McCain's Big (Government) Economic Idea

His wage insurance program could become pricier than the New Deal.

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John McCain’s left-for-dead presidential candidacy has been resurrected. Not only does he have a good shot at winning the New Hampshire primary, but the latest Intrade betting market data have Rudy Giuliani at 28 percent, Mitt Romney at 26 percent, and McCain gaining at 17 percent. That’s pretty good for a guy whose numbers were once down in Ron Paul territory. (It seems as if Giuliani’s hemorrhaging support is all bleeding over to McCain.)

Now the rap on McCain among Republicans is that while he’s great on the war on terrorism, he’s weak on domestic policy. He voted against the 2001 and 2003 tax cuts, for instance. So I couldn’t wait to read his just-released economic plan. Most of it is pretty standard stuff: Get rid of the alternative minimum tax. Extend the Bush tax cuts. Make it harder for Congress to raise taxes. But right toward the end of his agenda is this absolutely mind-blowing bit, especially for free-market types:

John McCain will overhaul unemployment insurance and make it a program for retraining, relocating and assisting workers who have lost a job. The unemployment insurance system needs to be modernized to meet the goals of helping displaced workers make ends meet between jobs and moving people quickly on to the next opportunity. John McCain will reform the half-dozen training programs to approaches that can be used to meet the bills, pay for training, and get back to work. John McCain believes that we can strengthen community colleges and technical training, and give displaced workers more choices to find their way back to productive and prosperous lives.

McCain expanded on this in a recent chat with the editorial board of the Detroit News:

McCain said that a displaced worker who ends up at a fast-food restaurant or other lower-paying job shouldn't be penalized because the economy is changing.... "If someone has to work at McDonald's, I will compensate them for the loss of income for some period of time," McCain said. "We need to compensate them for the difference as an incentive to stay in the workforce." The concept could be costly in Michigan. Thousands of autoworkers, who are paid an average of $28 per hour, have lost jobs in recent years, and national surveys have shown that fast-food workers make an average of $7.50 to $8 per hour.... McCain said he would reallocate money spent on existing retraining programs to help pay for his proposal, although he had no estimate on how much it would cost.  

This is an idea that Democrats have been inching toward: a move to a Danish-style “flexicurity” system. In that country, workers who lose their jobs have almost their entire salary replaced by the government but are also required by the government to aggressively look for new employment or accept retraining in a new field.

It’s very expensive. For the United States, completely copying the Danish model—lauded by many as a response to globalization-inspired worker angst—could cost some $400 billion to $500 billion a year if it is as expensive for us as it is for the Danes.

Now what McCain seems to be proposing is a more modest “wage insurance” idea. Under a plan originally put forward by Brookings Institution economist Robert Litan and University of California-Santa Cruz economics Prof. Lori Kletzer, a laid-off worker who once earned $40,000 and found a new job paying just $30,000 would receive $5,000 a year--broken down into quarterly payments--for two years after the initial layoff. Such a plan might cost $4 billion a year.

Yale political scientist Jacob Hacker would up the ante considerably with a $34 billion-a-year "universal insurance" program. If a family experienced catastrophic medical costs or a large drop in income—say, more than 20 percent—owing to a variety of common risks (unemployment, loss of wages because of sickness or childbirth, temporary disability, or the death of a spouse), Hacker's universal insurance plan would make up a portion of the loss ranging from 20 percent to 50 percent of all losses or costs in excess of a fifth of that family's income. And House Ways and Means Chairman Charles Rangel has a $1 billion-a-year plan to expand Trade Adjustment Assistance, a benefit and training program for manufacturing workers who lose jobs to trade, to include service workers.

My take: Clearly, this is McCain’s version of his hero Teddy Roosevelt’s Square Deal. Just as that plan was TR’s governmental pushback against unfettered capitalism, this is McCain’s response to globalization or, more accurately, his response to worker concerns about globalization. And maybe it would be a smart move. By reducing worker worry, wage insurance makes it more likely that America will continue to embrace free trade.

Of course, there are downsides here. First, it could make U.S. labor markets less mobile and dynamic as there would be less incentive for workers to get back into the workforce or start a new business because of Uncle Sam’s largess— especially if the carrot isn’t accompanied by a stick. Second, the program might grow ever bigger, becoming a massive new entitlement. The McCain brand has two big components: tough on defense, tough on spending. Not sure how proposing something that could become pricier than the Great Society or New Deal fits into that.