Broken Contract

It’s time policymakers recognize that in the new global economy, growth and economic security go hand in hand.

For the first time in its history, America is in danger of breaking its quintessential economic promise: that with hard work and education, each generation will have the opportunity to do better than the one that preceded it. Many Americans sense this danger: According to two polls taken in recent years, a majority are “worried and concerned” about reaching their economic goals and believe that their children will be worse off than they are. Their anxiety is understandable. Despite strong macroeconomic performance, many workers today are not fully sharing in the prosperity of the new global economy and must cope with growing levels of economic risk.

Some on the right continue to respond to these troubling economic trends by arguing that unfettered free markets always produce the best of all possible outcomes and denying that insecurity and inequality are much of a problem. Others, predominantly on the left, argue that the global economy is the ineluctable enemy of the average American worker and that the only way to improve his or her lot is to turn inward and place various government requirements and limitations on industry. But both views are misguided, and they ignore the fact that the disruptive forces of the twenty-first century global economy are both a blessing and a curse. These forces bring substantial economic benefits to American families, but they can also cause real economic difficulties. It would be short-sighted to forgo such potential gains, but it would also be unjust and unwise to reject efforts to shore up the social safety net for fear of interfering with market forces.

Rather, what is needed is a new model that acknowledges the two-sided reality of the twenty-first-century economy. Such a model should be guided by an understanding that economic growth is stronger and more sustainable when that growth is broadly shared, and that a robust yet well-tailored government role is necessary both to correct for the market’s limitations and to enhance economic security. As the employer-based system for providing economic security comes under increasing strain from the forces of global competition, this model would not strive to prop up outdated arrangements, but rather it would be built on a new and sustainable social compact among individuals, corporations, and government. Individuals would take primary responsibility for their own economic security and accept certain mandates and default arrangements, but they could rely on employers and government to help manage economic risks that they could not manage alone. Employers would continue to play an important role in facilitating the provision of benefits and paying for a portion of their cost but would not provide such benefits directly. And government would not only set the rules that shape private sector and individual efforts to manage risk but would also serve as the ultimate guarantor of a basic level of economic security. Such a New Social Compact would help American workers manage the risks of the twenty-first century economy, while also sharing in its prosperity.

The Era of Growing Economic Insecurity

Americans’ increasing insecurity about their economic futures is a reflection of two worrisome, and by now familiar, trends. First, American families face greater economic risks and lack adequate safety nets during periods of hardship. Second, the nature of economic growth today is far less broad-based than has been the case throughout American history; most Americans’ wages have been stagnant while the inequality gap has widened enormously.

American workers face greater insecurity because many economic risks have been shifted onto individuals and away from employers and the public sector–a shift that the Economic Policy Institute’s Jared Bernstein has labeled “you’re on your own economics.” Proponents of this approach call for policies that rely almost exclusively on the putative benefits of individual incentives, such as reduced marginal tax rates. They pay little attention to market imperfections and limitations–such as those that result from costly and limited information–or to the reality of individual decision-making, which can differ significantly from the perfectly rational behavior assumed in classical economics. They also ignore the absence of markets for various types of insurance, the fact that markets may not provide merit goods (such as health care) to the degree that society demands, and sometimes even the fact that government must set the rules under which markets operate. And “you’re on your own” advocates fail to realize that their approach can result in significant disparities in economic outcomes, even among those who invest in their education, work hard, and plan prudently for the future. Under a “you’re on your own” approach to economics, those who suffer unforeseen hardship may simply be left behind, while improving economic performance is simply a matter of getting government out of the way.

The embrace of this approach in recent years, coming at the same time that the employer-based benefit model is deteriorating, has resulted in growing individual risk associated with such challenges as health care, retirement security, and job loss. Let’s start with the most urgent source of economic insecurity for many families: health care. As the cost of health insurance premiums has risen–from 8 percent of median family income in 1987 to 17 percent in 2003–fewer firms are offering health insurance, leaving more Americans to fend for themselves. The share of the population with employer-provided health coverage declined from 64 percent in 2000 to 60 percent in 2005. Even firms that have not cut back on their health benefits have shifted the cost of rising premiums to employees in the form of reduced wage growth.

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