Job Insurance – Part 12 (Finance)

In Budget Politics, Economic Planning, Economics, Financial Crisis, Full Employment, History and Politics, Liberalism, New Deal, Political Ideology, Politics of Policy, Progressivism, Public Policy, Regulation, Social Democracy, Social Policy, Taxes, Welfare State, WPA on November 16, 2009 at 1:05 pm


In previous installments of the Job Insurance series, I’ve used a simple $20 a month premium, split 50/50 between workers and their employers, to give a rough idea about how a Job Insurance program could be financed as a significant new social insurance program, without creating a heavy fiscal burden.

However, there are important alternatives for financing a Job Insurance program that should be considered – especially as we think of how to construct a jobs bill without triggering an internal struggle with our party’s “deficit hawks.”

Why Social Insurance:

In my segment on jobs for youth, a commenter asked why people in need of work should have to pay a premium to be eligible. This is a very fair question, and the answer largely boils down to a mix of politics and policy. Politically, social insurance programs are much harder to attack than non-contributory social programs. The usual methods of de-legitimization don’t work – beneficiaries are workers, not an easily stigmatized group of unemployed poor; the benefits they receive aren’t “government handouts” but “getting their money back” and the program tends to be more universally open (at least in the sense that everyone will eventually gain access), as opposed to “giving your tax dollars away to [insert minority here].” In the minds of voters, they feel that their contributions gave them an “earned right” to their benefits, and that this makes the program inherently more “fair” than a non-contributory program; voters are also more likely to identify themselves with beneficiaries, rather than viewing them as some disliked “other.” That’s why Social Security and Medicare are politically untouchable, to the point where conservatives have essentially had to give up on trying to eliminate them, and now try to use them to block health care reform.

Policy-wise, the advantage of designing a social policy as social insurance is that it creates a certain element of independence from the party in power. Programs that are funded through general taxation and the regular budgetary process can be de-funded the moment that one party loses their majority and is replaced by the opposition, and this is just as true of social policy as any other. When a conservative majority gradually formed in Congress between 1938 and the 1940s, FDR saw many of his New Deal spending programs phased out – with the significant exception of the Social Security system, which didn’t need Congressional appropriations thanks to its payroll tax-driven Trust Fund. Similarly, much of LBJ’s Great Society and War on Poverty programs were eliminated between the end of his presidency and the rise of Reagan – again, because many of those programs depended on Congressional appropriations for survival.

A premium-financed Job Insurance program would thus be constantly generating revenue (at about $37 billion a year), allowing it to fund jobs programs without having to go hat-in-hand to a potentially hostile Congress. At the same time, creating an enormous constituency of 150-odd million workers who’ve paid their dues and expect to get a job when they get laid off, as well as a smaller but significant constituency of Job Insurance alumni who have positive memories of the program would make it much harder for even a conservative Congress to repeal Job Insurance once enacted.

How to Finance:

However, it is also true that a flat premium – just like the FICA tax that funds Social Security and Medicare or the FUTA/SUTA tax that funds Unemployment Insurance – is just one option, and that there are other funding mechanisms than a $20/month premium.

1% Payroll Tax – in many ways, a 1% payroll tax would simply be an extension of the $20 premium, but it illustrates why historically we’ve turned to payroll taxes to fund some of our largest social policy programs – they can raise an enormous amount of money, especially if you’re dealing with a periodic event like a recession and can build up a reserve in the meantime. Given an average weekly earnings of $619, a 1% payroll tax (average of $25 a month, split to $12.50/$12.50) would generate $46.2 billion a year. This level of revenue would allow for a 5 million job reserve within four years, enabling the Job Insurance system to cope with even quite severe recessions.

On the other hand, a flat payroll tax is rather regressive in nature. Just as it would be possible to make our existing payroll tax progressive, it would also be possible to make the Job Insurance premium more progressive. It would probably be possible to, say, levy a .25% payroll tax on workers making $25k or less a year, .5% on workers making between $25k-50k a year, 1% on workers making between $50-75k, 1.5% on workers making between $75-100k, 2% on workers making $100-150k, and so on up the income scale and generate enough revenue to operate a robust Job Insurance system.

EDIT: according to more recent data, median weekly earnings are actually $748. This only makes the calculations easier.

Tobin Tax – another revenue option that has increasingly been suggested since the financial crisis (it’s prominently mentioned in regards to the jobs bill, for example) is a Tobin Tax. A Tobin Tax, for those unfamiliar with the term, is a small tax on financial transactions (buying and selling stocks, bonds, currency, futures, derivatives, etc.), usually anywhere between .1 to .25% of volume (or in other words, a 10-25 cent tax per transaction). Because of the enormous volume of financial transactions that happen every second of every day, such a tax would generate about $100-150 billion per year, and would have a beneficial side-effect of decreasing market volatility by making rapid, short-term speculative transactions (also known as “churn”) more expensive.

Half of a Tobin Tax’s revenues could easily create a robust Job Insurance system with a 5 million job reserve inside of four years. The remainder of the revenues could be tasked to any other purpose – funding health care reform, reducing the deficit and national debt, funding a multi-year project to restore America’s infrastructure, and so on.

Income Tax Surcharge – one of the smaller lessons learned from the health care reform debate is the sheer amount of of money that can be raised from a surcharge on the richest Americans. In the House’s bill, one of the ways that the bill is paid for is a surcharge of “1 percent of income between $280,000 and $400,000; 1.5 percent of income between $400,000 and $800,000; and 5.4 percent of income in excess of $800,000” for individuals and “1 percent of income between $350,000 and $500,000; 1.5 percent of income between $500,000 and $1 million; and 5.4 percent of income in excess of $1 million” for couples filing jointly. Keep in mind that we’re talking about only 1.2% of American taxpayers, and an average rate increase of about 3%. And yet, this surcharge will likely generate $55 billion a year.

This should suggest two things. First, conservative arguments that our tax system is too progressive and that we simply can’t solve our problems by raising taxes on the rich are disingenuous at best. If a mere 3% increase can generate $55 billion a year, then returning to the 50% top bracket that the rich enjoyed in the notoriously liberal years of 1982-1986, could easily generate enough revenue to put a massive dent in our fiscal problems. Second, an income tax surcharge could easily finance a robust Job Insurance system with a 5 million job reserve in about three years.

The point here is that there isn’t necessarily one right way to raise tax revenue – you can generate $50 billion a year in many different ways; the question then becomes one of the  relative merit of the different options.

Supercharging Job Insurance:

Before I evaluate the merits of the different options, I do want to discuss a point that has come up in some of my previous discussions regarding the Federal Reserve and central banking. Namely, that the Federal Reserve has an enormous power in its role as a “lender of last resort” that we have for some inexplicable reason decided can only be used to assist the financial sector and not the public sector, or even the public at large. The relevance here is that, while with a revenue stream of about $50 billion a year you can create an effective Job Insurance system, if the Job Insurance system is allowed to use its revenues as collateral for a loan from the Federal Reserve, the potential for public action on a grand scale becomes immense.

First, enabling the Job Insurance system to borrow from the Fed would allow the system to punch way above its weight. Instead of having to build up reserves for multiple years in order to respond to recession-driven mass layoffs, the Job Insurance program could easily take out a loan for $175 billion, put 5 million people back to work, halting the recession in its tracks, and pay back the loan within 3 years. Even in a catastrophic depression, a Job Insurance system could borrow enough to put 10 or 20 million people to work (dropping the unemployment rate by 6.5 and 13 percentage points respectively), and pay back the loan in 6 to 12 years. Looked at another way, if the Job Insurance system only had to build up enough reserves to take out and pay for a loan from the Fed, instead of paying 100% of the costs of creating millions of jobs up front, you could drop the social insurance premiums down to $10 a month (split $5/$5).

Second, such a system would be good for the Fed. As we can see from the current political discourse, the Federal Reserve currently has both an image problem in that it’s viewed as being interested only in the well-being of the financial industry and not that of the people from whom it borrows the inherently public monetary powers that give it force, and a policy problem in that has much less in the way of tools to deal with the “maximum employment” part of its mission than it does with the “price stability” part of its mission. At the moment, because the Federal Reserve works on the economy primarily by influencing interest rates, the Federal Reserve’s ability to actually achieve “maximum employment” is something akin to the captain of a giant ocean liner trying to turn the ship – it can be done, but it takes a huge amount of effort (in terms of pushing interest rates), and the ship is slow to respond. Lowering interest rates will generally boost economic growth and employment, but it takes several quarters, if not years to generate job growth. By acting as “lender of last resort” to the “employer of last resort,” the Federal Reserve would be able to create millions of jobs in a few months, giving it a degree of control over the unemployment rate equivalent to its control over interest rates.


While bringing the power of the Fed to bear on the jobs crisis is alluring, there’s still the question of how we raise the revenue. As I suggested above, each model has different attributes. For example, each way of financing Job Insurance has different economic effects: payroll taxes make employment marginally more expensive, Tobin taxes decrease the volatility in our financial markets, and an income tax surcharge would modestly redistribute wealth from the richest to the poorest.

However, it’s also my firm belief, based on my understanding of policy history, that public policy is as much (if not more) about political ideology and culture as it is about technocratic details. Each tax tells a different story and makes a different argument about how and why we want to do things. A payroll tax, as was the case with Social Security and Medicare, evokes the idea of an earned right to public benefit, but it also makes a case for understanding social insurance as a collective responsibility shared by the state and citizens, between citizens and citizens, and between workers and their employers. A Tobin Tax suggests instead the idea of a systemic imperative; fluctuations in the financial markets can have ruinous consequences in the real economy, so we must reduce volatility and ensure that financial activity contributes towards the stability of the labor market. A surcharge on the rich expresses an egalitarian principle: concentrations of great wealth are bad for the health of the economy, because they reduce the ability of the masses to consume and concentrate income among the speculating classes; by redistributing income from those who will never miss it to those who need to work to survive, we create a more equal and humane society.

What principle would you enshrine in the heart of Job Insurance?

  1. […] hand, a Job Insurance system, because it could use its independent financing in conjunction with loans from the Fed, could act very quickly in the current crisis to create large numbers of jobs, potentially as much […]

  2. […] as I’ve explained in previous segments, there are two ways in which such a program could be brought back down into the realm of the […]

  3. […] to overheat – which costs about $104-156 billion per year. Now, as I’ve stated before, this is well within the realm of fiscal possibility. A 1% payroll tax or its equivalent raises about $64 billion per year (wages and salary are 46% of […]

  4. […] is going to have to be a more active participant in the American labor market. While there are ways of financing such a system that are well within the fiscal capacity of the state, it also requires substantial […]

  5. […] tax, which would raise about $5.7 billion a year, and then using that as collateral for either a Federal or state reserve bank loan – a jobs program could be passed on a majority vote basis. Social […]

  6. […] spending their wages. The second policy difference is that, as a social insurance fund, the program generates its own revenues – and if you structure the premiums in a progressive fashion, backload the premiums but frontload […]

  7. […] right to a job ultimately requires the government to act as an Employer of Last Resort, directly hiring the unemployed and competing with the private sector as an employer of workers and […]

  8. […] scratch. $2.2 trillion is a lot of money, but if we can spread the cost over say, 50 years, through more flexible central bank policy, that comes to $40 billion a year in payments. And keep in mind, the Federal Reserve loaned out $9 […]

  9. […] at lower costs. A permanent Build America Bond program, or even a program for cities to borrow directly from the Federal Reserve would allow the cities to take advantage of the Federal government’s functionally-unlimited […]

Leave a Reply


You are commenting using your account. Log Out / Change )

Twitter picture


Facebook photo


Google+ photo


Connecting to %s


Get every new post delivered to your Inbox.

%d bloggers like this: