Is It Time for a New 'New Deal?'

AP Photo/Jae C. Hong

Hsingii Bird holds up a sign for supporters to take a selfie with it before a campaign rally with Democratic presidential candidate Senator Bernie Sanders, Tuesday, May 17, 2016, in Carson, California. 

Hillary Clinton has clinched the Democratic presidential nomination, thanks in part to a leftward policy shift that many attribute to Bernie Sanders. Sanders does deserve some credit for Clinton’s moves to the left, which include her proposal to let those 50 and older buy into Medicare; her promise not to cut Social Security, and her pledge to sign any $15 minimum wage bill passed by Congress.

But Clinton’s increasingly liberal tilt comes not just in response to the Sanders insurgency, but to burgeoning demographic and economic trends that will last well beyond the 2016 presidential election. Indeed, emerging economic and electoral forces are poised to move the political boundaries of public policy from decades of center-right prescriptions—defined by privatization, deregulation, and devolution—to more center-left policies.

In short, the era of small government is over. It may even be time for a new ‘New Deal’ that expands and reinforces the existing social safety net. Historically, Americans have only embraced social welfare investments for such “deserving” populations as the elderly and the working poor. But a variety of factors is forcing policymakers on both sides of the aisle to respond to an electorate that is increasingly young, diverse, and economically strapped.

First, there is an upward swing in the number of Americans who call themselves liberal. When Bill Clinton was first elected in 1992, only 17 percent of the electorate identified ideologically as liberal. For decades, many Americans associated the term liberal with anti-war and civil rights radicalism. However, as the ‘60s-era fades from the public consciousness, one out of four voters identifies as liberal.

Younger voters with no stake in the political battles of the 1960s are driving the rise in liberal self-identification. These Millennials were battered by the Great Recession and are deeply suspicious of capitalism—a system that they associate with rising income inequality and with living in their parents’ basements. These new voters do not associate the term socialism with the Red Army, but rather with the red soccer jerseys from the Nordic countries they like to visit during their semesters abroad.

The 2016 presidential election will be the first in which Millennials will make up the same proportion of the U.S. voting age population as the Baby Boomers. Younger voters who drove the Sanders campaign are not content with a Democratic Party that functions as a collection of somewhat progressive interest groups. These voters want an ideologically liberal Democratic Party that pushes an aggressive agenda of national redistribution.

Moreover, the electorate is not only growing younger but also more ethnically and racially diverse. When Ronald Reagan won re-election in 1984, the electorate was 80 percent white. By the time Obama won re-election in 2012, white voters were down to only 72 percent of the electorate and nonwhite voters comprised a record 28 percent of all voters. In 2016, the electorate will be even more diverse, and one out of three eligible voters will be Asian, black, or Latino. This growth is primarily being driven by increases in the Hispanic electorate. Racial and ethnic minorities primarily vote on economic issues and tend to demand higher social spending and a more activist federal government than white voters.

The increasing diversity of the voting age population will be especially important in Sun Belt swing states. An interactive model by Aaron Bycoffe and David Wasserman shows that the white share of eligible voters will dip below 70 percent in 2016 in Virginia, North Carolina, Nevada, and Florida. According to Census Bureau projections, people of color will represent 37.2 percent of all U.S. adults in 2020, and 54.8 percent by 2060.

These demographic trends are not lost on Republican leaders struggling to damp down the furor over presumptive GOP nominee Donald Trump’s claims that a federal judge’s Latino heritage should disqualify him from presiding over a lawsuit against the now-defunct Trump University. This latest controversy underscores the ethnocentric nature of his campaign, which he opened by comparing Mexican immigrants to rapists and drug dealers. It is no coincidence that this election cycle is prompting massive numbers of Latinos to register to vote and seek citizenship.

 

Demographic changes are only part of the story, of course. Developing economic trends also are poised to drive policymakers from both political parties to move to the left. The Republican Party has spent 40 years expanding tax breaks for the wealthy and cutting public spending for the poor. Yet, Donald Trump’s capture of the Republican nomination has shown that a large swath of the GOP’s base wants to protect entitlement spending and potentially even raise taxes on the rich.  

Income inequality has been on the rise for 40 years, and the wealthy are projected to continue to claim an ever-larger share of the economic pie for the next two decades. Average Americans have responded to rising inequality by calling for more redistributive policies, and by blaming the wealthy for the lack of equal economic opportunity. These public opinion changes create political incentives for more populist policy offerings—the kinds that have helped both Sanders and Trump gain traction with disaffected white voters.

 

The great wage stagnation has pushed more people from the middle class to the working class. Historically, working-class voters have been the most vocal advocates of redistributive policies such as a higher minimum wage, and universal health care. Since the mid-1970s the hourly wages of most workers have been stagnant. Middle-class wages have been completely flat through the 1980s, 1990s, and 2000s (the only exception being the late 1990s). The salaries of low-wage workers have fared even worse, falling 5 percent over the same three decades.

The decrease in union jobs and the transition from a manufacturing to a service economy has meant not only dipping wages but also a loss in employer-provided health care and pensions. According to the Employment Benefit Research Institute, low-skilled workers are enrolled in company pensions at half the rate they were in 1987. Trump’s promise to bring back good manufacturing jobs is in part a pledge to create an economy that produces low-skilled jobs that offer respectable pay and employment-based benefits—a promise he realistically can’t keep.

These economic trends, along with increased globalization and automation, not only make such seemingly ultraliberal ideas as free college and national health care more palatable to workers being pushed out of the middle class. They also make popular conservative policy prescriptions look increasingly unrealistic.

The Republican Party has tried to mollify angry, white working-class voters by proposing tax subsidies that would ostensibly enable them to invest in and set aside savings for their own social welfare needs. These include recent Republican plans to expand Health Savings Accounts and Individual Retirement Accounts, proposals that ring increasingly hollow because the average blue-collar household is living paycheck-to-paycheck. Moreover, the average American worker has not experienced a real pay raise in 30 years, is not employed in an occupation that offers generous employer-provided benefits, and has a household savings rate that is less than 5 percent.

Recent reports show that half of families have saved nothing for their retirements, and even Americans older than 55 are financially unprepared for their retirement years. President Barack Obama just last week announced his support for generously expanding benefits to both current and future Social Security beneficiaries. The population of Americans older than 65 is projected to double between today and 2050. Retirees are not just growing as part of the electorate, but they also vote at the highest levels in American politics.

More importantly, the politically active elderly of tomorrow will be more liberal than older voters today. The majority of older voters, in the past decade, have been reliable Republican voters who have played an especially important role during off-year elections. However, the Baby Boomers who came of age during the Kennedy, Johnson, and Nixon administrations are more liberal than previous elderly cohorts.

In addition, future 65-and-older voters will be more racially and ethnically diverse than today’s older voters. Social Security and Medicare are much more important to the financial security of black and Latino retirees—key constituents of the Democratic Party. Social Security, for example, makes up 90 percent of the total retirement income for half of the racial minorities older than 65, but only one-third of the retirement income for whites.

The vast majority of voters know and trust Social Security and Medicare. Therefore, as the nation grows older, and as economic insecurity presumably continues to grow, any effort to replace these programs with private alternatives will meet with stiff political resistance.

 

So what would a new “New Deal” for these new and disaffected voters look like? First, workers in the modern economy need generous and portable social insurance. This starts with health care. A natural evolution of Obamacare would be the formation of a national health-care exchange that would allow workers to shop and buy health insurance over state boundaries and harness the buying power of the federal government in negotiating lower prices for health-care services and products. A federal health-care exchange along with expanded Medicare and Medicaid would effectively create a piecemeal but universal American health-care system.

American workers who are relying more and more on Social Security and lack access to private pensions could benefit from an expansion of a new federal program known as “myRA.” The program right now is only available to workers who are not offered 401(k)s through their employer. This program could be mandated so that all workers are automatically enrolled and employers offer matching contributions. This could be paid for, in part, through eliminating tax subsidies for private pensions. In contrast to current private pensions, the myRA has no fees, stays with a worker when they change jobs, and is backed by the U.S. Treasury. This program would not only increase household savings but also release some of the pressure on most workers who currently have to rely exclusively on Social Security for their retirement income.

Next, the federal government could take a number of steps to reduce the cost of college. President Obama’s American College Promise plan to make the first two years of community college free would target the families most in need of assistance and access to a college education. The federal government could also use its power as the largest lender of student assistance to force states to reinvest in their public universities after years of reduced state-level financing and tuition hikes.

Finally, the federal government could pass a universal basic income (UBI) that would write an annual check to every adult for $10,000 and give every child $2,000. This started out in the 1970s as a conservative option to existing welfare policies, has gained traction with policy analysists, and was recently voted on in Switzerland. Since the UBI would be given to everyone, it would allow the federal government to eliminate some existing and ineffective welfare policies and severely cut back on tax benefits that accrue to the rich—such as the home mortgage interest and capital gains deductions.

The big challenge, of course, is how to pay for all this. Younger voters want national health care and free college. Older voters want to protect Social Security and Medicare. By some estimates, Sanders’s “College for All” and universal health-care plans would cost $33 trillion. For policymakers on both sides of the aisle, another challenge going forward will be to balance the demands of younger voters who are attracted to ideas such as national health care and free college, with the determination of older voters to protect Social Security and Medicare.

The most obvious mechanism to pay for these new programs is by raising taxes on the wealthy, who have captured most of the gains from economic growth over the past four decades. An obvious first step would be to eliminate the more than $1 trillion of tax breaks, mainly benefiting the rich, that currently riddle the tax code. Another proposal from Robert Schiller is to change the tax laws so that increases of income inequality would trigger a subsequent rise to the top marginal income tax rate. This policy would actively address income inequality by not only tethering the highest tax rate to rising inequality levels but would also create a new revenue stream that could be used for public programs that help the poor and middle class.

Tax hikes on the rich would not fully pay for the programs at the heart of a new “New Deal.” Middle- and working-class Americans, who have had their income taxes cut for decades, would also have to pay more to the federal Treasury. Political resistance is inevitable. The answer may lie in a new consumption tax that, although regressive, would be less visible to the public, and could be traded off for income tax reductions. Whatever form tax increases take, recent polls show that most voters do not feel overburdened by their federal tax bills.

A new “New Deal” will invariably excite opposition in some quarters, and will not be enacted overnight. But as younger, more diverse, more liberal voters rise to become the largest cohort in the electorate, and as more Americans psychologically associate with the working class, policymakers must begin to respond to their calls for economic equity, income security, and a more sustainable social safety net.

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