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Digital • Economy • Growth

A digital progressive project

Karen Kornbluh - 11 December 2015

Digital technology is unleashing new growth and opportunity for some, but will only strengthen our societies if we reform our industrial age social policies

In the industrial economy of the late 19th and early 20th centuries, companies rationalised their processes to take advantage of capital investments with scale production. These new arrangements produced economic growth, but also major economic and social dislocation; many families moved to cities to take factory jobs and workers gave up farm life for a wage income. Companies amassed economic power, and inequality grew. Throughout Europe, a patchwork system of social insurance grew to soften the hard edges of the industrial economy for workers and their families by helping them share the risks associated with the inability of the breadwinner to earn the family income because of sickness, old age, a temporary layoff, or disability. Franklin Roosevelt borrowed the concept for the United States’ own version of social insurance. These systems, along with consumer protections and labour laws, helped bring about the great progressive triumph of middle class prosperity and dignity of the 20th century.

However, in the last few decades, as the digital revolution has disrupted the industrial economy, it has also disrupted middle class existence. Those who seek to restore economic security and combat growing inequality should look to the great innovation of the last century, social insurance, but update it to meet changed circumstances. They also should find ways to harness the new technologies to update the social sectors. Progressives should not attempt to put the digital genie back in the bottle, but instead look to reform progressive policies for the new digital age.

The Organisation for Economic Co-operation and Development (OECD) calls the internet ‘a great enabler’, like electricity and the combustion engine before it. The internet connects and drives down the cost of transactions and collaboration. Suppliers link to designers, innovators to producers to consumers, dissidents and artists have outlets to reach a public that they could not previously have dreamed of reaching. The internet favours the edge over the centre and the lean over the large. In its initial stages in the 1990s it unleashed innovation, investment and productivity – driving up wages and employment.

However, the internet age, like the industrial age before it, has also resulted in great dislocation for families, workers, and communities. The internet accelerates globalisation by allowing companies to outsource many functions around the world and creates a ‘winner-takes-all’ economy that drives down wages and employment-related social insurance for workers in commoditised industries and jobs. It undermines the industrial age protections while transferring political and economic control to a highly educated few, who are able to leverage capital and other scarce resources.

Just as politicians are finally recognising the need to address these challenges, new technologies are changing business organisations again. Data science, artificial intelligence, and advanced automation will drive additional economic and social advances – and they will also introduce additional competition to labour, in the form of algorithms and robots.

As in the industrial age, the problem is not the technology or the business organisation, but a failure of policies. A new digital progressive project should reform industrial era policies to help broaden the benefits of the new age.

First, policy reform would remake the social insurance system for the new economy. Doing so offers the upside of unleashing the potential of an inclusive new digital economy and would restore economic security to working families. However, it runs the risk of ending the fragile ceasefire negotiated over the existence of these social insurance programmes, and for this reason it is not to be undertaken lightly. But as the UK Labour party warned in the 1990s about the British health system, these programmes must be reformed so that they remain relevant to the middle classes if they are to be saved.

The great social insurance programmes that underpin the economies of the major democracies were created in response to a transformative period analogous to the one we live in today. The US was late to social insurance policy, waiting until the exigencies of the Great Depression led Franklin Roosevelt to copy the programmes that had already grown up in Europe and were the subject of state-level experiments in the US. Bismarck’s Germany led with a sickness law, workmen’s compensation and compulsory old-age insurance – all created in the 1880s, and unemployment insurance finally in 1927. England’s workmen’s compensation law dated to 1880, though its sickness and unemployment insurance laws did not bear fruit until 1911, pushed along by Winston Churchill, and its old-age insurance system was not created until 1925. Denmark had been the first to institute a national old-age pension system followed by France, which in 1897 created an optional system that became compulsory in 1910; France had created voluntary unemployment insurance in 1905 and a sickness insurance law in 1930. These systems differed in how much of the contributions came from employers, employees and government, how premiums were computed, what benefit levels were, and what protections were included.

Social insurance has been one of the most successful government initiatives ever undertaken. The universality of these systems helped bond our societies together, while the progressive transfers kept inequality in check and kept the wolf from the door for families without a financial cushion when an assembly line closed, an injury occurred, or the breadwinner grew too old to work in the mill. As Roosevelt put it when he borrowed the model, these programmes helped guard against “the hazards and vicissitudes” of life in the new economy. They supplemented basic employment innovations like the creation of the minimum wage, limits on the working week, and the ban on child labour.  The success and durability of capitalism in the 20th century cannot be separated from the success of social insurance.

In the new digital economy, social insurance programmes continue to provide families essential support. Yet because they were designed for a different economy, and in many instances a different family, they are in need of reform. Today, workers in developed countries face a volatile, ‘winner-takes-all’ economy. They compete with workers around the world for wages and benefits. They are increasingly employed in nonstandard positions – temporary, part-time, freelance, contingent, day labour, on-call, self-employed, or ‘sharing’. They change jobs more frequently and are unemployed for longer periods than in the past. Employees today are less likely to be offered benefits through employers. Only those who have rare and needed assets to sell on the global market can earn large returns; those whose work can be done off-shore or by a machine have no such luck.

The family has changed as well. Today, most families with children are headed by either two working parents or a single parent who works. Parents in these new ‘juggler families’ are working more and more hours, but wages have stagnated, and so they are running harder just to stay in place. For these families, juggling to make ends meet, time off to care for a sick relative can result in devastating income interruptions and even job loss. As a result, juggler parents often wind up paying a hefty penalty just to be good parents. They lose jobs as a result of a child’s illness; they take part-time, contingent, or other nonstandard jobs; and they sacrifice wages, benefits, and job security if they cannot do shift work.

The challenges differ in the US and Europe. The US finally has universal health insurance, filling its greatest social insurance gap, but workers still lack family and medical leave insurance (the ability to take leave with pay for a new child, an illness, or to care for an ill relative) as well as subsidised childcare – areas in which much of Europe’s social insurance system has kept up with the changing family. These are especially important since American families often have little control over or even advanced knowledge of their work schedule and one third of children live in families with only a single parent. In addition, where American social insurance takes the form of a tax-subsidised employer benefit – as in pensions – major holes have opened.  In Europe, far more generous policies for childcare, family leave, and poverty prevention prevail. However, ageing populations, slow growth, youth unemployment, and austerity politics put tremendous financial pressure on European social programmes and subject them to criticism for supporting existing workers – with early retirement or long periods of unemployment insurance – at the expense of new ones, including youth and immigrants.

The answer to these challenges is not that social insurance should be privatised. Rather, it must be reformed to share the new risks families bear and lessen the inequalities created by the new ‘winner-takes-all’ economy. This should be the central goal for progressives in the 21st century.
What is needed are new universal insurance schemes that fill the new gaps in the system that provide workers no margin for error. These programmes would be tied not to work for a paternalistic employer (as is often the case in the US programmes) or only to citizenship (as is the case with many programmes in Europe), but to activities that contribute to society, such as job training and childrearing.

A new family insurance[i] system is needed in the US. It would enable families to draw down benefits to replace earning lost as a result of taking leave up to a capped amount, just as they do in retirement. The benefits could replace partial earnings if a worker goes part-time instead of taking full-time leave – including if he or she decides to take part of his or her child leave as reduced leave. Family insurance would include an add-on account. New parent accounts would cover the health, childcare, and education-related expenses of raising a child.

A new training insurance system is needed to provide training and income support for mid-career workers who lose a job, and young people. Benefits would subsidise on-the-job internships and worker training programmes. These would need to be added on to existing unemployment insurance schemes to guarantee a sufficiently broad pool to cover new workers coming into the system. To be eligible, programme providers would be required to submit to rigorous assessments of outcomes they produce.

Other new insurance policies could plug other gaps in the industrial era social insurance systems in various countries, eg for pensions or disability disrupted by ‘sharing economy’ work.

Funds for these inequality-fighting insurance policies would be assessed on a progressive basis (unlike with US social security, where one’s first dollar earned is subject to tax). Regressive or outdated benefits, such as the flexible spending tax benefit in the US, available only to those with taxable income and a good employer, might be sacrificed over time.

Citizens are ahead of politicians in realising the system has failed to keep up. If they do not hear solutions from progressives they will be more likely to respond to arguments for dismantling the whole enterprise and lowering taxes. This may be especially true of both of those who have little hope of being cut into the system and those who feel they do not need it. However, the effort of filling the gaps in social insurance must be undertaken with great transparency so as not to appear to cheat current workers and retirees of the benefits they have been promised – and relied on – through their working lives.

A successful digital progressive project will also need reform at its centre, and should follow the lead of former New York City mayor Michael Bloomberg who demonstrated his seriousness by cutting programmes that failed effectiveness tests, and French prime minister Manuel Valls who eliminated an array of outdated business restrictions. Without a plan to reform existing programmes, the call for new social protections sounds to many anxious voters like a call for government to play a larger role in the economy and undermine growth. The progressive paradox holds: voters’ hostility to government programmes often increases in hard times because government seems less effective at addressing their needs and a smaller tax bill seems preferable. A recent US study supports this thesis – showing, for example, declining US voter support for Obamacare even as inequality roses.

Therefore, a second group of necessary policy reforms would harness the technologies of the future to improve the delivery of social services. Digital technology has improved service delivery in most industries with the exception of the social sectors such as education, health care, energy and the operation of government itself. Teacher and student, nurse and patient, public servant and citizen are left behind in an industrial-age top-down, one-size-fits-all environment without the personalized, connected, information-rich tools that have unleashed so much creativity for consumers.

In education and training, new technologies offer the opportunity for tailored, wrap-around learning at home and at school, as well as the ability to train for and find new jobs in the digital economy. National programmes can ensure high-speed broadband reaches all classrooms and homes with children and they can also train teachers in the use of the new technology tools and spread best practices for the use of technology. In health care, telemedicine can be deployed to enable video consultation and remote patient monitoring while electronic health records can improve quality and reduce costs. Technology can improve energy distribution, as in Estonia where advanced smart meters allow utilities to track customer consumption on an hourly basis. Then, by logging into a friendly, web-based interface, customers can in turn see their detailed metering results and adjust their usage accordingly.

In the operation of government itself, technology can enhance transparency, accountability, responsiveness, and effectiveness. A new ‘mobile-first’ government with a ‘customer-centric’ approach is needed. Citizens should be as empowered in their dealings with the government, just as they are as customers – casting a ballot from the comfort of their own living room, filing income tax returns in just five minutes, signing a legally-binding contract over the Internet from anywhere in the world via a mobile phone, registering new businesses in as little as 20 minutes. For example, in Kansas City, Missouri, new business owners use an online tool to help navigate complex regulations and approval processes in place of the old system in which business owners were expected to identify which permits they would need and work with multiple departments.

Programmes should be monitored for effectiveness; those that do not work should be ended or reformed, and those that do should be celebrated and funded to scale. Digital technology is already unleashing new growth and opportunity for some, but will strengthen our societies only if we learn how to reform our industrial age policies so that these technologies fuel a new wave of prosperity and dignity.

Karen Kornbluh is senior fellow for digital policy at the Council on Foreign Relations and former US Ambassador to the OECD. She writes in a personal capacity

[i] Note: Karen first proposed Family Insurance in her 2006 article “Families Valued:  Creating a 21st century social insurance system for today’s “juggler families” in the journal Democracy.

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