Martin Feldstein’s Left-Wing Labor Scheme

The cleverest idea from Martin Feldstein was a plan to take unemployment funds away from employers and hand them to employees. Workers of the world, unite!

Feldstein, who died June 11, was an illustrious Harvard economist of a conservative bent. He worked for a while in the Reagan administration. Progressives had no use for him. I was biased in his favor, partly because he opposed big government, big taxes and big deficits. Partly, too, because, as a cub reporter, I got an interview with him.

Professor Feldstein took a look at unemployment funds. They have always been, in a sense, the property of the employers who fund them. Acme Widget chips $1 million into a pot. When Acme lays workers off they draw from the pot and Acme has to replenish. If there are no layoffs Acme can cut its contributions.

What if the ownership were turned around? Instead of a $1 million account assigned to Acme, there’s $1,200 assigned to John Doe and $2,200 to Jane Roe and so on. When Jane is laid off she draws down her account. If the account goes to zero the government lends her money to keep her benefits going; the loan is repaid out of contributions from Jane’s next job. Anything left in the account when Jane retires belongs to her.

Here’s what I said about the idea in a 2001 editorial:

Right now, the balances in unemployment insurance funds are attached to employers, in the form of “experience ratings” that determine their tax rates. Why not attach them to individual workers instead? The government would put the tax levied on your salary into a 401(k) account with your name on it. It would earn interest. If you got laid off, you’d draw down benefits from this account; up to certain limits, you could borrow (at interest) against future tax payments. If there’s any money left when you retire, it’s yours to spend. A negative balance would be forgiven at that point.

Just this sort of reform has been advocated for the past 26 years by Harvard professor Martin Feldstein. It would create a powerful incentive for people to get back to work quickly, even if that meant taking jobs they didn’t particularly want. Yet it would not penalize people who can’t land any job offers. In a paper published three years ago, Professor Feldstein calculated that it would be considerably cheaper for taxpayers to forgive negative balances than to continue to subsidize unemployment insurance in the present fashion.

What this world needs: More pro-worker ideas and more right-wing economists. Both are scarce.