During the Republican Presidential debate in Iowa, Mitt Romney argued for replacing our current unemployment insurance with a system of unemployment savings accounts. Romney (transcript): “But I would far rather see a reform of our unemployment system, to allow people to have a personal account which they’re able to draw from as opposed to having endless unemployment benefits….if I were president right now, I would go to Congress with a new system for unemployment, which would have specific accounts from which people could withdraw their own funds.”
Suzy Khimm has more, while Crooks and Liars has video and notes that this proposal looks a lot like a policy paper from the Mercatus Center. A proposal where, instead of contributing to a public trust fund for UI, employees create a savings account while working that has money automatically channeled into it tax-free to be drawn down during periods of unemployment.
We’ve tried to generalize a contrast between a liberal and neoliberal ideological policy agenda at this page before. I often think if we created the social safety net for the first time right now we’d see something very different. In particular, if we had to create unemployment insurance in this neoliberal era I think we’d see something like these unemployment insurance savings accounts instead of the unemployment insurance system that came into being with the 1935 Social Security Act (an act which celebrated its 76th birthday Sunday – Happy Birthday Social Security!).
You could even see a sprawling wonky policy debate. There would be a left-neoliberal unemployment insurance savings account that matched contributions for low-wage employees and an innovative-neoliberal unemployment insurance savings account which completed markets by allowing for the unemployed to borrow against future earnings within the fund at low rates. An entire debate that took place within the policy walls of an individualized UI benefits given through the tax code.
As such, we can use this as a learning moment to contrast the liberal policy of unemployment insurance as it exists now with a neoliberal approach – an approach to governance where the state’s role is one of creating and completing otherwise incomplete markets. What are the differences between our current approach and the Romney approach?
The first difference is that the unemployment insurance savings accounts don’t actually involve what the liberal government does best: social insurance. There’s no risk pooling or sharing risks along large populations in order to take advantages of the traditional benefits of insurance. Whether or not you view the ideology of insurance as sound actuarial reasoning or as a form of solidarity doesn’t matter because the actual mechanisms of insurance don’t exist in this plan.
Part of the point of social insurance is that it is social; we help others and they help us through a government which shapes our obstacles and opportunities. This is lost in the world of individual savings accounts. In this world there are just isolated, atomized individuals, absorbing the entirety of the economic risks of unemployment all by themselves.
The second is that redistribution in the Romney suggestion is quietly upwards, towards the richest, instead of obviously towards those in need. Like any welfare spending through the tax system, it benefits those who pay the most in taxes and those who have the ability and means to take advantages of it through disposable income and tax sophistication – and these unemployment savings accounts work that way. The current way unemployment taxes are collected (taxes levied on the first $7,000 of wages) is regressive, but it goes to those who have hit a spell of unemployment. Those who are most in need take the full advantage of it regardless of their ability to hire a tax accountant.
The third is that it weakens the power of the unemployed. Unemployment insurance increases the time until the unemployed take their next job. Cutting-edge econometric research tells us that the majority of this is a “liquidity” effect as opposed to a work disincentive effect – people are taking the time they need in order to find the best job for themselves instead of taking the quickest job in order to make basic payments. This gives the unemployed more choices and, as Acemoglu and Shimer argued, can create a better economy with more output and productivity.
However what is good for the economy isn’t necessarily better for any individual employer, and by empowering the unemployed and giving them breathing space to search for the best job also enables them to search for the best wage to go with their job. Switching this system of unemployment insurance throws off this balance between workers and bosses in favor of the latter. It reduces aggregate labor bargaining at a time when it is precariously weak.
A fourth is that it is hard to scale outwards in cases of emergency. In a recession it is very easy to extend unemployment benefits. These unemployment savings accounts would be difficult to expand in any sense – as such it takes a serious mechanism of “automatic stabilizers” out of commission. If your goal is to thwart the ability of the government to counter the business cycle and to shred anything that hints of Keynesian counter-cyclical spending, this would be a major home run.
And the fifth and last point is that it removes the idea of the government from the equation of people dealing with economic risks. Like much of the “submerged” state, people will look at private savings accounts and think that the government isn’t doing anything. Even if there are substantial tax benefits people will, rightfully in my humble opinion, ignore this because the government isn’t doing what the government is best at – absorbing risks. All the government is doing is setting the stage for the individual to confront the entirety of their economic risks by themselves. There’s no social to this program and thus no politics and thus no real political constituency for it.
This is my quick read, and I’d really enjoy your thoughts. What do you think about the difference of the two approaches?