety net requires thatgovernment be able to raise adequate revenue. Belowwe propose a way to raise the additional revenuesneeded.

5.1 tHe goveRnment Role in

economic gRowtH

While the debate continues over why theUnited States has lower unemployment rates thanGermany and France, there is little evidence that

social programsor the United States or acrossindustrialized countriesare a cause o sloweconomic growth. Moreover, despite widespreadclaims to the contrary, there is little support or theview that higher taxes reduce incentives to work orinvest. Te experience o the 1990s, during whichtime there were two tax increases, did not result inreduced investment.67 o the contrary, ater theClinton tax increase, investment as a proportion oGDP increased substantially. Similarly, we also know

Figure 8: Additional government spending

needed for New Social Safety Net by compo-

nents (in billions of dollars).

Component Cost

Healthcare for all 600Childcare and family policies 150

Unemployment broadening 12.3

Social Security 100

College for all 60

Total 932.3


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that reducing taxes has had the hypothesized eecto reducing investment. Consider the Bush tax cutssince 2000. Federal taxes are now only about 16% oGDP, the lowest level since the 1950s, and prots asa share o GDP are at an historic high. Still, capitalinvestment as a percentage o GDP is surprisingly

low given the high level o prots. In sum, basedon the evidence rom the past 15 years, we do notbelieve there is any strong macroeconomic caseagainst moderate tax increases.

5.2 Possible efficiency gains

Te goal, however, is not to raise or reducetaxes or its own sake. Te point is to nd theright set o tax and expenditure policies thatencourage investment, employment and growth,and control costs. We argue in this paper that thismay include moving spending on social protection(notably, health insurance) rom the private tothe public sector. Tere are at least two potentialsources o eciency gains rom our proposal. Temost important are the gains rom a single payerhealthcare system. Such gains rom extensive useo inormation technology, reduced administrativeand marketing costs, and universal coverage (whichreduces catastrophic health care due to prevention)could save the national economy substantial amountso money.

Te evidence is overwhelming that urtherwell-managed investment in education, rom pre-K

through college, will also generate substantial pay-os or the economy. It is arguable that they willpay or themselves. Tere is historical precedent:increased incomes due to college attendancesubsidized by the G.I. Bill ultimately paid or thegovernment subsidy through increased tax collection.

5.3 Raising tHe PayRoll tax

o be scally responsible, we cannot count onthese eciency gains. Tus all o the scenarios callor an increase in the payroll tax on both employers

and employees. Businesses have oten argued thatreducing the payroll tax burden on employers willencourage more exibility, induce more hiring, andspur household consumption demand as the tax cutleads to higher wages. In theory these claims havemerit. I the tax is ully shited onto the workers,then employers are unaected, while workers seetheir wage decline by the amount o the tax. But ithe tax is only partially shited onto workers, thenemployers costs rise while workers wages all only a

portion o the tax. Employment will all in this caseTe empirical literature on the incidence o

payroll taxes shows that the eect is mainly on wageswith little eect on employment. Tis is presumablybecause labor supply is highly inelastic. According toDaniel Hammermesh:

[Most o the long-run burden o a payrolltax increase is borne by workers in theorm o lower wages. Tis is true regardlesso the value o the demand elasticity. Itimplies that the increase generates littledisemployment, and obversely thatsubsidizing employers payroll tax paymentsgenerates only small rises in equilibriumemployment.Barring substantialimprovement in empirical studies o taxincidence, we must tentatively iner thatmost o the burden o payroll taxes is onwages.68

It is possible that the existing empiricalliterature is not applicable in our case, given the largetax increase and osetting cost savings on healthinsurance premiums that we are proposing. Most othe literature is based on experiences o small changein the payroll tax and would be considered reliableonly or small movement in the tax rate. I we areright that savings rom subsidized health insuranceis upward o 12% o payroll and that payroll taxesare raised by 8% on employers, this implies a ourpercentage point decline in costs per employee.Around such a large change, it is possible that

rms will indeed expand employment. Certainlythe opposite has been ound, that large increasesin per employee health care costs have loweredemployment.69 Te question is whether this eectwill work in reverse.

5.4 financing Plan: summaRy

Our nancing plan requires a rise in payrolltaxes by a total o 8.5%, 75% o which is paid orby business and the remaining 25% by individuals.Te remainder o our program requires $332 billion

in additional ederal nancing. Tese are oset byreduced private spending on healthcare and the otherbenets o the new social contract. Americans aregetting something back rom their governmentasignicant increase in overall welare, given thebroadening o coverage or health insurance,preschool and schooling, and or unemploymentinsurance.

We propose that the remainder o the social


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0

net be nanced as ollows.70 Raise all personal tax rates by 3%. Tis would

yield $150 billion .

Restore corporate taxes to their pre-2001level o 3% o GDP. Tey are now 2% oGDP. Restoring them to 3% o GDP throughaggressive closing o loopholes and otherreorms would plausibly raise $100 billion.

Eliminate the cap on payroll taxes orcorporations to raise $50 billion a year.

Finally, tax dividends and capital gains atpersonal rates to raise more than $50 billion.

Our proposed tax reorm is slightly progressive in itsincidence and thus more airly distributes the cost othe social net between capital and labor.

5.5 two alteRnative tax

Revenue Possibilities:

1 We could eliminate any employee payroll taxincrease to nance the universal healthcare programby adopting a nationwide sales tax. A two and a halpercent sales tax would raise $150 billion, sucientto nance the employees share o the healthcareplan. An additional two and a hal percent increasewould enable the government to establish subsidiesor small business to reduce the required increasein payroll taxes.71 A sales tax is regressive, but a

progressive consumption tax could also be devisedto raise an equivalent amount o money. Tere arepractical problems with the progressive consumptiontax, however. Te tax imposed on high incomeindividuals would typically have to be on the ordero 25% or more to generate the equivalent o a 5%nationwide sales tax. Te reason is that the largemajority o American income is earned by middle-and lower-income individuals.

2 A second alternative would be to cut substantiallythe regressive tax expenditures or housing andprivate pension coverage. We have not ullycomputed the revenue generating possibilities. Forexample, lower caps on the tax deductibility o homemortgage interest could be both socially benecial

and raise signicant revenues. President BushsAdvisory Panel on Federal ax Reorm has recentlyrecommended reducing such tax benets or higherincome individuals.

6] conclusionApplebaum and Blatt speak o high-

perormance work systems.72 Tese are rms thatare not only at world levels o productivity, butalso that are innovative and able to respond quickly

to changes in market orces. High-perormancework systems require exible management and asecure and well-trained workorce. Te social saetynet in the United States has not encouraged high-perormance rms. Te role o government has notbeen transormed in tandem with the economy, andas a result U.S. workers are insecure and unprotectedand U.S. rms are uncompetitive and underincreasing pressure to cut compensation by reducingbenet packages or ull-time workers, to increasethe share o part-time workers, and to outsourceabroad. Firms are strapped with high healthinsurance costs and inadequately unded pension

liabilities, yet social protection is highly uneven in itsavailability.

We have argued that globalization andnew technologies require that both managers andworkers in the United States have more exibility.Corporations must be relieved o part o theobligation to und pensions, health insurance, andchildcare. Tis should be accomplished, we argue, atthe national level, so that corporations do not bearthe ull burden o what is a social obligation. Onthe other hand, portable pensions, insurance, andchildcare mean workers will be much more willingto move across jobs. o the extent that hiring is

less expensive to rms and capital investment moreprotable, there will be ewer tendencies or rms tooutsource internationally. When outsourcing doesoccur, worker health insurance and pensions arestill guaranteed, meaning that workers will be morewilling to take time to retrain and, in any case, theburden o adjustment will be shared more broadlyacross society.

Figure 9: Summary of new revenue proposal

Component Revenue

8.5% payroll tax increase $600

Other revenues $350

3 percentage point increase $150

Taxing dividends and capital $50

Eliminating the cap on $50

Closing corporate tax loopholes $100


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Te purpose o this paper was to explorewhether a new arrangement between governmentand the private sector, more response to theeconomic challenges o the 21st century, is alsonancially easible. A 21st century social saety netwould require expanding government spending

by almost one trillion dollars over current levels,and it would require some tax increases, closingo tax loopholes, and perhaps ending o some taxexpenditures. We have argued that the higher taxburden can be shared broadly by rms, employees,consumers, and the wealthy. While the proposedtax reorms could be made more or less progressivein their incidence, our view is that the broaderand deeper social protection the proposal supportsthe more it will ease the burden on businesses byallowing more exibility without the negative socialconsequences usually associated with such exibility.

Te proposal oered in this paper should be

taken as a rough estimate o the needs and nancingto make a social saety net work or business and theAmerican workorce. It is an attempt to rame thelarge issue o the role o government in our economyand in our society. We believe an expanded roleis a requirement in addressing our current needs.For reasons o eciency, equity, innovation, andinternational competition, it is time to redene therole o the government in the economy. Such aredenition, we believe, is scally easible.


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endnotes

1 Bureau o Labor Statistics, able B-1.Employees on nonarm payrolls by majorindustry sector, 1955 to date,

2 Bureau o Economic Analysis, Annual IndustryAccounts: Gross-Domestic-Product-(GDP)-by-Industry Data,

3 Tere is debate over the relative importanceo these actors in explaining U.S.deindustrialization. For a brie overview,see Kucera, D. and W. Milberg (2003),International rade and Deindustrialization:Factor Content Analysis or OECD Countriesor 19781995, Review o World Economics,

39 (4): 601624.

4 Piore (2004), Shiting Axis o Labor MarketRegulation and Social Mobilization in theUnited States: Reinterpreting the Americanexperience at the turn o the 21st century,Prepared or 32nd Congress o the GermanSociological Association, Munich Germany, p.13.

5 See Madrick, Je (1995), Te End o Afuence,New York: Random House.

6 On wages and employment, see Reber, Sarahand Laura yson (2004), Rising HealthInsurance Costs Slow Job Growth and ReduceWages and Job Quality, working paper. On thelink between spending on health and the oreigndecit, see Barbosa-Filho, Nelson H., CodrinaRada, Lance aylor, and Luca Zamparelli(2005), U.S. Macroeconomic Imbalances:rends, Cycles, and Policy Implications,SCEPA Policy Note (December),

7 Kucera, D. and W. Milberg (2003),International rade and Deindustrialization:Factor Content Analysis or OECD Countriesor 19781995, Review o World Economics,39(4): 601624.

8 For a survey, see Mahoney, Melissa, WilliamMilberg, Markus Schneider, and Rudi VonArnim (2006), Spurring Growth Dynamicsrom Services Oshore outsourcing. SCEPAPolicy Note No. 2006:2, .

9 Te 2004 Annual Report o the Board orustees o the Federal Old-Age and Survivorsand Disability Insurance rust Funds,Washington DC, p. 2.

10 Ibid, able VI.F11. Estimate or retired workerswith career-average earnings at about 100percent o the SSA average wage indexing series(AWI).

11 Ibid, p.2

12 Ibid, able II.B2. Tis is the combined tax rate

or employees and employers. Each pays 6.2%o wages.

13 Munnell, Alicia and Annika Sunden (2004),Coming Up Short: Te Challenge o 401(K)Plans, Washington, DC, Te BrookingsInstitution.

14 Includes active, retired, and separated vestedparticipants not yet in pay status. Te numbero participants also includes double counting oworkers in more than one plan.

15 Employees Benets Security Administration(2004), Private Pension Plan Bulletin 1999,U.S. Department o Labor, Washington, DC,able A1. Active participants include anyworkers currently in employment covered by aplan and who are earning or retaining creditedservice under a plan. Active participants alsoinclude nonvested ormer employees who havenot yet incurred a break in service.

16 United States Government AccountabilityOce (2005), Government Perormance andAccountability: ax expenditures represent asubstantial ederal commitment and need to bereexamined, GAO-05-690, able 2.

17 Ibid.

18 Economic Policy Institute, EPI Issues Guide:Unemployment Insurance. Revised August2004.

19 Ibid


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20 U.S. Department o Labor, UnemploymentInsurance Data Summary (2005 First Quarter).

21 Oce o Families Assistance, U.S. Departmento Health and Human Services. Fact sheetavailable at http://www.ac.hhs.gov/opa/act_sheets/tan_actsheet.html

22 Oce o Families Assistance (2004),emporary Assistance or Needy Families:Sixth Annual Report to Congress, U.S.Department o Health and Human Services.Chapter II, able A.

23 Ibid, Chapter I, able B.

24 Meyers, Marcia K. and Janet C. Gornick(2004), Work/Family Reconciliation Policies orthe United States: Lessons rom Abroad

25 Committee or Economic Development (2002),Preschool or All: Investing in a Productive andJust Society, New York, N.Y. p.11.

26 College Board (2005), rends in Student Aid,rends in Higher Education Series, New York.

27 College Board (2005), rends in CollegePricing, rends in Higher Education Series.

28 See Baicker, K. and M. Rehavi (2003), PolicyWatch: rade Adjustment Assistance, Journalo Economic Perspectives, 18(2): 239255.

29 Greenstein, Robert (2005), Te EarnedIncome ax Credit: Boosting Employment,Aiding the Working Poor, Center on Budgeand Policy Priorities, .

30 Internal Revenue Services, EIC Inormationand Resources or Individuals, ax Preparers,and Partners Frequently Asked Questions,

31 Hussey, Peter. S., Gerard F. Anderson, RobinOsborn, Colin Feek, Vivienne McLaughlin,Jon Millar, and Arnold Epstein (2004), HowDoes the Quality o Care Compare in FiveCountries?, Health Aairs, 23(3): 8999.

32 Te economist David Cutler vividly

summarizes these ailures in his book, YourMoney or Your Lie (Oxord University Press).

33 Te National Coalition on Health Care and theInstitute or Healthcare Improvement (2002),Curing the System: Stories o the Change inChronic Illness Care, May.

34 Stoddard, Jerey J., Robert F. St. Peter, andPaul W. Newacheck (1994), Health InsuranceStatus and Ambulatory Care or Children,New England Journal o Medicine, 330(20):14211425.

35 National Academy o Sciences (2003), HiddenCosts, Value Lost: Uninsurance in America,Executive Summary, p. 34.

36 Employer Health Benets 2004 Annual SurveyKaiser Family Fund and Health Research

Education rust.

37 Center or Medicare Services, Oce o theActuary, National Health Statist ics Group,able 10,www.cms.hhs.gov/statistics/nhe/historical/t10.asp

38 Mintz, M. (2004), Single Payer: Good orBusiness, Te Nation, November 15, 2004.

39 Reber, Sarah and Laura yson (2004), RisingHealth Insurance Costs Slow Job Growthand Reduce Wages and Job Quality, workingpaper.

40 Building a Better Healthcare System, AReport rom the National Coalition on HealthCare, Washington DC, 2004.

41 Families USA (2004), One in Tree: Non-elderly Americans Without Health Insurance,20022003, June.

42 Impacts o Health Care Reorm: Projectionso Costs and Savings, National Coalition onHealth Care, Washington DC, 2005.

43 Based on the 2001/2002 Medical ExpenditurePanel Survey and the March 2004 CurrentPopulation Survey, Te U.S. Census Bureau.

44 Heckman, James (2004), Te ProductivityArgument or Investing in Young Children,Committee or Economic Development, Investin Kids Working Group Working Paper 5.

45 U.S. Census Bureau (2004), Statistical Abstract


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o the United States: 2004-2005 (124th Edition)Washington, DC. ables No. 578 and 579.

46 Ibid, able 581.

47 Meyers, Marcia K. and Janet C. Gornick (2004),Work/Family Reconciliation Policies or the

United States: Lessons rom Abroad. Estimate or2005.

48 Ibid

49 Meyers and Gornick argue that paid amily leavecan be nanced by expanding the structure othe Federal Insurance Contribution Act (FICA)to include it.

50 See Schweinhart, Lawrence J. (2005), TeHigh/Scope Perry Preschool Study TroughAge 27: Summary, Conclusions, and Frequently

Asked Questions, High/Scope Press: Ypsilanti,Michigan; Reynolds, Arthur J., Judy A. emple,Dylan L. Robertson, and Emily A. Mann (2002),Age 21 Cost-Benet Analysis o the itle IChicago Child-Parent Centers, Institute Researchon Poverty Discussion Paper No. 124502.;Masse, Leonard N. and W. Steven Barnett,A Benet Cost Analysis o Abecedarian EarlyChildhood Intervention.

51 Lynch, Robert G. (2004), Exceptional Returns:Economic, Fiscal, and Social Benets oInvestment in Early Childhood Development,

Economic Policy Institute, Washington D.C.

52 Currie, Janet (2001), Early ChildhoodEducation Programs, Journal o EconomicPerspectives, 15(2): 213238.

Using upper bound o the estimated benetor ull-day, ull-year childcare would suggestthat the benets o the program would oset81% o the costs. Currie argues that the upperbound estimate or the benet o childcare is anoverestimate because it assumes that all motherswork ull-time. Te lower-bound estimate iscalculated using the act that 55.6% o employedmothers o preschool children report paying orchild care.

53 Bureau o Labor Statistics, able A-9. Unemployed persons by duration ounemployment,

54 College Board, rends in College Pricing2004, New York.

55 U.S. Census Bureau, Current Population Survey,Annual Social and Economic Supplements,able H-6.

Note: Real median amily income has not beenstagnant over this period. It increased by 10%between 1995 and 2000 and decreased by 4%between 2000 and 2004.

56 Advisory Committee on Student FinancialAssistance (2002), Empty Promises: Te Mytho College Access in America. U.S. Departmento Education, Washington DC.

57 College Board, rends in Student Aid 2004,New York.

58 Debs-Jones-Douglass Institute (2002), FreeFor All: Free uition at All Public Colleges andUniversities or Students Who Meet AdmissionsStandards, Washington, DC, p. 19.

59 Te Advisory Committee on Student FinancialAssistance (2002), Empty Promises: Te Mytho College Access in America, U.S. Departmento Education, Washington, DC.

60 U.S. Census Bureau, Current Population Survey,Annual Social and Economic Supplements,able P-16.

61 Debs-Jones-Douglass Institute (2002), FreeFor All: Free uition at All Public Colleges andUniversities or Students Who Meet AdmissionsStandards, Washington, DC, p. 3.

62 Smith II, Preston H. and Sharon Szymanski(2003), Why Political Scientists ShouldSupport Free Public Higher Education, PS:Political Science and Politics, October.

63 Debs-Jones-Douglass Institute (2002), FreeFor All: Free uition at All Public Colleges andUniversities or Students Who Meet Admissions

Standards, Washington, DC.

64 I we propose a two year college-or-all program,the cost may be hal o this estimate plus one totwo times the current total tuition and ees andtwo year public degree granting institutions. In200001, these totaled $6.1 billion. Tus, thecost may all between $22.1 and $44.1 billion

65 Social Security and Medicare Boards o


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rustees, A Summary o the 2005 AnnualReports, Washington DC. < http://www.ssa.gov/OAC/RSUM/trsummary.html>

66 2005 Report o the rustees o Federal HospitalInsurance and Federal Supplementary MedicalInsurance rust Funds, Washington DC.

67 For substantial discussion on past empiricalstudies, and their own original work, seeLindert, Peter (2004), Growing Public, OxordUniversity Press and Slemrod, Joel B. (ed)(2002), Does Atlas Shrug, Harvard UniversityPress and Russell Sage Foundation.

68 Hammermesh, D. (1993) Labor Demand,Princeton, Princeton University Press, p. 169.Anderson and Meyer (2000) in a study oWashington State ound that industry averagetax rates are largely passed on to workers

through lower earnings. (Anderson, PatriciaM. and Bruce D. Meyer, Te Eects oUnemployment Insurance Payroll ax on Wages,Employment, Claims and Denials, Journal oPublic Economics, 78(12):81106) Kruegerand Meyer (2002) in a survey article also donot nd cause to revise Hammermeshs earlierconclusion. (Krueger, Alan B. and Meyer, BruceD. (2002), Labor Supply Eects o SocialInsurance (June), NBER Working Paper No.W9014. Available at SSRN: http://ssrn.com/abstract=316793 ) Alesina et al. (2005) also ndthat cross-country dierences in the payroll taxrate do not explain dierences in hours workedover time. Tey attribute this dierence largelyto the residual eect o strong unions in WesternEurope in the 1970 and 1980s. (Alesina, AlbertoF., Edward L. Glaeser, and Bruce Sacerdote(2005), Work and Leisure in the US andEurope: Why So Dierent, CEPR DiscussionPapers 5140.)

69 Reber, Sarah and Laura yson (2004), RisingHealth Insurance Costs Slow Job Growth andReduce Wages and Job Quality, working paper.

70 Tese revenue estimates are based on the taxmodel o Robert McIntyre, Citizens or axJustice, Washington DC.

71 Gale, William (2004), A Note On Te Requiredax Rate In A National Retail Sales ax:Preliminary Estimates or 20052014, TeBrookings Institution , Washington, DC.

72 Appelbaum, Eileen and Rosemary Blatt

(2000), Manuacturing advantage: why high-perormance work systems pay o, Ithaca, NY:IRL Press.


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