Job Insurance – Part 2 (The State Option)

In Budget Politics, California, Economic Planning, Economics, Full Employment, Politics of Policy, Public Policy, Public Works, Social Democracy, Social Policy, WPA on August 17, 2009 at 9:51 am


In part 1 of this series, I described how a Job Insurance system could work if it was organized nationally by the Federal government. However, as I suggested in 50 State Keynesianism, Part 2, it is also possible to run job insurance systems on a statewide basis if the Federal government balks at establishing a job insurance system.

Given the severity of the unemployment situation, and the likelihood that even should economic recovery begin in the second quarter and continue unabated that we will have persistent high unemployment, I believe that action on job insurance is necessary regardless of whether the Federal government can act.

State-Level Job Insurance:

State-level job insurance programs are more difficult to organize than national systems, largely because you’re dealing with a lower number of premium payers per re-hired workers. A national program creating four million jobs for example, would have 37.5 payers per worker, whereas a California state program creating 1 million jobs, would have only 18.5 payers per worker. Nonetheless, the fiscal capacity is there for states to create jobs – it’s a question of finding revenue sources (such as job insurance premiums, state reserve banks, etc.) and passing legislation.

The task becomes somewhat easier if states could re-purpose their existing Unemployment Insurance (UI) systems to finance their job insurance system. While many states have been under-funding their UI systems in order to keep taxes low, it’s still worth noting that state UI systems, with their dedicated taxes on employers, can raise significant revenue. The state of California, for example, raises about $5 billion a year in UI taxes – combine that revenue with a job insurance program that generated $4 billion a year in premiums (see the example in the second-to-last paragraph at that link), and you could easily build up a $40 billion reserve in about four years (or a $20 billion reserve in about two years, if you assume the state could kick in for 1/2 the cost). This would allow the state Job Insurance (JI) program to create 1 million jobs immediately in the event of a future recession the size and scale of this one (without any other state financial assistance)- which would halve an 11.6% unemployment rate down to 5.8%.

However, we are in a recession right now, and we need jobs right now. And while financing a massive jobs program without the luxury of several years to build up reserves is more complicated, if you expand the range of fiscal tools at your disposal, the task becomes more manageable, even for a state like California. Let’s take the task of coming up with $40 billion in new spending and break it up: potentially $9 billion could come straight from the JI system, $15 billion could come from a California Reserve Bank loan, and another $15 billion could come from the state itself (or $9 billion could come from JI and $31 billion from the Reserve Bank), or any other combination. There are additional ways that the state’s contribution could be made easier by the Federal government, but more on this later.

Blue State Job Insurance:

Another way to thread the needle of Job Insurance financing is to follow the basic logic of insurance systems, by seeking to enlarge the pool, by establishing an inter-state job insurance compact. While gaining acceptance from states dominated by conservative Republicans who are ideologically opposed to extending Unemployment Insurance to temporary and part time workers would probably be impossible, if you restrict yourself to just the “blue states,” you can build a quite big pool indeed – the 2006 “blue states” alone held 168 million people.  With a larger pool, you can create more jobs with lower premiums.

Furthermore,state compacts would also have other benefits – they would allow for important regional projects to go forward (like improving Amtrak’s Northeast Corridor, for example, or beautifying the beaches along the Pacific Ocean, or interstate bridge maintenance and repair), they would decrease the already low likelihood of “footloose” corporations (although a $10/month/worker tax is so low that businesses would barely notice it), and they would also decrease the equally unlikely chance of mass migration to find jobs in other states (but if eligibility depends on contributions, it’s probably not going to happen).

Federal Assistance:

While at the outset I said that Federal action on Job Insurance would be preferable to trying to build programs state-by-state, it is still the case that even if Job Insurance can’t pass through this Congress, there are a number of measures that Congress could take to help the states establish job insurance systems:

  • Allow States to Experiment With UI – as you can see from the example above, the fiscal task of establishing and operating a job insurance system becomes much easier if states can re-purpose their Unemployment Insurance systems. Since unemployment insurance in America is a Federal-state joint program, a Federal waiver would be crucial to making this new system work. It’s a similar idea to the so-called “state option” on health care reform (which would allow states to experiment with single-payer systems under the proposed new health care system) – one circumvents political blockages in the national legislature by allowing states with progressive majorities to move ahead and hopefully shift the “Overton window.”
  • Guaranteeing/Purchasing State Bonds/Loans – as I suggested in 50-State Keynesianism, Part 1, one of the ways that the Federal government could “lend” its capacity to deficit-spend to the states is by acting as an alternative to the volatile and politically-charged bond markets and rating agencies in dealing with state debts is by agreeing either to guarantee or to purchase “economic recovery bonds” specifically targeted at preserving and creating state jobs. When you combine the establishment of state reserve banks (see part 2 of that series) with the establishment of state job insurance systems, you create a potentially quite powerful mechanism for transfering Federal fiscal assistance directly into job creation.
  • Federal Contributions – while joint Federal-state programs in other areas of social welfare have not always worked out as well as the proponents of Social Security might have hoped (AFDC or “welfare,” Old Age Assistance, Unemployment Insurance, and Medicaid are all examples of how state-run social programs without state fiscal capacity to deficit spend inevitably run into crises in recessions), if progress any other way is blocked, you could have the Federal government pay something along the lines of 30-50% of the cost of hiring new workers, which would greatly accelerate the establishment of job insurance systems.


Ultimately, I believe that job insurance must and should be a Federal program – in 2009, the U.S economy is nationally integrated, and we are all affected by world-wide recessions that make unemployment a national concern. Moreover, there is a major shortcoming to the state-run system that should give progressives pause before they too-casually accept the old notion of the states as fifty “laboratories of democracy.” In the end, progressives should and do care about helping everyone who needs it, not just the people who are lucky enough to live in states with progressive majorities – indeed, the regional disparities in poverty and other conditions means that it really is impossible to fully grapple with national problems without assisting those who need it in specifically those conservative states which will refuse to act on their own. It is wrong to protect unemployed workers in California while leaving unemployed workers in Texas to go without work – an accident of geography should never be the basis for social protection.

Nevertheless, the severity of the situation demands that any option for positive action must be taken.

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  1. […] catch up on part 1 (national job insurance), part 2 (state job insurance), part 3 (the meaning of a work state), and part 4 (the experience of working […]

  2. […] Parts 1, 2, 3, 4, and 5, see the lovingly hand-crafted links […]

  3. […] rules and the Blue Dog Caucus. As I’ve discussed in my 50-State Keynesianism and Job Insurance series, I believe that it’s possible to reform state governments to be successful […]

  4. […] I’ve discussed in previous posts, it is well within the fiscal capacity of California (or indeed, of most states) to […]

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