Obama Just Proposed Giving Middle-Class Workers Wage Insurance. He Should Have Called for Giving Everyone Free Money.

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US-POLITICS-STATE OF THE UNION
"Who wants free money? Let's see those hands."Photo: SAUL LOEB

Barring an alien invasion or nuclear war, Barack Obama will leave America with a stronger economy than the one he inherited. When the president delivered his first State of the Union address, employers were cutting upward of 700,000 jobs each month, while millions of Americans were entering foreclosure. When he gave his final such address Tuesday night, the unemployment rate was a half-point lower than Mitt Romney had ever promised it could be.

But the Obama economy does have an Achilles heel: the decline of middle-class wages. If you’re having trouble squaring the sunny statistics in the president’s address with the populist rage that’s defined the 2016 campaign, take a look at this chart. Since the recession, wages have declined for the bottom 85 percent of workers, outside of a small bump for those at the very bottom of the pay scale. While there has been considerable job growth in the highest- and lowest-paying occupations, the middle third of the economy has been hollowed out. Last year, a study by Georgetown University’s Center on Education in the Workforce found that there were 900,000 fewer people working middle-wage occupations — jobs with average earnings of between $32,000 and $53,000 — than there were prior to the Great Recession.

After his well-deserved “I saved us from a depression” victory lap, the president did acknowledge the middle-class wage crisis Tuesday night — in fact, said crisis served as the impetus for the speech’s most unorthodox policy proposal.

Obama argued that, as a result of globalization and automation, “workers have less leverage for a raise,” making it “harder for a hardworking family to pull out of poverty.” The president then offered his vision for what the government owes such hard workers (emphasis mine):

Say a hardworking American loses his job  —  we shouldn’t just make sure he can get unemployment insurance; we should make sure that program encourages him to retrain for a business that’s ready to hire him. If that new job doesn’t pay as much, there should be a system of wage insurance in place so that he can still pay his bills.

That last clause sent policy wonks all atwitter. While this isn’t the first time Obama has endorsed some form of wage insurance, his previous proposal restricted the benefit to workers over 50. In Tuesday night’s hypothetical, he seemed to be describing a more universal system — one in which protection against sudden wage declines was guaranteed as a right.

While still obscure in the political arena, wage insurance has been a popular notion in the think-tank world for some time. For liberals who favor free trade, the policy offers a means of protecting workers against the economic displacements inherent to a globalized economy. And, by solving for one of the alleged moral hazards of unemployment insurance, the measure has ostensible appeal to conservatives. At present, a person on unemployment may have incentive to decline a job that pays less than their last post: Freely given insurance payments are preferable to earned wages, if the latter aren’t more lucrative than the former. Wage insurance eliminates this incentive to stay unemployed, by ensuring that a worker’s new job will provide better compensation than remaining on the dole.

Gary Burtless of the Brookings Institute offers a thumbnail sketch of how this might work in practice: “Assume the program insured workers for one-half of their earnings loss. An experienced laid-off worker who previously earned $800 a week who lands a new job paying only $400 would receive a regular insurance check for $200 – lifting his income to $600 a week.”

Under Burtless’s system, a worker would only be eligible to receive payments for two years after being displaced, and those payments would only kick in after they accepted a new position, allowing a worker to maximize his receipt of social welfare by minimizing his period of unemployment. 

In an America where incremental expansions of the social-welfare state could be achieved through bipartisan compromise, wage insurance would be an idea worth spotlighting. But we live in an America where it’s politically untenable for Paul Ryan to applaud the president’s plan for curing cancer, let alone to make a deal with that Kenyan Marxist to expand entitlements.

And wage insurance won’t actually solve the middle-class wage crisis, which, in Obama’s own narrative, is caused by structural trends that appear persistent. As Burtless notes, wage insurance is only a temporary cushion against downward mobility — one that does absolutely nothing for workers who have already fallen into low-wage work, or who never made it beyond the bottom of the income scale.

If Obama wanted to signal-boost a policy that can’t pass until the second term of the Warren presidency, he might as well have picked one that would actually solve for his economy’s greatest weakness — a policy like the universal basic income.

Like wage insurance, the universal basic income, or “UBI” is a think-tank favorite with (strictly theoretical) bipartisan appeal. Championed on the left by Francis Fox Piven and economist John Kenneth Galbraith, and on the libertarian right by Milton Friedman and Charles Murray, the UBI is founded on the radical idea that the best way to end poverty is to give people money. More specifically, the UBI would establish a guaranteed minimum income that all citizens would receive just for staying alive. The universality of the program is critical: In contrast with traditional welfare programs, the UBI would create no perverse incentives to remain in a low-income bracket, as everyone from Donald Trump to the immigrant who cleans his toilet would receive the same minimum payment. The program’s universal nature also frees the impoverished from having to apply for benefits, and the government from having to screen applicants for eligibility.

In the program’s libertarian iteration, the UBI would replace all other forms of welfare, allowing the government to lay off thousands of bureaucrats. In the left-wing model, UBI would supplement the existing welfare state.

Beyond abolishing poverty, the UBI would directly address the lack of “leverage” that Obama rightly named as the source of declining wages. Once every American has their own independent source of income, employers will have less power over even the most low-income, “low-skill” workers. To induce someone to work full-time flipping burgers instead of supplementing their UBI with the occasional Uber shift or TaskRabbit gig, McDonald’s will have to put some money and benefits on the table. And when service-sector workers have more disposable income, they can spend more on goods and services, which boosts aggregate demand and stimulates economic growth.

Obviously, there are devils in these details. How high the minimum income could be without creating a crisis of inflation, debt, or voluntary unemployment is a source of fierce debate. And, okay, the president probably wouldn’t have been able to plug the UBI as breezily as he did wage insurance: “Say a hardworking American loses his job  —  we should just give everyone free money … 

Still, the president framed his speech as an idealistic vision for America’s long-term future. And his address included ambitions nearly as far-fetched as “government handouts for all” — like the total abolition of gerrymandering and comprehensive campaign finance reform. If you’re going to lay out your big-picture vision of 21st-century progressive priorities, shouldn’t you at least offer plausible solutions to the status quo’s greatest problems? If not UBI, then what? If not now, then when?