If comments can have titles, my title would be, « Three Cheers for Automatic Stabilizers: Where Goes Detroit Goes the Rest of the Nation » because I’m going to talk about the big part of the stimulus package that’s being ignored, and give you four recommendations for the stimulus package that go beyond tax cuts for the income taxes, and beyond federal spending in terms of roads and bridges and other kinds of infrastructure.
The financial crisis reveals the importance of income streams that are not related to labor or financial markets. The financial crisis reveals the importance of income streams that are not related to labor or financial markets. Not only is it important to get money into pockets of families that aren’t related to finance markets and labor markets but it’s also a way to get us out of the recession. We redouble our appreciations for government deficits, and this gives us a chance to rethink those sneaky aspects of our federal architecture, our fiscal policy architecture, that actually deliver stimulus and meet the criteria that we want from all of our fiscal stimulus programs: these programs have to be timely, targeted and temporary.
« We should focus on health care as a stimulus package, not just on roads and bridges or the green economy."
The part of the fiscal policy I’m talking about is called automatic stabilizers. These are programs and systems that, as soon as a recession hits, inject money into the economy. The most obvious one comes from the progressive income tax structure: since in recession people are losing income, they fall down the ladder into lower and lower tax breaks, and we get an instant tax cut that does not require an act of Congress. Usually we stop there, but right now, during this unusual time, we have to go beyond that usual thinking.
The other automatic stabilizer is, of course, unemployment benefits. Unemployment benefits are triggered by a recession they are paid out the week a claim is made, so it’s timely; if you extend it or increase it, it becomes targeted to those families that need the money the most; and, from a macroeconomic point of view, it actually is targeted to the areas of the country that need it the most.
But we’re ignoring all sorts of other automatic stabilizers that we need now. The first one is Social Security. Social Security works just like unemployment benefits. Many people retire or accelerate their retirement plans in a recession, or find a yet different way to leave the labor market: either through disability - even in cases where it is not required; in all OECD countries disability works as a de facto unemployment insurance system - or through collecting Social Security early benefits if they can.
Another, indirect but important part of our automatic stabilizer infrastructure comes through fiscal policy. It comes through the collective bargaining agreements or labor agreements, and it comes from the architecture of our employee benefits and wage structure. Defined benefit plans and traditional pension plans work as automatic stabilizers. Because people can retire early from a shrinking employer or shrinking industry, they can often retire much earlier than Social Security retirement age, which only starts at 62. You have automobile industry workers, coal mine workers and steel workers retiring at 55. We have a whole history of industrial policy that has been implemented through the defined benefits system. So we have all these early retirees collecting their traditional benefits, and those benefits are prefunded, they’re a guaranteed payout; so they’re not related to the ups and downs of the financial market. We actually have a nation that is in much better shape thanks to traditional pensions, Social Security early retirement benefits and disability payments. And you didn’t appreciate that, did you? That’s because they’re very underappreciated. But they’re vital.
After 30 years of a shift away from these traditional benefits to a defined contribution or 401-K-type world - our federal tax system has given more and more indulgence to the 401-K system, saying to employers and government: « you no longer take the risk of retire- ment or layoffs; we’re going to give that to the worker » - we actually transformed an automatic stabilizer into a destabilizer. We see it in the newspapers right now: young people are having a hard time get- ting jobs because the older people are fearful, panicked about the strength of their own 401-K plans, and are hanging onto their jobs. So just when you want the elderly to withdraw from the labor market (or not to come back to it), you have them clinging on to the labor market. That’s precisely the reverse of the behavior that you want from an automatic stabilizer.
Over the last 10 recessions we’ve seen the elderly withdraw from the labor market, especially men. But in this last recession: we’re actually seeing a big increase in labor force participation of the elderly, and that comes from the lack of secure pensions.
Let me take the example of Detroit. If it wasn’t for the automatic stabilizers that we have in Detroit, the city would be much worse off. And believe me, Detroit and many other parts of the country are much worse off than any federal statistics, any national statistics that Mr. Sinai and others have invoked. The unemployment rate is at 6.5 here in New York; in many other parts of the country, like Detroit, it’s three times that amount. The situation would be even worse if it wasn’t for Social Security. The work-force in Detroit is 2.8 million in the metro area of the city. Seventy thousand former workers are getting Social Security benefits. Twenty-five percent of the work-force is actually getting money from former attachment to the labor force - and they got a 5.4 increase in their « wages », as Social Security went up last month 5.4 percent. It went up while every other source of income went down.
Negotiated pensions, defined benefit pensions are a very important source of income for that region. Some twenty years ago, thirty percent of the workers in Detroit were in unions. They got defined benefit plans, not 401-Ks. Those negotiated benefits are paying their dues now. The incomes in that area are going up.
Equally important, and this leads to my solutions, is how the health insurance industry in constructed. In Michigan, it has been built up by the health insurance benefits contracted at work. But the health insurance model varies from region to region: some areas of the country have more geanerous health insurance plans than others. So if ex-auto workers and their families are getting new jobs in Detroit - there are all sorts of programs to turn tool and dye-makers into nurses - it is because there was an auto industry and rich benefit plans. That contour gives you a flavor for why I’m going to propose what I’m going to propose.
Here is what I propose: instead of just focusing on cutting income tax rates, we actually should look at how the tax structure can choose winners and losers among industries and pump money into the economy. That’s the hidden aspect of our tax system, the tax expenditure side. Professor Stiglitz alluded to the housing industry being promoted by the tax deduction. He mentioned that the tax deduction might be a very poor way to expand home ownership and to provide subsidies for home ownership in this country, because you’re actually delivering the highest subsidy to the people who need it the least. I have done the same thing for the 401-K industry. It now comes through a tax deduction, not a tax credit. I’m attacked today in The Wall Street Journal op-ed piece for precisely that suggestion: that we turn the deduction into a credit; Professor Stiglitz, let this be a warning to you what might happen to you also.
I also agree with Professor Galbraith that we should immediately suspend the FICA tax for employers and employees, but with an important proviso: rather than suspending it, we have the govern- ment pay it, so that the income is still going into the Social Security system. We give relief to employers and lower the cost of hiring - that’s a jobs program if I ever heard one - and we also increase the net take-home pay of lower-income workers the most - that’s a stimulus program if I ever heard it. In other words, I would suggest we focus away from that income tax and talk more about the payroll tax.
The third proposal I have is to raise Social Security benefits. A way that would really help employers hobble through this period of time is to lower the Medicare age from 65 to 55. In one stroke, a lots of elderly people clinging onto their jobs will suddenly be able to retire; at the same time you lower the health insurance costs of many employers all over the country, especially in the manufacturing regions where they actually pay health insurance.
The last proposal I have buys my ticket into a conference on peace and security: we focus on health care as a stimulus package, not just on roads and bridges or the green economy. Since investing in the health care industry is also a way to create jobs. But we can’t have national health insurance or universal health insurance without finding a way to finance them. We can’t just give health insurance to everybody and watch the costs go up; we have to do something about the infrastructure of health care delivery.
As it is, we’ve already done that with the Veterans Administration. It’s becoming the best delivery system for health care, especially for elderly people, in this country. It has automated its medical records and created a distribution of doctors and nurse practitioners that provides the best health care for the least cost. Now most of us in fee-for-service have to go to specialists to get our good advice. The best way to deliver health care is to do it through internists or general family practitioners and that’s what the Veterans Administration has developed.
So here’s my proposal: Expand the Veterans Administration with the Iraq war budget, build new clinics everywhere in this coun- try, and then allow private sector groups to buy into the Veterans Administration. I am a trustee of the largest health care plan on the planet if it gets implemented: for retirees from GM, Ford and Chrysler. Our members have retired mainly in the metro area. We have one of the best, newest Veterans facilities in the country in Detroit. If our health care trust could just buy into the Veterans Administration, the negotiations that are happening now in Washington over the fate of the big Detroit auto firms could actually be moved along very substantially; because a big part of the cash flow problems of GM and Ford and Chrysler are caused by the health care obligations. Let the government help reduce that obligation in a creative way - and a fast one as well; we could do it in a couple of weeks.
To summarize: we have to rethink the way that we can do fiscal stimulus, and do it through the payroll tax and tax expenditure, making them much more progressive. That will immediately raise consumer demand. And we have to consider national health insurance as an infrastructure and jobs creating program.