Social Democratic America (2 page)

Even if we could make progress in reversing the decline of families, unions, and community organizations, it wouldn't be good enough. At their best, these institutions leave a significant portion of the population uncovered. There has never been a society in which all children grow up in stable two-parent families, all workers enjoy union-negotiated wages and benefits, and civic associations serve the needs of all the disadvantaged. Only government has the capacity to help all Americans.

Most of us try to steer clear of risk events, and we attempt to insure ourselves against potential harm or loss in case we do get hit by one. We save money in case we lose our job or outlive
our working years. We bind ourselves in long-term partnerships (marriage) in order to spread childcare duties and safeguard against financial difficulty. We purchase health insurance in case we need expensive medical care. We buy auto insurance in case we get in an accident. We purchase home insurance in case our house is damaged or destroyed.

When our income is low, we can't afford to spend much on insurance, so we often go without. The more income or assets we have, the more insurance we buy. This is true of individuals and of nations. As a person's income or assets increase, she will tend to spend more on insurance. Similarly, as a nation gets richer, it will tend to allocate a larger portion of its income—its gross domestic product (GDP)—to insurance.

For some types of insurance, private markets do an effective job. Auto insurance is a good example; the incidence of accidents and the repair or replacement sums are sufficiently low that private companies can offer insurance at prices most drivers can afford. In other areas, government is a better provider, because it can spread the cost across a larger pool (all citizens), having a single payer reduces administrative costs, and government can insist on cost reductions and safety measures by private actors.
⁶

Most of what we call social policy is actually public insurance.
⁷
Social Security and Medicare insure against the risk of having little or no money in your retirement years. Unemployment compensation insures against the risk of losing your job. Disability payment programs insure against the risk of suffering a physical, mental, or psychological condition that renders you unable to earn a living.

Other public services and benefits also are insurance programs, even if we don't usually think of them as such. Public schools insure against the risk that private schools are unavailable, too expensive, or poor in quality. Special education services insure against the risk of having a disability that inhibits participation in school. Retraining and job-placement programs insure against the risk that market conditions make it difficult to find employment. The
Earned Income Tax Credit (EITC) insures against the risk that your job pays less than what's needed for a minimally decent standard of living. Social assistance programs such as the Supplemental Nutrition Assistance Program (SNAP, or “food stamps”) and Temporary Assistance for Needy Families (TANF) insure against the risk that you will find yourself unable to get a job but ineligible for unemployment or disability compensation. Even affirmative action programs are a form of insurance; they insure against the risk of being in a group that is, or formerly was, discriminated against.

Over the past century, the United States, like other rich nations, has created a number of public insurance programs. But we haven't done enough. From our own experience and that of other affluent countries, we know there are significant risks we could insure against but currently don't, and others for which the protection we now provide is inadequate.
⁸
We need the following:

• Universal health insurance

• One-year paid parental leave

• Universal early education

• Increase in the Child Tax Credit

• Sickness insurance

• Eased eligibility criteria for unemployment insurance

• Wage insurance

• Supplemental defined-contribution pension plans with automatic enrollment

• Extensive, personalized job-search and (re)training support

• Government as employer of last resort

• Minimum wage increased modestly and indexed to prices

• EITC extended farther up the income ladder and indexed to average compensation or GDP per capita

• Social assistance with a higher benefit level and more support for employment

• Reduced incarceration of low-level drug offenders

• Affirmative action shifted to focus on family background rather than race

• Expanded government investment in infrastructure and public spaces

• Increase in paid holidays and vacation time

Now, to some, this will look like a predictable laundry list of left goals. Yet I've arrived at this list not by consulting the latest edition of the “Progressives' Handbook,”
⁹
but by examining the problems we face and the experiences of the world's rich nations in addressing them. As I explain in
chapters 2
,
3
, and
4
, the evidence suggests that we can do better at enhancing economic security, expanding opportunity, and ensuring shared prosperity, and that these policies are the best way to do so. Moreover, you will see, if you read on, that I believe the prevailing wisdom among the American left on some key issues—taxes, regulation, competition in services, wage levels in low-end service jobs, and others—is mistaken.

Of course, spending on insurance has an economic cost. When we allocate funds to insurance, we forgo other uses of the money that might have contributed to economic advance, such as investment in research or new companies or in expansion of existing businesses. Moreover, the existence of insurance increases the incentive for people to engage in risky behavior or to avoid employment. Given these costs, it isn't surprising that some object to the expansion of public insurance.

At the same time, insurance has economic benefits. Schooling and medical insurance improve productivity via better knowledge, creativity, and health. Bankruptcy protection encourages entrepreneurship. Unemployment compensation reduces efforts to restrict employers' flexibility in hiring and firing, and it facilitates employees' skill upgrading and geographic mobility.
¹⁰
Programs that
boost the income of poor households, such as the Child Tax Credit and the EITC, increase the future employment and earnings of children in those households.
¹¹
Many insurance programs reduce stress and anxiety, enhancing productivity. Insurance also lessens conflict within firms and within society as a whole, contributing to economic stability.
¹²
Finally, the de facto choice often isn't insurance or no insurance. It's insurance or regulation, and the former interferes with markets and competition less than the latter.
¹³

The experience of the world's rich countries over the past century suggests no reason to fear that a rise in the size and scope of public social programs would weaken the economy. In the United States, social policy expenditure has steadily increased, yet the country's rate of economic growth has not slowed.
¹⁴
Affluent nations that spend more on public social programs have tended to grow just as rapidly as those that spend less.
¹⁵
There surely is a level beyond which public social spending hurts the economy. But the evidence says America hasn't yet reached that level. In fact, we're probably well below it.

Social democracy originated in the early twentieth century as a strategy to improve rather than replace capitalism. Today, we associate it with European social democratic political parties and the policies they have put in place, particularly in the Nordic nations.
¹⁶
I believe our array of social programs will increasingly come to resemble those of the Nordic countries. It is in this sense that I say America's future is a social democratic one.

Let me be clear about what that means. A generation ago, the label “social democratic” referred to policies that make it easier for people to survive with little or no reliance on earnings from employment.
¹⁷
Social democracy meant, in effect, a large public safety net. Today that's too narrow a conception. In recent
decades the Nordic countries have supplemented generous social insurance programs with services aimed at boosting employment and enhancing productivity, from early education and active labor market programs to public infrastructure and support for research and development.
¹⁸
And for the most part, these countries believe in a market-friendly regulatory approach.
¹⁹
There are regulations to protect workers, consumers, and the environment, to be sure. But these exist within an institutional context that aims to encourage entrepreneurship and flexibility by making it easy to start or close a business, to hire or fire employees, and to adjust work hours.

In other words, modern social democracy means a commitment to extensive use of government policy to promote economic security, expand opportunity, and ensure rising living standards for all. But it aims to do so while facilitating freedom, flexibility, and market dynamism.

Freedom, flexibility, and market dynamism have long been hallmarks of America's economy. These are qualities worth preserving. The Nordic countries' experience shows us that a nation can successfully embrace both flexibility and security, both competition and social justice. Modern social democracy can give us the best of both worlds.

There are understandable worries about the transportability of Danish or Swedish policies to a large, diverse nation such as the United States. But as I explain in later chapters, the grounds for concern dissolve once we consider specific policies. Indeed, if you look carefully at the policy suggestions listed earlier, you'll notice that many of them are already in place in this country. Getting closer to the good society entails doing more of what we already do, not shifting to something qualitatively different.
²⁰

Moreover, I'm not suggesting that we copy the Nordic countries' playbook in full. Our future array of public social services and benefits will be broader and more generous than it is now, but it will retain a distinctively American flavor. Indeed, in a few respects,
the Nordic and other European nations may come to look more like us.
²¹

Expansions in the size and scope of our social programs won't always constitute progress. Policy makers will make some poor choices, and the structure of the US policy-making process ensures that we seldom get optimal policy. But that has always been true, and yet American policy makers have managed to craft a host of programs that work quite well, from Social Security to Medicare to the EITC. As our evidence base grows, and particularly as we learn more about best practice in other nations, there is reason for optimism about the quality of future social policy.

For the past half century, our government has taxed and spent a smaller portion of the country's economic output than have most other affluent nations. In 2007, the peak year of the pre-crash business cycle, government expenditures totaled 37 percent of GDP in the United States. As
figure 1.1
shows, in most other rich nations the share was well above 40 percent, and in some it was above 50 percent.

The added cost of the new programs and expansions I recommend plus our existing commitments to Social Security and Medicare is likely to be in the neighborhood of 10 percent of GDP.
²²
If that sounds massive, keep in mind two things. First, if our government expenditures rise from around 37 percent of GDP to around 47 percent, we will be only a little above the current norm among the world's rich nations. Second, an increase of 10 percent of GDP would be much smaller than the increase that occurred between 1920 and today.

How can we pay for it? As a technical matter, revising our tax system to raise an additional 10 percent of GDP in government revenue is simple. Adding a national consumption tax could get us halfway there, and an assortment of relatively minor additions and adjustments would take us the rest of the way.
²³

FIGURE
1.1 Government expenditures as a share of GDP

Includes government at all levels: national, regional, local. 2007 is the most recent business cycle peak year.
Data sources:
OECD, stats.oecd.org; Vito Tanzi,
Governments versus Markets
, Cambridge University Press, 2011, table 1. US 47 percent in 2060 is my projection.

Since 1980, much of America's left has thought about taxation in terms of its impact on the distribution of income, putting tax progressivity front and center. But we can't get an additional 10 percent of GDP solely from those at the top, even though they are getting a steadily larger share of the pretax income. We would have to increase the effective tax rate paid by the top 1 percent or 5 percent to a level far exceeding what it has been at any point in the past half century.
²⁴
This news may disappoint some. But all rich nations have tax systems that are roughly proportional: households up and down the income ladder pay approximately the same share of their pretax income in taxes. Income redistribution occurs largely via government transfers rather than taxes. The key difference between America's tax system and those of highly redistributive countries such as Denmark and Sweden isn't that ours is less progressive; it's that it raises less revenue.
²⁵