Lane Kenworthy, The Good Society
November 2022

Our historical experience and those of other rich democratic countries suggest that more expansive and generous public insurance programs and employment-promoting public services would help in the United States, and they would do so without sacrificing economic growth, individual freedom, community, or other desirable outcomes.¹ These programs function as a safety net, a floor, and a springboard: they provide economic security, ensure a decent living standard for the least well-off, and enhance opportunity. Properly formulated, they can also serve as an escalator, ensuring rising living standards over time.

Here’s what America needs to add or improve: health insurance, paid parental leave, a child allowance, unemployment insurance and wage insurance, sickness insurance, disability assistance, social assistance, criminal justice, pensions, eldercare, housing assistance, early education, apprenticeships, college education, affirmative action, full employment, minimum wages, the Earned Income Tax Credit, profit sharing, infrastructure and public spaces, and paid vacation days and holidays. After outlining the details for each of these, I turn to how much it will cost and how to pay for it.

Skip to:

• Health insurance
• Paid parental leave
• Child allowance
• Unemployment insurance and wage insurance
• Sickness insurance
• Disability assistance
• Social assistance
• Criminal justice
• Pensions
• Eldercare
• Housing assistance
• Early education
• K-12 education
• Apprenticeships
• College education
• Affirmative action
• Full employment
• Minimum wage
• Earned Income Tax Credit
• Profit sharing
• Infrastructure and public spaces
• Paid vacation days and holidays
• How much will it cost?
• How to pay for it
• A partial but valuable fix

HEALTH INSURANCE

In a rich nation such as the United States, everyone should have health insurance. We also should do better at controlling healthcare costs; while we won’t go bankrupt spending 18% of our GDP on health, or even more, the fact that every other rich democratic country achieves equivalent or better health outcomes while spending far less suggests that we have considerable room for improvement.² How can we achieve these two goals?

The most straightforward path would be to expand coverage through Medicare, Medicaid, and a “public option”: lower the age at which Americans can get Medicare, raise the income limit for Medicaid eligibility, and add a Medicare-like program that individuals and families can purchase on health insurance exchanges and that firms can purchase for their employees. Or simply allow any employer or individual to buy into Medicaid or Medicare, with subsidies for those who need them. Eventually, a large portion of the population would be covered by these public programs. This would achieve universal coverage, and the government, as the dominant payer, would be in a strong position to control healthcare costs.³

The experience of other affluent democratic nations suggests that this type of arrangement can function quite effectively. In all of these countries, every person has health insurance, and over the past half century life expectancy has increased more than in the US despite a far smaller rise in healthcare expenditures.

Such a system wouldn’t eliminate private insurers. There would be a market for insurance plans better than the one(s) offered by the government. And employers and individuals might choose to supplement the basic health insurance plan with an additional one, as many elderly Americans who have Medicare currently do.

Over time, government has gradually increased its role in promoting access to health insurance in the United States. The Veterans Administration (VA) was created in 1865 and significantly reformed in 1930 and 1994. In the 1940s and 1950s the federal government created and expanded a tax deduction for firms that contribute to health insurance for their employees. Medicare was created in 1965 and extended to cover prescription drugs in 2004. Medicaid too was created in 1965, and the share of the population it covers was expanded in the 1980s, in 1999 with the S-CHIP program, and in 2010 via the Affordable Care Act (ACA). Together, Medicaid and Medicare now cover about 40% of the US population. The 2010 ACA also requires that medium-size and large firms offer health insurance to their employees, it provides subsidies for persons and families with modest incomes, it requires that health insurers allow people to remain on their parents’ plan through age 25, and it forbids insurers from denying insurance to persons with preexisting conditions.

Why not instead expand employer-based insurance? America’s employer-centered health insurance system was a historical accident.⁴ It originated during World War II, when wage controls made it difficult for firms to use higher pay to attract and retain good employees. Some decided to offer health insurance instead. After the war, encouraged by a new tax break, this practice proliferated, and it has continued ever since. But in a society where people switch jobs frequently, it makes little sense for insurance against a potentially major and very costly risk to be tied to one’s employer. Moreover, providing health insurance is expensive for firms, putting them at a disadvantage relative to small firms and foreign competitors. And it likely acts as a brake on wage increases.

Why does employer-based health insurance work well in some other countries, such as Germany and Japan? The reason is that if people quit or lose their job, they are automatically switched into a government (“community”) health insurance plan. And the cost of healthcare is contained, so it’s less of a burden for employers. This happens in part because health insurance firms and funds aren’t for-profit, so they aren’t inserting additional costs into the system, and partly via cost controls set by centralized agreements between insurers and providers, with government stepping in if that fails.⁵

Do Americans like government health insurance? Most say they do. About two-thirds of Americans think Medicare and Medicaid are working well for the groups they serve.⁶ And in 2015, when Gallup asked a representative sample of US adults “Are you satisfied or dissatisfied with how the healthcare system is working for you?,” satisfaction was higher among those getting their health insurance via the military, the Veterans Administration, Medicare, or Medicaid than among those getting it via an employer or purchasing it directly themselves.⁷

Should government not only pay for health insurance and oversee it but also be the provider? That’s how countries such as the United Kingdom, Sweden, Finland, and some others do it, and it tends to work well. Indeed, the UK got top ranking in a recent Commonwealth Fund assessment of healthcare quality in 11 affluent nations.⁸ But these might be isolated examples; there is no systematic evidence to support a conclusion that government provision of healthcare is superior to mixed public and private provision.⁹ In any event, it’s extremely unlikely that the United States will replace its existing array of private for-profit and nonprofit medical providers with a fully government-run physician and hospital system.

If the United States were to move to a single-payer healthcare system, how much would it cost? And where would the money come from? In 2015, the US spent $3.2 trillion, 18% of the country’s GDP, on healthcare. The government’s share is a little less than half of this total. The tax benefit to employers costs about $250 billion, Medicare $650 billion, Medicaid $560 billion, healthcare for veterans $65 billion, and healthcare for current military personnel and their families $40 billion.

Medicare and Medicaid limit the amount they will pay to healthcare providers, and they have relatively low administrative costs. Even though they’ve been covering a growing of the population, the share of GDP spent on these two programs has been rising at about the same pace as the rest of the healthcare system.¹⁰ Their cost will continue to rise going forward, owing partly to population aging and expansion of Medicaid coverage and partly to the general rise in healthcare costs, but the projected increases are fairly small.¹¹

A key obstacle facing proposals for a single-payer system is that taxes would have to increase significantly in order to pay for it. But this isn’t insurmountable. A single-payer system likely would reduce total spending on healthcare. According to one estimate, adding coverage for the roughly 9% of Americans who now lack it and improving coverage for the 35% who currently are underinsured would increase costs by about 10%. But single-payer would reduce overall healthcare costs by approximately 18%: 7% from reduction in administrative costs, 3% from lower pharmaceutical prices, 3% from paying Medicare rates to healthcare providers, and 5% from improved service delivery (reduction in unnecessary services, inefficiently delivered services, missed prevention opportunities, and fraud).¹² If correct, this estimate suggests a single-payer healthcare system would cost roughly 90% of the current spending total, or about 16% of GDP. That means government expenditures on health would rise by about 8% of GDP.

Of current health spending, 45% is by government (federal, state, and local). The other 55% is private: 27% by households, 20% by private firms, and 8% by other private sources.¹³ The cost of a single-payer system would need to come from taxes that replace these private expenditures. There are many possibilities, from a payroll tax paid by employers to an income tax and/or consumption tax on households. While the dollar figure will scare some Americans, such a system won’t mean additional payments for healthcare; it will simply mean a different form of payment — public instead of private.

So is single-payer the solution for the United States? In the long run, quite possibly yes. In the short run, it’s probably more sensible to focus on making health insurance universal and making sure all Americans have insurance that is minimally adequate. The most straightforward way to do this is by expanding access to Medicaid and/or Medicare, in one or more of the ways I described earlier. According to one estimate, this would increase government healthcare expenditures by approximately 10%, or about 1.75% of GDP.¹⁴

PAID PARENTAL LEAVE

A 1993 law, the Family and Medical Leave Act, gives employees the right to 12 weeks of job-protected leave for the birth of a child or to care for a sick relative. But this only applies to companies with 50 or more employees. And there is no requirement that the leave be paid. Only 14% of American workers have employer-provided paid family leave.¹⁵ Consequently, many Americans in middle- and low-income households take little time off. That’s unfortunate, because outcomes for children tend to be best when they are with their parent(s) during the first year of life.¹⁶

In Sweden, parents of a newborn child have 13 months of paid leave, with the benefit level set at approximately 80% of earnings. Two of those months are “use it or lose it” for the father; if he doesn’t use them, the couple gets eleven months instead of thirteen. In addition, parents can take four months off per year to care for a sick child up to age twelve, paid at the same level as parental leave.¹⁷ Sweden’s policy is a generous one, but not exceptionally so by the standards of other rich nations.¹⁸

The United States is the only affluent democratic country without a paid parental leave program. A few states — California, New Jersey, New York, and Rhode Island — along with Washington DC have enacted small-scale programs. Results from California’s, which has been in place since 2004, are encouraging.¹⁹

A new federal parental leave program for the US should provide a minimum of six months of paid leave per child, with an incentive for the father to take a portion of the leave. The leave should be job-protected. The replacement rate should be at least 50%. All workers meeting minimum work history requirements, including those in small firms and self-employed persons, should be eligible.²⁰

Sweden’s policy costs about 0.75% of GDP per year.²¹ With a slightly less generous version and our larger per capita GDP, an American counterpart might cost around 0.5% a year.²²

CHILD ALLOWANCE

Many things affect children’s well-being and life chances. Money is one of them.²³ An increase in family income of a mere $3,000 during a person’s first five years of life is associated with nearly 20% higher earnings later in life.²⁴

Most other affluent countries have a universal “child benefit” or “child allowance.” In Canada, for instance, a family with two children under age six and an income below $30,000 receives an allowance of $10,000 (in US dollars). The amount is less for families with older children and/or higher income.²⁵

The United States has a weaker version, the Child Tax Credit, which provides a maximum of $2,000 a year per child.²⁶ Families that don’t file a federal income tax return, or that have no earnings, don’t qualify. As a result, low-income households benefit far less than middle-income households.²⁷

A team of researchers led by Luke Shaefer has offered a sensible proposal for improving this.²⁸ The Child Tax Credit would be replaced by a child allowance paid to all families with children. The amount would be $3,600 per year for younger children and $3,000 for older ones. It would be universal and unconditional — not contingent on employment or low income or low assets.²⁹ The money would be taxable, though that wouldn’t affect its level for many households with low or lower-middle income. According to calculations of Shaefer and colleagues, this child allowance would reduce the child poverty rate in the United States by around 40%, and it would virtually eliminate extreme child poverty. The cost would be approximately 1% of GDP. After subtracting the current cost of the Child Tax Credit and the child deduction, the net new cost would be around 0.5% of GDP.

UNEMPLOYMENT INSURANCE AND WAGE INSURANCE

Unemployment insurance is a key policy mechanism for ensuring economic security. Our program was created in 1935 as part of the New Deal. The federal government pays for it, but states have considerable leeway in determining eligibility criteria and benefit levels.

The average share of prior earnings replaced by unemployment benefits is just 45%. A bigger problem is that only about 40% of unemployed Americans qualify for compensation. Particularly likely to not qualify are persons who have low wages, work part-time or intermittently, move frequently from one employer to another, are self-employed, or interrupt employment for childbirth or family care.³⁰ Two simple reforms would address these problems. The first is to federalize eligibility rules and benefit levels, as some states are too stingy. The second is to adjust eligibility criteria to accommodate nonstandard workers and nonstandard employment, which are more common now than in the past and likely will become even more common going forward.³¹

We also should add a wage insurance component to the program. Some Americans who get laid off can’t find a job that pays as well and are forced to settle for less. For a year or two, wage insurance would fill half of the gap between the former pay and the new lower wage.³²

SICKNESS INSURANCE

The United States is the only rich nation without a public sickness insurance program.³³ Though many large private-sector firms offer employees some paid sickness days and five states (California, Hawaii, New Jersey, New York, and Rhode Island, along with Washington DC) have a public program, more than one in four employed Americans gets zero days of paid sick leave.³⁴

Sweden’s approach offers a useful model.³⁵ A person with illness, disease, or injury that causes her to miss work receives 80% of her pay. The amount of the benefit is capped at about $28,000 per year.³⁶ The benefit is taxed as ordinary income. Day 1 isn’t reimbursed. Days 2 through 14 are paid by the employer, and after that the money comes from a public sickness insurance fund. Self-employed persons are paid from the public fund. The payments can last up to a year (longer for a serious disease). A certificate from a doctor is required after seven days and a detailed medical exam after one month. Eligibility begins after three months of employment for sickness and disease and immediately for workplace injury.

We need not begin with a program as generous as Sweden’s, which has typically cost about 1.5% of GDP. A program spending about a third of that amount, 0.5% of GDP, would be a good start.

DISABILITY ASSISTANCE

Disability is pervasive and varied³⁷:

“A baby is starved of oxygen during childbirth. A construction worker slices off a finger with a power saw. Another loses partial lung function after spending a year cleaning up dusty debris at Ground Zero. A retired professional football player forgets instructions he was given moments earlier. A nurse suffers back strain from helping an obese patient into bed. A young adult develops schizophrenia. An oncologist diagnoses an energy-depleted 55-year-old salesman with multiple myeloma. A soldier in Iraq suffers a traumatic brain injury when an explosive device detonates underneath a transport vehicle. A Cornell student is paralyzed for life by a prescription drug-induced stroke. Another suffers the same fate as the result of an act of drunken horseplay.

“Disability may be innate, as in the cases of those born with developmental deficiencies. It may be total, as in the case of the worst traumatic brain injuries, but more often it is partial. It may be temporary or permanent. It may lead to a shortened life span, but often it does not. It may occur on the job, but more often it happens away from work. Whatever its genesis and character, disability leaves the victim with a diminished capacity to work for a living. Through rehabilitation and retraining some can overcome the functional limitations engendered by their disabilities, but many cannot regain sufficient functioning to enter or reenter the workforce.”

About 20% of Americans are disabled. Approximately 30% will at some point in their career experience a disability significant enough to cause them to miss 90 or more days of work.

One-third of Americans have private disability insurance (short-term and/or long-term) through their employer, mostly in large or middle-sized firms. A few purchase disability insurance on their own. The chief source of disability compensation for most working-aged Americans is three public programs: workers compensation, Social Security Disability Insurance (SSDI), and Supplemental Security Income (SSI).

Workers compensation covers about 85% of employed Americans. It pays out about $30 billion per year to people injured on the job, generally covering two-thirds or less of a worker’s earnings. The incidence of on-the-job injury requiring time off from work has decreased from about 3% of employees in the early 1990s to 1% as of 2010. As a result, workers compensation claims and payments have decreased.

Persons who become severely disabled and have paid Social Security taxes in five of the previous ten years may, after a five-month lag, receive Social Security Disability Insurance payments. After two years, they also receive Medicare to cover healthcare costs. The average SSDI payment is $15,000 a year. About 40% of applicants qualify for the benefit. Recipients are reviewed every two to five years to determine whether they remain eligible.

Around 10 million Americans, including former workers, spouses, and children, receive SSDI benefits. The share of the population getting SSDI payments has increased over the past generation, due to the rise in the share of people employed, an increase in the retirement age for Social Security eligibility (from 65 to 67), the aging of the population, and an expansion of eligibility criteria to include musculoskeletal maladies and mood disorders.

Disabled Americans who don’t qualify for SSDI, and who have assets of less than $2,000 excluding house and car, may be eligible to receive SSI payments. These average $7,000 per year. The number of recipients is approximately 6 million. About one in three applicants are deemed eligible. Recipients also typically qualify for Medicaid health insurance.

Some people who are disabled temporarily don’t qualify for unemployment insurance, worker compensation, SSDI, SSI, or veterans compensation and don’t have private disability insurance. Five states provide temporary disability insurance for such circumstances. Because this group of states includes heavily-populated California and New York, more than a third of Americans have this protection. In many states, however, it is easy to fall through this crack in the system.

There are three major deficiencies in our support for disabled Americans. One is the lack of short-term disability insurance for many Americans with partial or temporary disabilities. A second is our limited commitment to vocational rehabilitation for disabled persons who might be able to return to work. Such efforts have a low success rate, even in countries that dedicate more resources than we do. Yet the signal these efforts send — about our commitment to genuine inclusion for disabled persons and about our support for employment — arguably justifies the cost.³⁸

The United States spends about 1.5% of GDP on “incapacity” programs. Adding an additional 0.5% would put us closer to the 2.5% average among other rich democratic nations.³⁹

A third problem with our current policy is the strict asset limit for SSI recipients. This has the perverse effect of forcing people with significant disabilities to spend down their assets in order to qualify for the medical services and assistance they need.⁴⁰ Hardly any other rich democratic nations require this.

SOCIAL ASSISTANCE

What to do about working-age households that have no employed adult has long been the thorniest question in American social policy.⁴¹ There is no optimal solution. If we are generous, some will cheat the system. If we are stingy, we cause avoidable suffering. Given this tradeoff, the best approach is a policy that vigorously promotes employment for those who are able, provides a decent minimum for those who aren’t, and deals on a case-by-case basis with those who can work but don’t.

This requires several modifications to what the United States has now. First, we should adjust our approach to caseworkers and the assistance they provide. In theory, caseworkers help Temporary Assistance for Needy Families (TANF) recipients find jobs, but in reality many caseworkers are undertrained, overworked, and have limited means to provide real help.⁴² For some Americans at the low end of the labor market, adulthood is a series of transitions between part-time or full-time employment, off-the-books work, government benefits, romantic relationships, child rearing, drug or alcohol addiction, and time in jail.⁴³ The best thing we can do is to provide support, guidance, cajoling, and the occasional threat. People who struggle to find a job after leaving school should immediately get individualized assistance. This may include training, counseling, and cash support. Strugglers should be monitored as they move along in life, and helped when necessary. For this to be effective, we need caseworkers who are well trained, connected to local labor market needs, committed to their job, and not swamped with clients. They must be able to make realistic judgments about when clients can make it in the work force and when the best solution is to help them find a path to dignity and social inclusion that isn’t premised on employment.⁴⁴

Second, TANF’s eligibility restrictions, including the five-year lifetime limit, should be eased. In bad economic times, such as the 2008-09 recession and its aftermath, the five-year limit has proved too stringent, causing needless hardship.⁴⁵ We should allow more exemptions during economic downturns. But there is a strong case for relaxing the time limit even when the economy is doing well. Caseworkers should be allowed to make judgments about which clients can make it in the labor force and which ones can’t, about what is best for clients and their children, and about what supports and requirements are most appropriate for them. Some observers don’t like this because they don’t trust caseworkers to be sufficiently strict. (This is akin to favoring “three strikes” laws on the grounds that judges who have discretion about sentencing are likely to be too lenient.) It’s an understandable sentiment, but it leads to more suffering than is necessary, or justifiable, in a rich society.⁴⁶

Third, TANF’s benefit level should be increased. The average AFDC-TANF payment has fallen steadily since 1970, from about $12,000 per recipient family to just $5,000 today.⁴⁷ Current spending on TANF is about $30 billion per year. Doubling that amount would fund the needed changes. That would cost an additional 0.2% of GDP.

Food Stamps (SNAP) can be kept as is. It is effective, efficient, and widely appreciated.⁴⁸

CRIMINAL JUSTICE

Bruce Western and his research team conducted extensive interviews with 122 Americans released from prison in the Boston area in the mid-2010s. Here is his summary description of their situations⁴⁹:

“Aman was raised by his mother in a poor African American section of Dorchester. He was stabbed three different times during his teenage years, and by the onset of his schizophrenia, he had accumulated a long list of juvenile convictions. Eddie was an army veteran and had been a crack addict for most of his adult life. He worked periodically, but in the year after incarceration he lived mostly off his veteran’s benefits and street scams. Patrick’s mother was a heroin addict who died of AIDS when he was seventeen. A heroin user himself, Patrick had been a witness and victim of serious violence since early childhood. Carla was also a heavy drug user whose life was suffused by violence. Before she went to prison, she made a living by prostitution, selling drugs, and a government disability check for a bad back injured in a prison brawl. Juney was abandoned by his father and raised by his mother, left school at sixteen, and completed his GED in prison. Juney’s parole was revoked when his brother got arrested and called him to the scene to help out. Celia was raised by her mother, who had fled an abusive husband who battered her for years. Celia periodically lived with her grandmother, but left home for good at age seventeen. Like her mother, Celia was a victim of domestic violence as a young parent of twenty and made her living as a drug dealer. Peter grew up in the housing projects of Roxbury, with a mother who was addicted to drugs and an abusive father. He was a runaway from the age of eleven. At fourteen, his head was split open with a crowbar in a racial brawl. From the age of seventeen, he spent more than half his life in prison.

“These many different starting points all led to Massachusetts prisons, and then to prison release….

“Most [of the 122] had grown up poor in poor neighborhoods…. Two-thirds of those we interviewed had a history of mental illness or addiction to drugs or alcohol. Depression was common among them — and nearly universal among the women — and anxiety and post-traumatic stress were also frequently reported. Twenty percent of respondents used heroin or cocaine in the year after prison release, and about half of those with a history of addiction experienced a relapse to drug use, which regularly preceded a return to prison. Most of the regular users were the children of addicts…. Over 40 percent of the reentry study sample lived with chronic disease, like diabetes or hepatitis, and another one-third reported chronic pain, often related to accidents, fights, or heavy drug use…. By the time we interviewed them, the men and women of the reentry study had survived abusive childhood homes, grown up through teenage years filled with fighting, been stabbed or shot, and delivered their own share of violence too.”

As violent crime in the United States increased sharply and steadily in the 1960s and 1970s and then remained at a high level through the early 1990s, many policy makers signed on to a “lock ’em up” response. At the time, social scientists had little systematic knowledge of the drivers of crime or how best to combat its rise. Given this ignorance, and in a context in which a “tough on crime” approach was popular with voters, their choice is perhaps understandable.

Today we can, and should, do better. There is broad agreement among experts that incarceration contributed to the drop in crime since the mid-1990s, but that its impact probably was fairly small.⁵⁰ A sensible approach to criminal behavior — not just low-level drug offenders but also persons convicted of violent crimes — would minimize time in jail and prison, ensure a decent living standard after release, and provide extensive, individualized support and monitoring.⁵¹ Not only would this improve fairness; it also would be less expensive than incarceration, the direct cost of which averages around $30,000 per inmate per year.

PENSIONS

The poverty rate among elderly Americans has fallen steadily over the past half century, and the best available projections suggest that average incomes among the bottom 40% of elderly households will continue to rise in coming decades. Yet that rise is projected to be relatively slow, with incomes in old age falling farther and farther behind growth of the economy.⁵²

Social Security benefits could be increased.⁵³ A modest, gradual rise over time is appropriate as the economy grows, and it surely is affordable. However, this is only a partial solution. We need one or more of the other retirement income security pillars — personal savings, employer pensions, homeownership, earnings — to increase as well.

We could try to encourage more saving. But previous attempts, such as offering tax advantages (IRAs), have had little impact on the saving behavior of most ordinary Americans.⁵⁴

We should shore up employment-based pensions. Rather than allow Americans to contribute to defined-contribution plans if they have a steady job and if their employer offers a plan and if they know about that plan and if they feel they can afford to put some of their earnings in it, we could make contributing the default option and make it available to everyone. Employers that have an existing plan could continue that plan, but they would have to automatically enroll all employees and deduct a portion of earnings unless the employee elects to opt out. Employees who lack access to an employer plan would be automatically enrolled in a new universal retirement fund, and those who lack an employer match would be eligible for matching contributions from the government.⁵⁵

In the absence of federal government action along these lines, some states have created their own programs. California’s CalSavers program, the largest of these, requires firms with five or more employees to enroll them if it doesn’t offer a company-sponsored pension plan. The program deposits 5% of each paycheck, unless an employee chooses to opt out. But there is no matching contribution from the employer or the state.⁵⁶

We also could facilitate greater employment among the elderly. The employment rate among Americans age 65 and over dropped steadily in the 1960s, 1970s, and 1980s. Since the late 1990s it has slowly but steadily risen.⁵⁷ Later retirement isn’t a good option for everyone, especially those who have spent most of their working lives in stressful or physically taxing jobs. But for those who can manage it, it is doubly beneficial: it provides an additional source of income, and it allows people to delay receipt of Social Security, which in turn increases the benefit level they will receive.

ELDERCARE

An estimated 7 million elderly Americans, 14% of the elderly population, need help with everyday activities. The average yearly cost is about $30,000 for a home-health aide (30 hours per week, 50 weeks per year, $20 per hour), $45,000 for a room in an assisted living center, and $85,000 for a room in a nursing home. Few Americans have the resources to cover these costs for more than a few years, if that. Medicare doesn’t cover long-term elder care, so Medicaid is the principal provider of government funding. It funds mainly nursing home care and in-home care, though some money is available for care in assisted-living facilities. Medicaid has a stiff asset limit, which often forces recipients to spend down most of their assets in order to qualify. And Medicaid covers a comparatively small share of those who need support. About 3% of elderly Americans live in an elder-care institution, and another 3% receive in-home services. These shares are smaller than in most other rich democratic nations. Public expenditure on long-term care in the US amounts to just 0.75% of GDP.⁵⁸

Sweden has a more generous system. It spends a little over 3% of its GDP on long-term care. About 5% of elderly Swedes live in an elder-care institution, and another 12% receive “home-help services” in their home. In-home assistance may be for several hours, throughout the day, or round-the-clock if needed. Decisions about types and levels of provision are made by counties and municipalities. Providers of institutional care and in-home help are both public and private. There is a co-payment, but it is capped at about $200 per month.

Increased funding for elder care would improve financial security and quality of life for millions of retired Americans. Spending an additional 0.5% of our GDP in this area would move us closer to the norm among affluent democratic countries.

HOUSING ASSISTANCE

Many ordinary Americans would like to live in a large city but can’t afford to. Cities are attractive for a variety of reasons: they are where many jobs are located, particularly analytical professional positions; they are diverse; they provide lots of eating and entertainment choices; and unlike a generation ago, they are relatively safe and clean. Cities also are economically productive: they concentrate lots of economic activity in a small space, and by bringing people together they generate multiplier effects. And cities are environmentally friendly: they use far fewer cars and less heat and electricity per person than do suburbs and rural areas.⁵⁹

But rental prices in a number of large cities — New York, Boston, Washington DC, San Francisco, San Jose, Los Angeles, San Diego, among others — exceed what many poor, working-class, and even middle-class Americans can afford. The chief cause is an inadequate supply of housing. When demand for something is high and supply is limited, the price tends to go up. In some instances, such as Manhattan and San Francisco, the inadequate supply of rental units owes partly to physical constraints imposed by surrounding water, yet that can be overcome by additional vertical construction. The key obstacle is restrictions on new building stemming from zoning laws and historical preservation designations.⁶⁰

We should loosen these restrictions. Local government is the ideal source of action, but where city councils and mayors are reluctant to act, state governments may have to step in, as California’s and Oregon’s have done in recent years.

Income among the bottom fifth of US households averages less than $25,000 a year, so lower-income Americans need assistance with housing costs not only in large cities, but virtually everywhere.⁶¹ The federal government currently spends around $50 billion a year on low-income housing assistance.⁶² This assistance comes through a variety of programs. Since the 1930s the government has built public housing units, which are offered to low-income tenants at below-market rents. Though there has been little new public housing construction in recent decades, about one million such units remain across the country. Since the 1960s the government has subsidized private construction of low-cost rental units and subsidized the rent that low-income tenants pay. Since 1986 it has provided a tax credit (the Low Income Housing Tax Credit, or LIHTC) to developers for construction or rehabilitation of rental housing in which at least 20% of tenants have incomes below half of the area’s median income. And since 1974 the federal government has given “Section 8” housing vouchers to some low-income households who rent on the private market. Renters pay 30% of their income toward rent, and the voucher pays the difference between this amount and the rent amount (up to an allowable maximum).

These programs serve about five million households. Eligibility criteria have varied across the programs and over time within them. Roughly speaking, households with an income below 50% or sometimes 80% of the area median income tend to be eligible. Among eligible households, only one in four receives assistance from any of these programs. This isn’t due to lack of interest; about six million households are on waiting lists for a housing voucher and/or a public housing unit.

On average, these programs have enhanced access to housing, reduced over-crowding, improved housing quality, and increased residential mobility for their low-income recipients.⁶³ There are run-down, violence-plagued public housing projects, such as Cabrini Green in Chicago, but these have been the exception, not the rule. Housing vouchers tend to boost housing quality more, and at lower cost, than public housing.⁶⁴

We should expand housing assistance, via provision of a voucher, to the 15 million or so low-income Americans who are eligible for such assistance but don’t currently receive it. Doing so would cost about $75 billion a year.⁶⁵ The federal government spends (forgoes) about $80 billion each year on the mortgage interest tax deduction. The aim of this program is to boost home ownership, but many other affluent nations have homeownership rates comparable to ours or higher without a tax incentive. Moreover, most of the mortgage interest deduction goes to households in the top fifth of incomes; few in the middle or below benefit from it.⁶⁶ We could pay for the expansion of low-income housing assistance by ending this program. The additional cost to taxpayers would therefore be $0.

EARLY EDUCATION

Universal high-quality publicly-funded early education for children aged 1 to 4 would facilitate work-family balance for Americans, and the best available evidence suggests it would enhance opportunity for children who grow up in less-advantaged homes.⁶⁷

Why can’t we leave early education to the market? A good early education system will combine three features: accessibility, affordability, and quality. For Americans able and willing to pay a lot for childcare, our current market-based system often delivers all three. But for those with low to moderate incomes, getting access to affordable care often means sacrificing quality.⁶⁸ A universal system with public funding and some direct public provision could change this, ensuring good-quality care to everyone at an affordable price.

Government already pays for some early education: the federal government funds Head Start, subsidizes childcare for some poor families via the Child Care and Development Fund (CCDF), allows a tax break for childcare, and funds some special education services; and some state and city governments offer preschool for four-year-olds. Yet current funding is nowhere near sufficient to ensure that everyone has access to good-quality child care and preschool. Among three-year-olds, for instance, about 20% are covered by existing funding: state preschools enroll 5%, Head Start enrolls 10%, and the CCDF subsidizes care for another 5%. The shares are even smaller for children aged one and two.⁶⁹

Should government not only pay for but also provide early education? Those who say yes contend that this is the only way to guarantee universal access to preschool and care that’s above an acceptable quality threshold. On the other hand, it isn’t necessary that government be the sole provider. Denmark and Sweden allow private providers, as long as they meet quality standards. In many districts across the US we allow private providers for publicly-funded K-12 schooling (charter schools), and we allow private doctors and hospitals to provide medical care for Medicare and Medicaid recipients. What’s the ideal mix? We don’t know. Maybe it’s 25% of kids in public early education centers, or perhaps it’s 75%. This depends largely on how many private providers can combine good quality with a reasonable rate of return.

Why not increase access only for those with low incomes rather than for everyone? The argument for universal access is threefold. First, it isn’t just low-income parents who struggle to find good-quality care that’s affordable. Middle-class parents do too. Second, family structure and parents’ traits and behaviors are key sources of disadvantage, and they don’t overlap perfectly with family income. If we target low-income households, we’ll miss many children who need help. Third, development of cognitive and especially noncognitive skills is aided by peer interaction. Children from less advantaged homes gain by mixing with kids from middle-class homes, which doesn’t happen in a program that exclusively serves the poor.⁷⁰

Should we encourage parents to put their kids in out-of-home early education immediately after birth? Probably not. As noted in the “Paid Parental Leave” section above, research suggests that during the first year of life children tend to fare best staying with a parent.

Why not just give the money to parents and let them choose whether to use it on early education or on something else? The argument against doing so is that if early education has large individual and social benefits, it makes sense to require that the money be used for that and only that. The same is true of safety (military, police), infrastructure (roads, bridges), health insurance (Medicare, Medicaid), and K-12 schooling, among others. It’s worth emphasizing that no one would be forced to enroll their children in early education; parents who prefer to stay home with their children during the first five years would still be able to do so.

Some of the revenue needed to fund early education can come from user fees. Early education is different from police protection and healthcare, the kinds of services that almost no one opts to go without. Even if good early education programs were readily available, some families would choose not to use them because they prefer to provide stay-at-home parental care for their young children. And some people don’t have any children. This argues for having parents who do want to use early education pay something — even parents with low incomes. Here too the Nordic approach is sensible; in Denmark and Sweden programs charge on a sliding scale, with the fee rising in proportion to family income but capped at about 10%.

The bill to taxpayers will depend on specific details, but a rough estimate is 1% of GDP per year.⁷¹

K-12 EDUCATION

Elementary and secondary schooling is important for capability development, and it’s almost always a focal point of policy debate. How to make it better, for average students and particularly for the least advantaged, is one of the most heavily researched policy questions in the United States.

We need to improve. The high school graduation rate is just 84%.⁷² According to a White House report, only 40% of high school graduates are prepared for college or work.⁷³ American 15-year-olds score lower than their counterparts in many other rich democratic nations on the Program for International Student Assessment (PISA) reading, math, and science tests.⁷⁴ And literacy and numeracy among American adults, as judged by the OECD’s Survey of Adult Skills assessment, is lower than in many of those countries.⁷⁵

Yet after thousands of studies, there is little agreement about how best to improve America’s K-12 schools.⁷⁶ Candidates include equalizing school funding, better pay for teachers, more school choice, smaller class sizes, longer school days, longer school years, longer breaks in the school day, more standardized testing, less standardized testing, more homework, less homework, more use of modern technology, less use of modern technology, and better integration of individualized assistance into classrooms, among others.

We could afford to spend more on K-12 schooling. Public expenditures as a share of GDP have been flat for half a century, and we spend less than many other nations, though that’s partly because private school expenditures are greater here than elsewhere.⁷⁷ Yet while there is room for more spending, it might be better to allocate our scarce dollars to the other additions and expansions I propose here and wait on increasing elementary and secondary school spending until we have a better sense of which changes are most likely to yield improvement.

APPRENTICESHIPS

Of the two-thirds of Americans who don’t get a four-year college degree, some enter the labor market directly, others get some vocational training in high school or community college, and others complete a certificate program of some sort. Some among these two-thirds fare reasonably well, but the experience of other affluent nations suggests that a more robust approach to vocational education could help.

One option is an “apprenticeship” program that students would begin around age 16 and that combines classroom and on-the-job training. The best such programs run for three or four years and are tightly integrated with employers and employer organizations to ensure that the skills being produced are needed ones rather than simply ones schools feel competent to provide.⁷⁸

Federal government funding can be put to two particularly useful purposes here. One is to encourage and subsidize local or regional consortia of high schools, community colleges, universities, and employer associations with the aim of building career pathways.⁷⁹ The other is a tax credit for employers who create apprenticeships. Harry Holzer, for instance, recommends a credit of $1,000 per apprenticeship with a goal of one million new apprenticeships.⁸⁰ The total cost these efforts would likely be no more than 0.1% of GDP.

COLLEGE EDUCATION

America’s colleges and universities are among the country’s greatest achievements. Taken as a whole, they’ve long been, and remain, the best in the world. Yet too few Americans from less-advantaged families enroll in college, too few of those who enroll end up getting a four-year degree, and our colleges and universities probably aren’t doing as well as they should in educating students. These deficiencies have multiple causes, only one of which is the cost of college.⁸¹ And yet Christopher Jencks sensibly points out that “Making college a lot more affordable is a challenge governments know how to meet, while making students learn a lot more is a challenge we do not currently know how to meet. Under those circumstances, starting with affordability is probably the best bet.”⁸²

What is the best way to make college more affordable? If we want to reduce the cost mainly for students from lower-income families, we ought to focus on room and board, because many such students already are eligible for enough financial aid and grant money to cover most or all of the cost of tuition.⁸³ However, many American high schoolers and parents aren’t aware of this, and the process of applying for school-based financial aid and federal grants can be complicated. Making two-year and four-year public colleges tuition-free for in-state students would send a clear, simple message that college is affordable for all Americans.⁸⁴ Another potential benefit of zero tuition at public colleges is that it could increase pressure on private colleges to lower their price.

A common objection is that eliminating tuition is inefficient, in that students whose families can afford to pay the tuition now wouldn’t have to. But this is true of all universal transfers and services, including elementary and secondary schooling. The key question isn’t whether there is “waste.” It’s whether the benefits of the program outweigh the costs. With zero-tuition college, it seems likely they would.

Another concern has to do with the need for funding increases over time. The United Kingdom’s experience illustrates the problem. Prior to 1998, public universities in the UK were tuition-free. But in the 1980s and 1990s the government proved unwilling to increase funding in order to keep up with rising enrollments. Eventually it chose instead to cap the number of students colleges could admit. In 1998 the zero tuition policy was ended.⁸⁵ If a zero tuition policy leads to an increase in the share of people who apply to college but universities don’t increase the quantity they admit, students from less-advantaged circumstances could conceivably be harmed rather than helped by the policy, since fewer of them might end up admitted to any college. It’s impossible to know whether this dynamic would play out in the US context, but this is an important caution.

What would the price tag for tuition-free public college be? About 12 million Americans attend in-state public colleges every year, a majority of them in community colleges. Average tuition is $6,000.⁸⁶ So the total yearly cost would be approximately $75 billion, or about 0.4% of GDP.

The cost of room and board averages about $10,000 for US college students, and tuition-free college won’t do away with these costs. Moreover, many Americans will to want to attend private colleges, which won’t be tuition-free and may in fact continue to get more expensive.⁸⁷ Consequently, many American students will continue to have to take out loans. (The same is true in Sweden, where students pay no tuition and yet the average college graduate owes about $20,000 in student loans.⁸⁸) In the late 1990s we created a program that allows income-based repayment of student loans: the lower the student’s income after college, the smaller the portion of their loan debt they are required to pay back. This program was enhanced in 2007 and 2010, and it could be expanded further. We also could lengthen the loan repayment period to 20 or perhaps even 30 years.⁸⁹ And it would help to automatically enroll college students in this program, rather than requiring them to find out about it on their own and then wade through a complicated application process in order to utilize it.

The total cost of these two efforts to increase college affordability would be around 0.5% of GDP.

AFFIRMATIVE ACTION

Since the late 1960s, affirmative action programs for university admissions and employment have promoted opportunity for women and for members of racial and ethnic minority groups.⁹⁰ Not surprisingly, as these programs have been cut back or ended in recent decades, some of that progress has been reversed.⁹¹ Affirmative action should continue, but with family background as the focal criterion.⁹²

FULL EMPLOYMENT

Employment is front and center in the American ethos. Self-sufficiency and self-realization via paid work are at the core of the “Protestant ethic” that shaped the country in its early years and the “American dream” that has animated it since the mid-1800s. Employment has significant benefits for individuals, from mental stimulation to social integration to self-esteem and beyond. We also need a significant majority of working-age persons employed to help fund government programs. High employment allows for hefty tax revenues without requiring overly high tax rates. High employment eases the fiscal crunch another way, too, by reducing the number of people fully or heavily reliant on government benefits.

From the mid-1940s to 2000, the employment rate among working-age Americans rose steadily, from 60% to nearly 78%. But since 2000 we’ve moved in the opposite direction. This is partly a product of the deep 2008-09 recession, but sluggish employment growth began before the crash. And in the meantime many other rich nations have increased employment sharply, suggesting the problem isn’t something endemic to modern affluent societies.⁹³

There are a number of things we can do the address this. One is better family-friendly policies, particularly early education, paid parental leave, and sickness insurance, as described above.

We should strive to improve schooling, from preschool to K-12 to apprenticeships to college and beyond.

We should commit more resources to active labor market policy. Sweden and Denmark have used retraining and job placement assistance to help improve the efficiency of the private-sector labor market and public employment to increase demand for labor.⁹⁴ These two countries have committed 1.5% to 2% of GDP to such programs.⁹⁵ Swedish firms must notify their local board in advance when employees are to be laid off and when they have job openings that have lasted more than ten days. Workers who are displaced or who leave their job by choice can receive subsidized training through the employment service. Officials in local labor market boards keep in close communication with firms and with officials in other areas regarding trends in skill needs. The training programs are full-time and range in duration from two weeks to more than a year. The service then helps to place workers in new positions. If necessary, an employer subsidy may be used to encourage a private-sector employer to hire, or a public-sector job may be created. Denmark increased pursuit of active labor market programs in the mid-1990s, with beneficial effects. A recent meta-analysis of research on such programs concludes that they tend to improve medium-term employment outcomes.⁹⁶

It helps if monetary policy authorities pursue labor market tightness. The Federal Reserve, like independent central banks in other rich nations, is charged with maintaining both price stability and low unemployment. Its choices about which to prioritize, particularly during periods in which the unemployment rate is low and there are worries about the potential for a jump in inflation, impacts not only the business cycle but also the long-run employment rate. The longer the labor market can remain tight, the stronger the pressure on employers to increase wages and salaries, which tends to attract more people into paid work. And the boost to wages is a good thing apart from its effect on employment rates.⁹⁷

Government should serve as employer of last resort.⁹⁸ “Make-work” has a mixed history in the United States. It played a prominent role in the 1930s, and subsequent smaller-scale programs have boosted employment rates of low-end workers.⁹⁹ These programs are often criticized because they haven’t tended to improve long-term labor market success of participants. Yet we should think of make-work not as a route to “real” employment, but rather as a worthwhile expense. If we believe people who are able and willing to work should be employed, the fact that make-work might not provide a ladder to a good job shouldn’t discourage us.

That doesn’t mean we should guarantee everyone a job in the place where they currently live. Doing that would prevent sensible shrinkage of some towns or cities that are no longer economically viable. Instead, government can provide other types of support: public infrastructure investment, place-specific investment funds, regional employer consortiums, and temporary wage subsidies for new private-sector jobs.¹⁰⁰ An additional potentially-helpful strategy is to provide assistance for job losers to move out and incentives for others (including immigrants) to move in.¹⁰¹

EMPLOYEE VOICE

Downward pressure on wages is a signature feature of the post-1970s economic era. Labor unions are the principal institutional mechanism available to counteract this pressure. Their strength during the “golden age” following the Second World War was integral to the sustained pay growth that occurred during those three decades. Today only 10% of employed Americans are union members. Increasing this share significantly probably would be the most effective way to ensure regular wage increases for middle- and low-paid workers.

But accomplishing that would be a very tall order. America’s declining unionization rate isn’t a recent phenomenon. Nor is it mainly a function of Republican Party hostility since the Reagan administration in the 1980s. Unionization in the US has been falling steadily since the mid-1950s.¹⁰² Indeed, union decline isn’t a peculiarly American problem. Unionization rates have been falling in almost all affluent democratic nations.¹⁰³ Only five still have a rate above 40%, and four of those (Belgium, Denmark, Finland and Sweden) are helped by the fact that access to unemployment insurance hinges on union membership. It’s well and good to wish for bigger, stronger labor unions, but no one has yet figured out an effective strategy to achieve that.¹⁰⁴

One possible alternative to stronger unions is employee board-level representation (also called “codetermination”), whereby employees elect a portion of their company’s board of directors. Shareholder obsession with short-run profits is one of the key obstacles to wage growth. Giving employees more voice in firms’ decision making could potentially mitigate this and yield faster wage growth.¹⁰⁵ However, the available evidence doesn’t support this hope.¹⁰⁶

MINIMUM WAGE

The federal minimum wage in the United States is low, and it has been flat for half a century.¹⁰⁷ We should increase it to around $12 per hour and index it to inflation. States and localities with a thriving economy or a higher cost of living could set their own minimum wage at a higher level, as many currently do.

The chief worry about increasing the minimum wage is that doing so will reduce employment. The best available evidence, however, suggests that modest increases in the statutory minimum in the past haven’t reduced employment. The best test, because it is closest to an experimental design, is a “difference in differences” approach.¹⁰⁸ The fact that many of the US states have set minimum wages higher than the federal minimum, in varying degrees and at different times, is helpful for analytical purposes. In the early 1990s David Card and Alan Krueger compared changes in employment in fast food restaurants on either side of the New Jersey-Pennsylvania border after one state increased its minimum wage while the other didn’t. Arindrajit Dube and colleagues pursued this strategy for every pair of adjacent counties straddling state borders in which one increased its minimum wage between 1990 and 2006. They, like Card and Krueger, found no adverse employment effect of minimum wage increases.¹⁰⁹ This suggests reason for optimism that raising the wage floor to $10 an hour, and perhaps to $12, is likely to cause little or no employment decline.

The real question is whether the federal minimum wage should be even higher. California, the state of New York, and the city of Seattle, among others, have raised their statutory minimum to $15 an hour or more. Some argue that we should we do this for the nation as a whole.¹¹⁰ That would be a big increase, and it would affect a lot of Americans. Half of employed Americans currently earn less than $36,500 a year, and a person working full-time year-round at a $15 minimum wage would have annual earnings of $30,000.¹¹¹

We have no prior historical experience with a federal minimum wage anywhere close to $15 an hour. Nor is cross-country comparison of much help. Among the 14 rich democratic nations that have a statutory minimum, none is above the equivalent of $11 per hour in US dollars.¹¹²

Even some prominent advocates of a significantly higher wage floor fear that $15 an hour might cause substantial job loss, particularly in less-affluent parts of the country.¹¹³ Given this concern, coupled with the lack of empirical evidence on which to base a policy conclusion, the wise approach probably is to increase the federal minimum to something below $15 per hour, index it to inflation, monitor its impact, and then adjust as needed.

There are several other regulatory changes we should implement in order to boost wages for ordinary Americans: protect employees from being improperly classified as independent contractors; improve employees’ ability to recover wages their employer has illegally withheld from them; ensure that workers in retail, food service, and cleaning sectors be paid for at least four hours per shift; require that all workers paid less than $50,000 per year be paid at an overtime rate if they work more than 40 hours in a week.

EARNED INCOME TAX CREDIT

The Earned Income Tax Credit (EITC) is a very effective program, encouraging employment while boosting the incomes of households who struggle in the labor market.¹¹⁴ The EITC subsidizes earnings by as much as 45%, providing up to $6,300 (for a household with three or more children). The amount of the EITC increases with earnings up to a certain level, then plateaus, and then decreases with earnings. It is paid to households rather than to individuals, and the money comes in a lump-sum once a year.¹¹⁵ Households with at least one employed adult and earnings below $54,000 are eligible. The credit functions like a cash benefit; if it amounts to more than the household owes in federal income taxes, the household receives the difference as a cash refund.

The average amount recipient households get is $2,300 per year. The benefit level increased sharply between 1987 and 1996. Since then it has been flat. Nearly one in four Americans receives the EITC. This share rose significantly between the late 1980s and the mid-1990s and again in the 2000s, a result of changes in eligibility criteria, increases in the benefit amount, and stagnant wage levels for Americans on the lower rungs of the wage ladder.¹¹⁶

The United States and the United Kingdom were the first countries to introduce an EITC-type program, both in the 1970s. In recent decades many other rich longstanding democratic countries have adopted some version of it. A number of US states and a few cities have their own EITC; most are small, but some supplement the national EITC by as much as 75%.¹¹⁷

We can improve on the existing federal Earned Income Tax Credit in four respects.

First, the EITC is far too small for Americans who don’t have any children. A household with one child can receive up to $3,400, but the maximum for a childless household is just $500. Childless households are 25% of EITC recipients, but they receive only 5% of total EITC payments. The EITC thus creates little employment incentive for childless adults, and it provides very little income support for them.

Second, the fact that the size of the EITC credit depends on household earnings (actually pretax income) and that it has a phase-out range creates some employment disincentive for a potential second earner in a household whose earnings are likely to be relatively low.

A way to address these two problems is to give the EITC to employed persons, rather than households, and to give it to all or most such persons, rather than only those with low earnings. Sweden has an EITC, first introduced in 2007, that works like this.

Third, we could increase the amount of the EITC credit.

Fourth, we could use the EITC to help compensate for not only the low level of wages but also their slow rate of growth. Pay for ordinary American workers has increased very little since the late 1970s. To ensure that incomes rise over time as the economy grows, we could index the EITC to GDP per capita, rather than to inflation. This won’t compensate fully for stagnant pay: the EITC is a fraction of the $30,000 a year earned by a typical middle-class American, so if the EITC rises in line with the economy but earnings don’t, income (earnings plus EITC) growth will lag behind growth of the economy. It’s a partial remedy, not a full solution. But it will help.

How much would an expanded federal EITC cost? A fully universal version would give it to all 145 million employed Americans. If the credit averages $3,500 per person, the cost would be approximately 2.8% of GDP. (Sweden’s EITC costs 2.4% of GDP.) That’s a sizable increase over current expenditure on the program, which is 0.3% of GDP. The cost could be reduced by tapering the credit for those at the top of the distribution — the top tenth or the top fifth. The added cost might then be around 2.25% of GDP.

There are two main objections to an expanded EITC as a centerpiece of strategies to boost incomes. First, it might cause wage levels to fall. In the presence of the EITC, employers may offer a lower wage than they otherwise would, and workers may be willing to accept that lower wage. Also, the EITC might increase the number of less-educated people seeking jobs, and without an increase in employer demand for such workers, this rise in supply could push wages down. Existing studies suggest that the EITC may indeed reduce wages somewhat, but the evidence is thin and the effect is likely fairly small.¹¹⁸ The best way to address this danger is with a moderate to high minimum wage.¹¹⁹

Second, some object to taxpayers rather than employers bearing the cost of ensuring that household incomes rise. This is an understandable sentiment. But consider how we think about health insurance, pensions, unemployment insurance, and sickness insurance. Like income, these contribute to material well-being. In all affluent nations, including the United States, they are financed at least partly by taxes. Few object to the fact that firms aren’t the sole funders.

PROFIT SHARING

Another potential way to boost household incomes is profit sharing, whereby employees receive part of their compensation in the form of a portion of the firm’s profit rather than as a guaranteed wage or salary. For owners, the advantage is that when the firm is struggling, for example during a recession, its labor costs will fall, because workers will absorb part of the reduction in profits in the form of lower take-home pay. For workers, the advantage is that if profits rise, their pay automatically will too. Over time, their pay will be higher than it would have been without profit sharing.¹²⁰

There’s also a risk for employees: they will bear part of the cost of falling profits during bad economic times. Then again, the enhanced flexibility in labor costs makes it less likely that firms will need to fire employees during rough times.¹²¹ In this respect, workers’ security is increased.

How could we encourage profit sharing? In 2016, Hillary Clinton’s presidential campaign proposed offering firms that implement profit sharing a two-year tax credit equal to 15% of the amount they share (higher for small businesses).¹²² The credit would apply to shared profits up to 10% of a worker’s salary or wage. For instance, if a new profit share program in a firm added $5,000 to the pay of someone making $50,000 a year, the firm would receive a subsidy of $750. The cost of this subsidy would be in the neighborhood of 0.01% of GDP per year.

INFRASTRUCTURE AND PUBLIC SPACES

Public spaces and services matter for people’s lived experience. Think of roads, bridges, stoplights, enforcement of speed limits, air traffic control, sidewalks, museums, parks, sports fields, forests, campgrounds, beaches, oceans, lakes, swimming pools, zoos, phone lines, broadband, the internet, public television and radio programming, subsidization of free private TV and radio networks, libraries, festivals, and more.

Infrastructure also underpins a successful economy. America’s firms, and its citizens, face significant hurdles and risks due to our inadequate maintenance and improvement of roads, bridges, plane and rail systems, city layouts, broadband networks, and water systems. In 2013, the American Society of Civil Engineers reported that one-third of US roads are in poor or mediocre condition. According to the Federal Highway Administration, one-quarter of America’s bridges are deficient or functionally obsolete. The cost of traffic congestion in fuel and lost time is estimated to be nearly 1% of GDP. Delayed and canceled plane flights cost another 0.25% of GDP. We have an efficient freight-rail system for transporting products, but high-speed rail to move people around is nonexistent. Repeated droughts in California have exposed the inadequacy of our water supply systems. Four thousand dams are in need of repair. And as of 2015, 15% of Americans reported not using the internet and one-third lacked access to a high-speed connection.¹²³

This isn’t to say that America’s infrastructure is worse than it used to be. That notion is based largely on anecdote.¹²⁴ Nor is it to suggest that our infrastructure is far behind that of other affluent nations. We do lag behind some of them, according to the assessment by the World Economic Forum, but the gap isn’t enormous.¹²⁵ The point, rather, is that our infrastructure isn’t as good as it could and should be.
The needed amounts of money aren’t huge. One proposal, from a progressive think tank, estimates that to bring our roads, bridges, mass transit, rail, ports, airports, inland waterways, drinking water, wastewater, and energy infrastructure up to par would require additional expenditures by the federal government of about 0.5% of GDP per year.¹²⁶

Investment in infrastructure doesn’t only grease the wheels of the economy. It also increases employment.¹²⁷ Boosting employment is helpful in the aggregate, but it’s also vital, in the contemporary era, to the pursuit of geographical fairness. As production of food and manufactured goods has become steadily more automated and as more of it has moved abroad, smaller cities and towns across the United States have struggled economically. Places that suffer a sudden loss of a major employer experience particularly acute economic and social pain. Large job losses tend to have ripple effects, as unemployed households reduce their spending and thereby reduce employment at retail stores, restaurants, and other potential sources of substitute employment.

According to one study, counties with fewer than 100,000 residents accounted for 32% of the new businesses created during the 1992-96 economic recovery, but just 15% during in the 2002-06 recovery and 0% during the 2010-14 recovery. The pattern was similar for jobs: in the 1992-96 recovery, counties with population below 100,000 got 27% of the net increase in the nation’s jobs, while in 2010-14 they got just 9%.¹²⁸

If these patterns continue, there is no easy long-term fix for small cities and towns. But the building and repair of infrastructure can help in the short-run.¹²⁹ Given that a good infrastructure is directly beneficial for quality of life, and given that it can kick-start economic development, it tends to be money well spent.

PAID VACATION DAYS AND HOLIDAYS

In other rich democratic countries, the law requires that employers give their employees between 10 and 38 paid vacation days and holidays. The average in these nations is 27 days.¹³⁰ In the United States, the number is zero. Most public employees get some paid days off, and 77% of private-sector employers offer some to their workers. Yet some employees get none, and the average number of paid days off for those who get any is just 18.¹³¹

We should make the provision of paid vacation days and holidays mandatory. And it would make sense to increase the number to 10 paid holidays and 15 days (three weeks) of paid vacation, for a total of 25.

HOW MUCH WILL IT COST?

The additional expenditures needed to fund these various programs would total around 10% of GDP. Here is a breakdown.

2.25%	Earned Income Tax Credit
1.75	Health insurance
1.0	Full employment
0.8	Early education
0.5	Paid parental leave
0.5	Child allowance
0.5	Sickness insurance
0.5	Disability assistance
0.5	Eldercare
0.5	College
0.5	Infrastructure and public spaces
0.25	Pensions
0.2	Unemployment insurance and wage insurance
0.2	Social assistance
0.1	Apprenticeships
0.01	Profit sharing
0	Housing assistance
0	Minimum wage
0	Criminal justice reform
0	Affirmative action
0	Paid vacation days and holidays

Increasing public spending by 10% of GDP would be a significant change for the United States, but it wouldn’t be unprecedented. During the course of the twentieth century, government expenditures’ share of America’s GDP rose by more than twice that. And an increase of 10 percentage points would put the US merely in the middle of the pack, not at the top, among the world’s rich democratic countries.¹³²

HOW TO PAY FOR IT

What would be the best way to get the money? Broadly speaking, there are two options: “soak the rich” or “spread the burden.”

The world’s rich democracies tend to do the latter. They have a relatively proportional tax system, with everyone paying roughly the same share of their pretax income in taxes.¹³³ They do this instead of soaking the rich — taxing the rich at much higher rates than everyone else — for two reasons. One is to minimize tax resistance by the rich. The other is the need to go where the money is; even if the rich have very high incomes, there aren’t that many of them, so in order to generate a lot of revenue it’s usually necessary to spread the tax burden up and down the income ladder.

America too has a relatively flat tax system. Figure 1 shows average effective tax rates in the United States at various points along the pretax income distribution (hollow circles). An “effective tax rate” is calculated as taxes paid divided by pretax income. These calculations include all types of taxes at all levels of government. The effective tax rates paid by Americans are fairly similar for those with low incomes, middle incomes, and high incomes.

However, the distribution of pretax income is quite unequal. Households at the top get a much larger portion of the income than those in the middle or bottom.¹³⁴ As a result, the distribution of tax payments (dark circles in figure 1) also is very unequal. Households in the top quintile pay about 65% of all tax dollars, those in the middle fifth pay about 10%, and those in the bottom fifth pay 2%. Each is paying a similar percentage of their income in taxes, but the affluent end up paying a lot of the tax dollars because they have so much of the income.

Suppose we were to increase taxes for all Americans, keeping the distribution of tax payments exactly the same as it is now while increasing revenues by 10% of GDP. What would that change look like for households at various points along the income distribution? Households in lowest fifth of incomes would account for about 2% of these added revenues, households in the middle around 10%, and households in the top quintile 65%. In dollar terms, households in the bottom fifth of incomes would pay, on average, about $1,400 more per year, those in the lower-middle fifth $3,600, those in the middle fifth $7,000, those in the upper-middle fifth $13,100, and those in the top fifth $46,200 more.¹³⁵

As a presidential candidate in 2008, Barack Obama pledged to not increase taxes for households in the bottom 95% of incomes. The Democratic nominee in 2016, Hillary Clinton, made the same pledge. In the contemporary US context, there is some sense in focusing on the top in the search for more revenue. The chief rationale for progressive taxation is that those with more income can afford to pay a larger share of that income than those with less.¹³⁶ While the incomes of Americans in the middle and below have risen slowly over the past few decades, for those at the top incomes have soared, so it’s reasonable to ask them to contribute a larger share of their income.

However, there’s a limit to how much additional tax revenue we can get from those at the top. Figure 2 shows the effective tax rate on the top 5% of American households going back to 1960. We have three estimates of this tax rate (two of the three include only federal taxes, not state and local). The dot for the year 2016 indicates what the effective tax rate on this group would need to have been in that year in order to increase tax revenues by 10% of GDP.¹³⁷ It’s an extremely high rate, and one far above the actual rate at any point in the past half century. This seems neither desirable nor likely to find favor among policy makers.

What, then, should we do to increase government revenues by 10% of GDP? A multipronged approach might work. Here is one possibility. The numbers here are percentages of GDP. All are estimates.

5.0%	Add a national consumption tax (value-added tax, or VAT) at a rate of 12%, with limited deductions or a small flat rebate
1.4	Improve collection of unpaid taxes and reduce use of tax havens
1.0	Return to the 2000 (pre-Bush) federal income tax rates for taxpayers with incomes below $450,000
0.7	Increase the effective tax rate for the top 1% of taxpayers by 6 percentage points (from 34% to 40%)
0.3	Return the estate tax exemption threshold and rates to their 1965-75 levels
0.7	Add a carbon tax
0.5	Add a financial transactions tax of 0.5% on trades
0.3	Increase the payroll tax by 1 percentage point
0.2	Increase the cap on the Social Security payroll tax so the tax covers 90% of total earnings, as it did in the early 1980s
0.2	End the real estate tax credit

Begin with a national consumption tax. The United States raises the least revenue from consumption taxes of any rich democratic nation, as figure 3 shows. Currently we collect only about 5% of GDP in consumption taxes, almost entirely at the state and local levels. Most other affluent countries collect 10% or more. A value-added tax (VAT) at a rate of 12%, with limited deductions, would likely bring in about 5% of GDP in revenue.¹³⁸

Because of its regressivity, the idea of a large consumption tax has yet to be embraced by America’s left.¹³⁹ The degree of regressivity can be lessened by exempting more items from the tax¹⁴⁰; but the greater the exemptions, the less revenue the tax will bring in. A better strategy might be to offset the regressivity of a new consumption tax with other changes to the tax system.

Those on the political right tend to object to a VAT for fear it will become a “money machine” — a tax that can be steadily increased over time. But this fear is based on a misreading of the experience of other rich nations. Some countries have decreased their VAT rate, some have held it constant, and most of those that have increased it did so mainly in the 1970s and early 1980s, when high inflation made such increases less noticeable.¹⁴¹ Some argue that tax increases in rich countries since the 1960s have come mainly via VAT increases, but actually they’ve come as much or more via increases in income and payroll taxes.¹⁴²

Where would the rest of the new revenues come from? By improving collection of unpaid taxes and reducing the use of tax havens, we could raise, as a conservative estimate, 1.4% of GDP.¹⁴³

We could return to the pre-George W. Bush income tax rates for taxpayers with incomes below $450,000. (We did so in 2013 for incomes above that amount.) This would increase revenues by about 1% of GDP.¹⁴⁴

We could raise income tax rates for those in the top 1% a bit more.¹⁴⁵ This might entail increasing the tax rate on personal income or capital income, or both. The effective tax rate on the top 1% currently is around 34%.¹⁴⁶ An increase of 6 percentage points, to a 40% effective rate, would hardly be confiscatory. Increasing the effective tax rate for this group by 6 percentage points would generate about 0.7% of GDP.¹⁴⁷ A common worry is that raising taxes on the rich will cause them to flee, or at least to park their money elsewhere. The best available evidence suggests that while high earners are indeed responsive to changes in tax rates, the magnitude of this effect is small.¹⁴⁸

Since the 1970s, the estate tax has been steadily decreased. The exemption threshold — the amount of the estate beyond which the tax kicks in — has been reduced to the point where the tax applies to just two out of every thousand estates. And the tax rate has been lowered. Since 2010 estate and gift tax revenues have totaled just 0.13% of GDP, compared to 0.45% between 1965 and 1975.¹⁴⁹ Returning the estate tax rate and exemption threshold to the earlier levels would be appropriate given the rise in wealth inequality in recent decades.¹⁵⁰ It could boost government revenues by around 0.3% of GDP.

A carbon tax could generate about 0.7% of GDP in revenues.¹⁵¹ The United States arguably should have a carbon tax anyway, in order to shift resources away from activities that contribute to climate change.¹⁵²

Every rich democratic nation other than the United States has a tax on financial transactions, such as purchases of stock shares. On average those taxes yield about 0.5% of GDP in revenue.¹⁵³

Increasing the payroll tax by 1 percentage point (half a percentage point on employees and half a point on employers) would add about 0.3% to revenues.¹⁵⁴ This would leave the payroll tax rate well below that in many European countries, and almost certainly below the level at which it would be a significant deterrent to employment.

We could increase the cap on earnings that are subject to the Social Security payroll tax. A person’s earnings above $128,400 (as of 2018) aren’t subject to this tax. Because a growing share of total earnings in the US economy has gone to those at the top, a growing share has been exempt from the Social Security payroll tax. In the early 1980s, about 90% of earnings was subject to the tax; this has dropped to below 85%. Raising the cap to get back to 90% would increase tax revenues by about 0.2% of GDP.¹⁵⁵

Finally, we could do away with the real estate tax credit, which allows homeowners to deduct their state and local property tax payments from the income on which they pay federal income tax. The evidence suggests this credit does nothing to increase homeownership, and it mainly goes affluent taxpayers. This would increase revenues by about 0.2% of GDP.¹⁵⁶

This set of proposed changes is just one of many possible ways to increase tax revenues.¹⁵⁷ The point is that the technical details of getting an additional 10% of GDP are not difficult.

A PARTIAL BUT VALUABLE FIX

The recommendations I’ve offered won’t solve every problem America faces. We also need to deal with climate change, foreign policy challenges, prevention of future financial crises, and much more. But the new programs and expansions of existing ones outlined here would improve the lives of lots of Americans. We know from our own experience and those of other rich democratic nations that public insurance programs and employment-promoting services help, and that they do so without curtailing individual freedom, impeding the economy, or breaking the bank.