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Online Extra: The Free Market's "Softer Side"


Jacob Hacker's research on the uneven state of the American safety net has made the young Yale University political scientist a top idea merchant to Democratic think tanks. On Mar. 17, BusinessWeek Washington Bureau Chief Lee Walczak interviewed Hacker and discussed his ideas at length. Edited excerpts of their conversation follow:

Q: We've heard a lot about the Ownership Society. Is there a flip-side -- a group of Americans who shrink from assuming more financial risk?

A: Sure. But people's views about risk really vary depending on what you're talking about -- retirement security, personal savings, home ownership, or health care. Even people who feel perfectly comfortable investing in the stock market and owning their own homes often have qualms about individual medical accounts or Social Security private accounts.

Q: Is the government safety-net concept still popular, even in this post-Big Government era? I thought support for the collectivist dream of government-funded social protection was supposed to be fading.

A: I wouldn't put it in exactly those terms -- "the collectivist dream." The idea of social insurance against risk is quite compatible with a dynamic, free-market economy. Americans believe that people should work hard and get ahead on their own, but when disaster strikes and they need help with retirement or disability, Americans as a whole should come to their aid.

Q: Why is that the case?

A: This is the softer side of a free-market economy.... Even in good times, there's a feeling that we need protection against risk, and we value the protections that are still in place. Social Security is there, and it's one of the most popular programs in the U.S.

Changing it is going to face a very high burden. On the other hand, most Americans have health coverage through their employers, so when push comes to shove, the change [in this area] is harder. That may be why we have Social Security but do not have national health insurance.

Q: What's the condition of the safety net for the poor?

A: There have been areas of expansion and areas of retrenchment. An example of the former is the Earned Income Tax Credit, which has grown from nothing in the '70s into the largest social program since Social Security.

On the other hand, we have the 1996 welfare reform, which moved a lot of people off of welfare and gave them more incentive to work. The ways in which our social programs have changed have been in keeping with the drive for more individual responsibility.

Q: Is there an ongoing process of reentitlement, under which the middle class and especially seniors find ways to secure government benefits?

A: In the area of entitlements, such as Medicare and Social Security, there have not been very dramatic changes.

We have cut back quite a bit on state general assistance to the poor under the welfare system. We feel that everyone should be working, but we also feel that government should play a core role in providing income security for the aged and filling the gaps in the health-care system through Medicaid.

There has been a kind of Darwinian process of political selection over the last 20 years in which the stuff that has survived is really the stuff that's the most popular. And that may be hard for the conservative movement to understand. They felt that welfare reform and changes in Medicare that encouraged the role of private health plans would form a slippery slope to other reforms. But that hasn't happened.

Q: What would a more appropriate safety net look like?

A: In my research, I have shown that there has been a pretty significant increase in the variability of family income -- up and down. These big losses aren't adequately taken care of by our existing system of social protection. As President Bush himself has noted, that system was shaped in a world when men were the primary breadwinners, unemployment swings were short and cyclical, not long and structural, and people worked for a long time for one employer and had generally stable employment and family lives.

We now live in a much more vibrant, competitive, deregulated economy, one that's buffeted by the winds of global change, and a lot of these protections have not evolved to meet that new environment. The conservatives' critique that a lot of our institutions have not evolved is absolutely right. They just have the prescription backward.

Q: How so?

A: For them, the idea is that if you're in a more competitive and uncertain economy, you should also have a more decentralized and individual-based system of savings and responsibility. I think you have to encourage all sorts of individual savings, but you also have to provide workers with a basic form of insurance protection that is very flexible, follows people from job to job, and covers big risks.

Q: And how would you do that?

A: My idea is to create a kind of catastrophic insurance plan that could be administrated by the private system but be heavily regulated by the federal government. This would look a lot like the stop-loss coverage that employers get against liability, health-care costs, and other big risks to their income, but would be for families.

That insurance would be coupled with all sorts of enhanced savings vehicles to give lower- and moderate-income people an opportunity to do better on their own. The recent debate over bankruptcy legislation indicated that there's a need for this. Roughly 43% of bankruptcies are due to health-care costs, and two-thirds are due to the triumvirate of health costs, loss of employment, or divorce.

We need a universal savings account that would be available to citizens for schooling, purchase of a first home, education, and health-care costs and retirement. The amounts would be matched, based on income, by employers.

Q: Sounds expensive. Have you estimated what such a safety net might cost?

A: I have been asked to do just that by a new policy institute under a project headed by [Brookings Institution economist] Peter Orszag and plan to have something by August. I'm also going to look at the cost side in my forthcoming book, The Great Risk Shift. The cost will not be trivial. There's simply no way to do this without spending a significant amount of money.


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