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Voices: Conversation

Risky business

BY: Robert Keough
Issue: Winter 2007
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few books have generated as much anticipation here in the CommonWealth office as Jacob Hacker’s The Great Risk Shift. In terms of addressing themes we keep coming back to in this magazine, the only equivalent that comes to mind is Robert Putnam’s Bowling Alone (see “Picking up the Spare,” CW, Summer ’00), the book-length expansion of his famous journal article, written five years earlier, alleging a broad decline in civic participation.

As with Bowling Alone, the suspense built in part because The Great Risk Shift seemed a long time coming. Hacker, a professor of political science at Yale and fellow at the New America Foundation, began making the book’s central argument in print two years before the book came out. In an August 2004 article in The New Republic, he explained the jitters reported in public opinion polls—despite steady, if not spectacular, growth in the economy —as a function of increasing financial insecurity, which was undermining the confidence that ought to accompany improving economic prospects. To him, the anxiety came not from the oft-cited “middle class squeeze” of lagging incomes and rising living costs, but from a more fundamental increase in economic risk facing individuals and families over the course of their lives.

“The income squeeze that families face is not exactly the same as insecurity,” wrote Hacker. “Insecurity is something larger—the risk of large drops in living standards caused by loss of income or catastrophic expense. And, my research suggests, insecurity is something that more and more Americans, even the relatively well off, are confronting.”

It was at about that time that CommonWealth (along with our parent organization, MassINC) began to explore economic uncertainty, in the form of the changing nature of work and benefits, as a creeping threat to middle-class hopes and dreams. In these pages, associate editor Michael Jonas reported on the outsourcing of jobs overseas (“Offshore Leave,” CW, Summer ’04) and on the rise of temporary and freelance workers as companies began shedding permanent jobs with full benefits (“Lone Rangers,” Summer ’05).

In research, MassINC documented the replacement of traditional pensions with often-meager 401(k) tax-deferred savings plans, the result being a generation of Massachusetts adults heading toward retirement without adequate means to support themselves (The Graying of Massachusetts, 2004). Small wonder, then, that MassINC’s 2005 survey of Baby Boomers (A Generation in Transition) found nearly two-thirds of respondents planning to work, at least part-time, after they retired from their careers.

By the time Jonas checked in with families on CommonWealth’s bellwether middle-class street in Billerica for our 10th anniversary issue (“Heritage Road Revisited,” Spring ’06), it was no surprise to find that, even among those currently comfortable, worries about the future abounded, along with resentment that their taxes gave town employees benefits that they could no longer count on themselves. “A generation ago, the divide wasn’t nearly as stark,” Hacker commented for that article.

Photograph by Lanny Nagler

In The Great Risk Shift, Hacker pinpoints the source of that divide as the shifting of economic risk from institutions—corporations and government—to individuals, or at least those employed in the private, rather than public, sector. He identifies two trends that have made for a rise in economic insecurity: increasing income instability and declining benefits from America’s uniquely mixed (public and private) system of social insurance. Together, these factors leave American families more exposed to financial risk and less confident that, whatever their economic circumstances today, tomorrow will be as good or better.

Hacker mines the Panel Study of Income Dynamics, a national survey that has tracked the earnings of families since the 1960s, to reveal an “economic rollercoaster” that more and more Americans find themselves on. Family incomes, it turns out, rise and fall substantially over time, and the fluctuations are greater now than ever before. This, to Hacker, is more unsettling than the recent widening in income inequality, though he decries that as well.

“The gap between Bill Gates and Joe Citizen is a lot larger than it used to be,” writes Hacker, “but it’s actually grown less quickly than the gap between Joe Citizen in a good year and Joe Citizen in a bad year.”

And in benefits, the mix of government- and employer-provided “social insurance”—health care, pensions, and the like—is eroding, as employers shift more of the cost of health insurance to their employees and replace traditional pensions with retirement savings accounts, while officials in the White House and Congress talk of Social Security privatization and Health Savings Accounts. To Hacker, this is not just a function of short-term dominance by conservative political leaders (a phenomenon threatened by last fall’s national elections, in which the Republicans lost control of both houses of Congress) but the product of a long-term ideological campaign, which he calls the Personal Responsibility Crusade, that has undermined the very notion of broadly pooling economic risk to provide financial security for individuals and families.

“The core assertion of the Personal Responsibility Crusade is that Americans are best off dealing with economic risks on their own, without the overweening interference or expense of wider systems of risk sharing,” writes Hacker.

To Hacker, these trends of uncertainty in income and self-reliance in benefits make for a one-two punch to the midsection of middle-class families, leaving him to ask, “Why, at the same time that Americans are becoming more insecure, is more and more risk and responsibility being shifted onto them?”

I spoke with Hacker by phone, at his New Haven office, about this shifting of risk and how individuals, employers, and government could provide a renewed measure of financial security in an age of economic turmoil. What follows is an edited transcript of our conversation.

—ROBERT KEOUGH

CommonWealth: We’re now five years out from the official end of the last recession, but there continue to be worries nationally and here in Massachusetts about the state of the economy. We hear a lot nationally about the wage-less recovery and rising levels of inequality, and in Massachusetts sluggish job growth is the big concern. But your book is focusing on what you see as a structural change under way that is eroding the average family’s sense of economic well-being, a shift of financial risk. Whom is the risk being shifted from and to?

Personal finances are now 'less stable and secure.'

hacker: You’re absolutely right that my book is trying to change the conversation from just a focus on inequality or wages to a focus on the way in which our financial lives have become less stable and secure over the last generation. The risks I’m talking about are the major economic risks and responsibilities that we face in our lives—health care, pension plans, job security, the stability and security of our family finances. And I argue that in every one of those major facets of our economic life, risk and responsibility have shifted increasingly from government and corporations, which once managed and pooled these risks extensively, onto individual workers and their families. A generation ago, a majority of Americans had a guaranteed pension from their employer that would top off Social Security in their old age. Now most workers, especially younger workers, who receive a pension from their employer receive a 401(k)–style individual retirement account that offers no guarantee of a fixed benefit in retirement. A generation ago, most workers who had health insurance had relatively generous first-dollar coverage that paid most of the costs of their health care. Now, especially in the last decade, workers are paying a large chunk of those costs on their own, and some employers are even shifting to more individualized forms of health benefits, such as Health Savings Accounts, that make employees deal with routine medical expenses on their own. A generation ago, if you lost a job, you could usually get re-employed in a similar line of work with a similar level of pay and benefits. Increasingly, we’re seeing that job losses are structural rather than cyclical—they’re permanent or long-lived, and they often involve having to gain new skills and shift into different lines of work. Finally, a generation ago very few families filed for bankruptcy or lost their home, but in the last 30 years we’ve seen a dramatic increase in rates of bankruptcy among households and in rates of home mortgage foreclosure.

CW: A number of these changes are fairly visible things, like the shift from traditional pensions to 401(k)s. And the whole issue of who’s going to pay and how much for health insurance is a raging debate, and has been for some time. The things in your book that I found most surprising were the increased risks that show up in the way people earn their living, in terms of incomes, and, as you mentioned, jobs. Tell me a little bit about what you refer to as the increased “volatility” of income. What does it mean to say that incomes are becoming more volatile? And what are the implications for personal financial security?

hacker: Well, volatility is an accepted measure of the riskiness of stocks. It basically is a measure not of how big the returns of the stock are, but of how risky or uncertain those returns are likely to be. To say that family incomes are volatile is to say that families are experiencing more up-and-down movement of their incomes over time. The standard way we talk about our economy is in terms of static measures like inequality or average wages or median earnings. But volatility tells us whether the American family income stock, if you will, is more or less risky than it used to be. I have a number of different ways of looking at this. The most intuitive measure is the probability that a family, or an individual, will experience a large drop in income. In the early 1970s, the chance of an average working-age individual experiencing a drop in family income of 50 percent or greater in a given year was around 7 percent. By the early 2000s, the chance for an average individual experiencing a drop of 50 percent or greater had increased to around 17 percent.

CW: What is behind this greater volatility? What is it in the economy that makes people more subject to either big gains or big losses year to year?

hacker: There are a number of big factors at work. First, our job market has changed in ways that increase the probability of large income drops. We know that our economy produces huge turbulence; 57 million jobs are created each year and 54 million jobs end each year. Of those 54 million that end, about 20 million represent involuntary job losses, and we know that about a third of those involuntary job losses result in people having lower incomes over the next 10 years.

CW: This is a secular change over time, right? We all know that the unemployment rate rises and falls along with the business cycle. You’re suggesting that a certain rate of job loss has become a constant feature of the economy, and that it isn’t so much subject to cyclical or seasonal swings but is an ongoing process of job replacement.

hacker: That’s right. It used to be that when you lost a job it was relatively easy to get back in the game when the economy picked up. But increasingly we’re seeing structural unemployment, where people are displaced from jobs and have to retool their skills or shift lines of work or go out on their own. The work of [Princeton economist] Henry Farber shows that job-loss rates, defined as involuntary separation from employment over a three-year period, are as high today as they were during the deep recession of the early 1980s, when the unemployment rate was 10 percent, or twice as high as it is now. We see this trend also in the increase in long-term unemployment, which is quite striking. The average duration of unemployment has risen in every recession for the last 50 years, and in the most recent recession we saw the most stubborn problem of long-term joblessness that we’ve ever seen, with more professional and educated workers likely to experience long-term joblessness. The other place where we see this trend is in the slow job growth in this economy, not just in Massachusetts but nationwide. Indeed, Katherine Bradbury of the Federal Reserve Bank of Boston has calculated that, if we had seen increases in labor force participation similar to previous [economic recoveries], in 2005 there would have been as many as 5 million more workers in our economy overall, and if those workers had been actively seeking work but not employed that would mean an unemployment rate of around 8.7 percent, rather than 5 percent, which is what it was. I’m not the first person to say this, but the unemployment rate is a pretty limited measure of the instability of our job market.

CW: As you see it, this rise in risk associated with jobs and income comes along just as elements of the uniquely American form of the social safety net are coming apart. In an earlier book (The Divided Welfare State), you argued that the US welfare state is as large as that of most Scandinavian and other European social democracies, but that it has the unusual feature of being divided between the public and private sectors, with employers providing some of the benefits people elsewhere get from government. At this point, you also see the very notion of social insurance, the idea of the broad sharing of economic risk by all, as under attack by a so-called Personal Responsibility Crusade led by conservative ideologues. But hasn’t this crusade already shown the limits of its appeal? The talk of privatizing Social Security went nowhere, and Medicare is expanding rather than contracting—now covering, however controversially, prescription drugs. Entitlement has become a dirty word in political discourse, but aren’t these forms of social insurance as sacrosanct as ever?

hacker: I certainly think we’ve seen the real limits of conservative attacks on social insurance when it comes to Medicare and Social Security, the two most popular social programs in the United States. But we shouldn’t miss the larger ways in which the conservative attacks on insurance have both reshaped our debate and reshaped public policies largely beneath the radar screen. A good example of this is the erosion of unemployment insurance. The mid 1970s was a peak in the coverage and generosity of unemployment insurance and it’s eroded quite significantly since, with a little bit of an increase in both coverage and generosity in recent years. Only about one-third of unemployed workers receive any unemployment benefits. One of the main reasons why unemployment insurance has eroded is that there’s been very little attention to it or support for it at the federal level. The broader argument I want to make is that it’s the failure of government leaders to think creatively and strenuously about how to reconfigure the social contract that really shows the strength of conservative ideology and political strategy. We have seen a dramatic erosion of employer provision of social benefits, yet we’ve largely seen our national government pull back or fail to step in.

We can't 'count on corporate America' for old-age benefits.

CW: Certainly we have seen some erosion on the employer side of the social insurance equation. But I wonder if that hasn’t been as much a matter of economic necessity as an off-loading of risk by greedy corporations. What’s happened to traditional pensions is one of your key examples. They seem to be disappearing in part because they’re proving untenable. They were predicated on the 1950s notion that the American economy would continue to be dominated by large, stable corporations that would be able to support workers in their old age. But these corporations have come under competitive pressure from global competition and technological change. One of your examples is Eastman Kodak. We in Massachusetts had our own photographic example in Polaroid, a generous, paternalistic employer that ultimately went belly up. Many retirees ended up paying the price for that. Isn’t it simply the case that, in today’s economy, we can’t really count on corporate America to take care of us in our old age?

hacker: It is the case that we can no longer count on corporate America to be as committed to the provision of broad-based benefits as it once was. And I do think that this is largely a response to changes in our economy. But I don’t think this is to say that there aren’t ways in which we could respond to these shifts that would provide people with a stronger foundation of security in a more globalized and competitive economic environment. We are a much richer society than we used to be. Our corporations, while experiencing much more turbulence than they used to, are envied throughout the world for their products and innovation. I don’t think it’s realistic to expect that employers are going to reconstruct the mini-welfare states of old, but given how much we spend as a nation on social benefits, especially health care, and given how strong an economy we have overall, I think it’s completely realistic to expect that we could create a new social bargain that included employers, individuals, and government and that ensured that the overall prosperity of our economy and dynamism of our economy produced real gains and security for middle-class Americans.

CW: You treat the conversion from traditional pensions to 401(k)s as a sign of the shift in providing for retirement from a company-sponsored plan that took care of you for as long as you lived, to a savings plan that depends largely on the employee providing for their own retirement savings. But you also see 401(k)s, with some changes, as possibly being part of the solution.

hacker: Absolutely right. What is wrong with 401(k)s is not that they provide greater autonomy to individuals to plan for their own retirement, because I think that we’re going to have to move away from an exclusive reliance on employers as the means of obtaining valued benefits. What is wrong with 401(k)s is that they don’t give people the incentives or the tools to confidently plan for their retirement and ensure that they have a guaranteed income in retirement. I argue that we should move to a system in which Americans can invest in a 401(k)–style account regardless of whether their employers see it as in their interest to offer one, and also a system in which 401(k)s are completely portable from job to job, so that no worker is given a lump-sum payment when they leave a job. A majority of those payments are not rolled over into new retirement savings accounts; the majority of money is, but the majority of accounts aren’t. And I argue that we need to reorganize the tax breaks for 401(k)s to increase the incentives for middle-income and lower-income Americans to save for retirement. Perhaps the most innovative and potentially controversial change I propose is a measure to ensure that every American can turn their 401(k) account into a guaranteed income in retirement, a so-called annuity, and the way I do that is by essentially allowing government to provide low-cost annuities—and indeed requiring that individuals turn their 401(k)s into annuities if they don’t have sufficient assets [to guard against investment risk in retirement]. A shocking number of older Americans are deeply in debt; bankruptcy rates are actually rising among the aged faster than among any other group. One of the reasons is that, as more and more of this responsibility is shifted onto workers, more and more workers are finding themselves managing their retirement accounts well into retirement, often depleting those accounts very early in retirement. What an annuity or any other kind of guaranteed retirement benefit does is ensure that, whatever happens, you have a basic level of protection. That’s what we should be striving for, universal 401(k)s that can easily be converted into a guaranteed benefit in old age.

CW: Let me turn to the other big benefit that’s generally delivered primarily through employment rather than government, and that’s health coverage. Isn’t the private health insurance system that we’ve got, largely operating through employers, partly a victim of its own success? This was a benefit introduced as a way around wage and price controls, a way to increase compensation without raising wages during World War II, but it also was for many years a relatively cheap benefit. It had tax advantages for employers, and medical care just was not that expensive. Today, health insurance covers a great deal more than it used to, everything from routine check-ups to prescription drugs, and the cost of medical care is rising precipitously. Employers, who pay most of these premiums, are at their wits’ end. Don’t they need to do something?

Personal responsibility is 'a good thing' but not a cure-all.

hacker: Yes, we need to do something—that’s the way I would put it. I think employers can do some things on their own, but in point of fact employers are largely price takers rather than price makers in the market. They’re responding to the larger changes in medical care. They don’t have the ability to effectively manage those costs on their own. Employers are in serious trouble, and a program that would provide broader coverage and reduce costs would be an important step toward helping employers deal with the strains they’re facing. American medical care is so costly that employers can be paying much more than they used to and individuals can be paying much more as well. In fact, between 1996-97 and 2001-02, according to the Medical Expenditure Panel Survey, the share of families that were paying more than 10 percent of their income on out-of-pocket medical costs increased from 8 percent to 11 percent—18 percent if you include premiums. So individuals are more and more burdened by these costs, even as employers are. A solution that would provide broader coverage as a step toward restraining costs would be beneficial to both employers and government. The step that employers may take that I think is worrisome is that they may shift toward providing individuals with high-deductible Health Savings Account–style plans. My worry there is that not only will this leave some Americans inadequately protected against medical costs, but it could also lead to continued unraveling of the private employment-based system, because lower-cost patients are the most likely to take out health savings accounts. Absent concerted government action, either at the federal level or at the state level, we’re going to see a continued erosion of employers’ ability and willingness to finance generous health benefits. I don’t think employers should be the ones who decide whether people have health benefits, and I don’t think that employers today really want to be the ones fully on the hook for these costs. The real challenge is finding a solution that will help employers manage these costs and provide Americans with the health security they desire while ensuring that we maintain a broad risk pool in health insurance. The best way to do that would be to expand Medicare to cover those Americans who work in firms that are now heavily burdened by health costs or don’t provide coverage at all, while letting higher-income workers and their employers remain in the private insurance system.

CW: Here in Massachusetts we’re embarking on a little experiment of our own in expanding access to health insurance. I wonder what you make of our new health insurance law. It’s based, in large measure, on that notion of personal responsibility. Everyone will be required to obtain health coverage, whether from an employer or on their own. But the state is required to make sure that there are quality health insurance policies available and affordable for people at all levels of the income scale, with premiums subsidized for everyone earning up to 300 percent of the poverty level. Through this individual mandate no one will have the option of staying out of the risk pool just because they’re young and healthy, and no one who is unable to afford health insurance will need to have their care subsidized by those who do have it. Isn’t this a way to use that Personal Responsibility Crusade to spread risk as well as benefits?

hacker: I should be clear that I think personal responsibility is generally a good thing. My critique of the Personal Responsibility Crusade is really a complaint about those who say that personal responsibility alone—greater thrift in savings and individual self-reliance by Americans—will solve the severe problems of security that we face today. And the Massachusetts model, whatever its weaknesses, is not based on the idea of personal responsibility alone. You might say, with apologies to Alexis de Tocqueville [who wrote that “Americans believe in self-interest rightly understood”], that it’s based on the idea of personal responsibility rightly understood. It requires that individuals have coverage but then it puts in place, as you said, a series of measures that are aimed to ensure broad risk pooling and the availability of low-cost health plans, particularly for lower-wage workers. This is the aspiration. Whether that aspiration will be realized in Massachusetts remains to be seen. I think it’s an innovative model but not one whose full effects we can judge yet, certainly, and also not one that can be easily exported to many other states. Massachusetts [already] had a substantially lower share of the population uninsured, compared with states like California and Texas and with the nation as a whole. Massachusetts also had strikingly higher rates of employer coverage than in other states: Almost 70 percent of non-elderly Massachusetts residents have employer-based coverage, compared with about 63 percent nationwide. And only about 29 percent of Massachusetts residents are below 250 percent of the federal poverty line, compared with almost 40 percent nationwide. So I think that this approach—

CW: Would be a more expensive proposition elsewhere.

'We will be facing more risk than our parents did.'

hacker: Yes, this approach would be much more expensive in other states than it will likely prove to be in Massachusetts. But the really serious question is: Will we be able to provide health security over the long term with an approach like this? The Massachusetts experiment is based on the idea that the government will subsidize private health insurance that people can obtain through a new statewide risk pool. And while I think that the risk-pooling aspect is extremely innovative and promising, I worry about the affordability of coverage over the long term. The subsidies mean that, if there are no measures to rein in costs, then the state could be on the hook, if you will, for rapidly increasing premiums down the road. And Massachusetts has the highest health costs in the nation, so this is not an idle concern. I believe that responsibility should be emphasized in any proposal for universal health insurance—the responsibility of individuals to obtain coverage and the responsibility of individuals to take care of themselves and use resources judiciously. But with that responsibility comes an obligation on the part of government to ensure that people have access to affordable coverage and that [the plan] pools risk broadly. My greatest fear is that a responsibility-oriented agenda will lead toward a further fragmentation of our insurance system, where individuals are increasingly on their own. That’s why I argue that we should try to shore up employment-based health insurance where it works well and then create a new public insurance pool for the rest of the population, precisely because that has the best chance of preserving a broad risk pool in American health insurance.

CW: Let’s turn to solutions, on both the personal level and the policy level. It seems, going forward, that achieving and maintaining a middle-class standard of living is going to involve managing more risk. What can individuals do to protect themselves from the vicissitudes of the modern economy? And what can their employers do, even if they can’t play the sort of paternalistic role of corporations past?

hacker: There will be no perfect solution to these problems, but a movement toward greater security will require a new social contract that entails new responsibilities and obligations for individuals, employers, and government. It will be a team effort, if you will. For individuals, there’s no question that we will be facing more risk than our parents did, or than we did in the past. When I speak about the book, I often point out that if you take a roomful of average people, one in five people in that room will, in the next year, start a job, change a job, lose a job, or all three of those. And I also point out that the chance that an individual will experience a large drop in family income has increased dramatically as well. So it’s important not to see the possibility of large economic losses as something that happens to other people. It’s something that can happen to all of us. And if that is the case, we have to plan around these worst-case scenarios as best we can. [Research shows that] we are all highly loss-averse—that is, we dislike losing things far more than we take pleasure in gaining new things. But we can turn that loss aversion to our own advantage by creating what I call a sunny day fund. Whenever we have unexpected gains, put that money away in a special account to use for dealing with economic shocks. I call it a sunny day fund, rather than a rainy day fund, because the idea is to use the upside to protect against the downside.

The other thing I stress is that a lot of the work-related benefits we get that rely on us putting aside money—say in a 401(k) or a flexible spending account—are a nice way of planning for our immediate future as well as for our retirement. If you think about it, when you [regularly contribute to] a 401(k), you’re basically building some flexibility into your budget. If, for example, you find you need additional income in the short term you can always stop putting money away for the long term. And, of course, in the worst-case scenario, almost all of these accounts can be tapped early, with a penalty, and that’s something you should do if the alternative is much worse than having a slightly lower income in retirement.

Finally, I put a lot of emphasis in the book on insurance, and although I talk mostly about public insurance, people should also think about their private insurance options. It’s amazing how many different kinds of insurance most of us have—homeowner’s insurance, auto insurance, health insurance, and on and on. But there are two types of insurance that are important for families that many Americans fail to consider carefully enough. One is, of course, life insurance. Term life insurance is probably the best deal in insurance and something you should have if you have a family. Second is disability insurance, which can be a relatively inexpensive benefit, especially when purchased through employment. But it’s extremely helpful, particularly for those people who fall between the cracks of our federal disability insurance program.

That leads to the last recommendation. Many people aren’t aware that they’re eligible for public insurance. I may be burned at a conservative stake for suggesting this, but I don’t think there’s any shame for middle-class Americans to take advantage of public insurance options when they’re available. If, for example, you’re an older worker displaced by trade, you’re eligible for trade adjustment assistance and wage insurance benefits. Very few workers eligible for those benefits take them up. If you’re a lower-middle-income worker, you may be eligible in some states for Medicaid coverage or coverage for your children through the State Children’s Health Insurance Program. Again, millions of people eligible for these programs don’t take them up. It’s important enough for your family to have some kind of health insurance coverage for you to overcome the reluctance you might have to taking public benefits.

Government can 'spread risks across generations.'

You asked what role there is for employers. I don’t believe that we can just let corporate America shift all the obligations onto government. In some areas that’s what corporations want more than anything else. They would like to drop retiree health benefits and have government pick up the tab. They would be quite happy if they never had to provide another defined-benefit pension payment in their existence. But I think it’s important to make sure that corporations honor the obligations they’ve made in the past, and that when those obligations are not consistent with the economic viability of firms, the government works out a fair agreement that protects the security of workers. The other side of it, going forward, is that any proposal for universal health insurance—or expanded private retirement benefits, or maternity benefits through state unemployment insurance programs, or improved unemployment insurance benefits—will have to require some contributions from employers. And employers should be provided with the assurance that the contributions they make will remain modest and won’t be as risky as the current private benefit contributions that they’re making.

CW: Finally, what role is there for government and public policy? In particular, are solutions to economic uncertainty for individuals the kind of thing that only the federal government can play a role in, or are there things that could and should be done on the state level?

hacker: I think the role for governments, including state governments, is huge, because, as David Moss of Harvard Business School puts it, government is the ultimate risk manager. That’s because government has unique abilities that the private sector doesn’t have. Government can require participation in programs of risk protection. Government can pool risks very broadly. Government can borrow against the future. It can spread risks across generations. It can even try to reduce those risks through far-sighted economic management and planning. If there’s any message that comes out of this book, it’s that we should not let our understandable and reasonable skepticism toward government blind us to the ability of well-designed and far-sighted government policies to make Americans dramatically better off when it comes to economic risk.

We see that most clearly in the very creation of the middle class in the United States with the GI Bill and the creation of a broad-based subsidized mortgage system after World War II. With the investment in middle-class families and their security, government really changed the face of the nation and created a prosperous economy that also encouraged Americans to be civically active and to feel connected to each other and to the nation as a whole. In an era in which we are facing both more economic risk and more environmental and security risks in general, government is going to have to play a powerful and important role in helping Americans look toward the future with confidence rather than fear. State governments will be on the front lines in many of these decisions. The states have run a number of programs that provide economic security, including unemployment insurance and workers’ compensation and Medicaid. I expect that they will continue to have an important role in providing those benefits. Many states could vastly improve their unemployment insurance benefits and in doing so make the business climate in the state actually stronger. Unemployment insurance is, in many states, based on an extremely regressive and cramped tax structure that means that low-wage employers and their workers are facing substantial charges to pay for unemployment insurance, even though those workers and their employers are the least likely to benefit from unemployment insurance. The other area where states could make real headway is in thinking about how to create new insurance markets within states, such as through a clearinghouse that would provide individuals with information and ratings to be able to judge private insurance, or through re-insurance pools that would allow insurers to offer new forms of protection that are more risky than the ones they now have.

However, there are areas where federal protection is essential and unavoidable. Health care is truly a national problem, and although I think the federal government could encourage the states to come up with their own solutions within a national framework, we won’t deal with this problem until there’s a serious commitment at the national level to provide broad funding and lay out a far-sighted vision that can then be implemented either at the federal or state level. I also think that the federal government is ultimately going to be the place where retirement security is insured. Old age insurance, which is now known as Social Security, was the only federal program created by the Social Security Act, in part because the designers of the program recognized that, in an economy where people moved from state to state, planning for something as vital as retirement required a national solution. Our federal tax code spends over $100 billion a year to subsidize private retirement spending. The only way we’re going to provide a secure retirement guarantee to workers through the private sector is redirecting those subsidies and attaching new requirements to them that ensure that workers have access to a retirement-savings vehicle regardless of whether the employer offers them and a retirement-savings vehicle they can transform into a guaranteed income when they retire.

Finally, I’ve developed a proposal that I call universal insurance, which is essentially a stop-loss insurance program for Americans, allowing them to insure themselves against catastrophic drops in their incomes or catastrophic health costs. This, again, should be a federal effort because our economy as a whole has become more uncertain nationwide due to the whims of global economic change, the nationwide shift from manufacturing to services, and other broad-based changes in our economy. There’s no reason a citizen of Mississippi shouldn’t have access to the same basic economic protections as a citizen of Massachusetts. We are truly all in this together, and our solutions, our big solutions, should reflect that.

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