The U.S. Needs a New and Improved New Deal, by MARK THOMA, The Fiscal Times


This recession has been particularly unkind to labor markets, and indications are that a full recovery of employment is still years away. But even after the recession finally ends, worrisome structural trends that were present before the recession began will continue to cause considerable uncertainty for working class households.

The rapid pace of structural change in recent years due to technological innovation and globalization has increased the risk of worker displacement in a wide variety of industries.  Additional factors such as the decline in employer support for health care, the decline in employer-provided pensions, threats to Social Security, stagnant wages, and highly flexible labor markets compound the uncertainty.


The social contract of bygone days has faded
in the face of globalization and other pressures.

There was a time when employers provided employment, health and retirement security in return for employee loyalty, but the social contract of bygone days has faded in the face of globalization and other pressures.

President Obama, Congress and most Americans are very focused on the problems arising from the current recession, and that’s understandable. But the structural issues that are generating so much additional uncertainty for working-class households should not be ignored. 

A New New Deal
What the country needs is a “new and improved new deal” that reduces the risks associated with structural change, and does a better job of preventing and easing cyclical downturns. The original New Deal,  shaped by the experience of the Great Depression, was designed to overcome problems associated with large cyclical fluctuations in the economy. The “three Rs”  that served as its guiding principles – relief, recovery and reform – reflected this emphasis. We also see the focus on cyclical problems in the development of monetary and fiscal policy tools as countercyclical stabilization devices, and in the automatic stabilizers that have been built into the economy.

Both monetary and fiscal policy have helped to ease the cyclical downturn we are experiencing, but as our present experience makes all too clear, we can do better. Part of a new and improved new deal should focus on doing more to prevent problems before they occur and limiting the damage when cyclical downturns do occur despite our efforts. There’s little doubt that inadequate regulation by monetary authorities before the most recent financial crisis allowed problems to occur, and fiscal policy in particular could have been used more effectively to offset the downturn.

But the core of a new and improved new deal should be to ease the uncertainties associated with structural change. On average, technology and globalization make us all better off, but the distribution of the costs and benefits from this type of change does not guarantee that every individual will be a net beneficiary.

If you are one of the people who loses a job or has skills made obsolete because oftechnology or globalization, the change does not work in your favor. We often rely upon the idea that the winners could fully compensate the losers and still have something left over, and then use this to justify support for these kinds of policies. But it’s rare for this compensation to actually take place. Hence, it’s understandable why some groups are not so supportive of unbridled structural change.

Maintaining flexibility is the key to responding to shocks that hit the economy – the faster we can adjust efficiently the better – but this flexibility is also a big source of uncertainty for labor markets. So how do we balance the desire for flexibility with the desire for security? That is, how do we achieve “flexicurity?” 

Taking steps to reduce the costs of changing jobs is a start. More government help matching workers and jobs along the lines that have been so successful in Denmark would be beneficial, as would enhanced portability for health insurance, tax credits for workers willing to relocate, effective job retraining programs, wage insurance, and unemployment compensation linked to industry or region-specific conditions. Anything that reduces the cost of changing jobs without unduly inhibiting the desire to look for employment would help.

More generally, the insecurity that working class households face could be reduced by enhancing Social Security to compensate for the loss of employer-based retirement programs, by making health care truly universal, by improving support for childcare – expanding preschool has multiple benefits – and through other social programs recognizing that workers have responsibilities that go beyond the workplace. Implementation of international labor and environmental standards wouldn’t hurt either. The fact that multinational corporations have rendered traditional national borders obsolete makes country-by-country approaches to many problems, including this one, difficult, if not impossible. Coordinated responses across countries are needed, but those types of policies are unlikely in the immediate future.

The various shades of populist revolt we are seeing are due, at least in part, to worries about the future. Working class households want and need more security. If we want to maintain a flexible and dynamic economy that can make the transitions necessary to remain competitive in a world economy, but still be compassionate toward those who end up paying the costs of that flexibility, we need to enhance our social protections so that the adjustment costs are more equitably distributed.

As members of Congress reconvene, I would like to see them address our present problems through another round of stimulus directed specifically at job creation. Unfortunately, I don’t hold out much hope that Congress will do much along these lines. But it’s still possible for Congress to do something important for workers by beginning work on reducing the uncertainty associated with structural change. Concerns about how to pay for new initiatives will make progress difficult, but workers will benefit greatly if Congress and the administration somehow manage to ease the uncertainties that arise from our need to remain competitive in an ever-changing global environment.

Leave a Reply