Easing the Anxiety Economy

By Pat Regnier, Money Magazine senior editor

Democratic and Republican politicians will be arguing over how rich you are or how shafted you are until at least November 2008. (And afterward they may just switch sides.)

Rhetoric aside, it's a fact that many of the tools available to Americans to manage the risk in their lives are seriously outdated, if not obsolete.

Employer-sponsored health insurance is a product of World War II-era wage controls; companies could offer it instead of a raise.

Traditional pensions have proved too great a burden for many companies fighting overseas competitors, but 401(k)s aren't ready to replace them, and Social Security needs shoring up.

Republicans too are warming to the idea that the government can do more to help families cushion economic shocks. "So much of the conservative agenda has become stale," says Reihan Salam, a writer and political analyst. "How much can you keep talking about tax cutting when the salience of the federal tax burden just isn't what it was?"

More important, the Democrats control Congress, and thus the agenda.

Here are the three big items they'll want to take on, and how debate over them might play out over the next couple of years:

HealthCare : Loosen the bond between insurance and your job.

Getting laid off can be doubly devastating: You lose your income and your health insurance. (Unless you can afford COBRA payments even when there's no paycheck coming in.)

If we're going to embrace globalization and a flexible economy, leaving the inevitable losers in that process so exposed seems like a bad idea. "If we dealt with health care, some of the people who are skeptical about trade would be less skeptical," says Barney Frank, the powerful new chairman of the House Financial Services Committee.

Democrats have a simple cure: universal insurance. That's "simple" as in easy to understand, not to do. The Clintons, you'll recall, got thumped when they tried this.

But the problem looks worse now than it did 15 years ago, so expect to hear new variations on a government health-care solution. Hacker, for one, proposes keeping the private health-care system but requiring employers that don't offer coverage to pay into an expanded Medicare system.

In their book The Plan, congressman Rahm Emanuel and Bruce Reed of the moderate Democratic Leadership Council propose the smaller step of universal coverage for children. "It could provide a victory on an issue where there haven't been a lot of wins," says Reed.

Of course, it would also leave taxpayers on the hook for even more of a rapidly-inflating segment of the American economy.

Health-care spending already eats up 16% of GDP in the U.S., far more than in any other developed country. "We don't get good value for the funds we spend on health care," says R. Glenn Hubbard, dean of the Columbia business school and former economic adviser to the President.

Liberals think government can push back on costs by negotiating lower fees with drug companies and health-care providers. Republicans would rather see you do the pushing.

One of Bush's key health-care initiatives is tax-advantaged health savings accounts to encourage people to pay for more of their care directly instead of through insurance.

Hubbard would go further and make all out-of-pocket health spending, including premiums for insurance you buy yourself, tax deductible for those with insurance. If Americans picked up more of the tab themselves, the theory goes, they'd be pickier about costly treatments, and insurance would be more affordable.

But politicians may not be willing to wait to see those theories play out. In 2006, Republican governor Mitt Romney signed off on health-care legislation in Massachusetts. The law provides financial help for people to buy coverage and requires everyone to get insurance, an appealing idea for conservatives who value personal responsibility.

The idea is to keep costs down by forcing younger, healthier workers to pay in even if they use less care. It's too soon to say whether Romneycare will work, but California governor Arnold Schwarzenegger, another Republican, is talking about his state guaranteeing insurance for children.

Retirement : Fix Social Security - and get everybody in a private account.

With traditional pensions dying out, middle-class workers will be counting on Social Security more than ever.

Charles Rangel, the chairman of the House Ways and Means committee, says he's gotten signals from Republicans that they may be ready to work on a long-term fix for Social Security. What about the private accounts Bush had pushed for? When Money Magazine asked, Rangel said he hadn't heard the question.(He was kidding.)

Still, if the President wants to expand ownership of financial assets, most Democrats would be happy to create "add on" private accounts that supplement Social Security benefits.

After years of complaining about the decline of pensions, liberals have mostly given up on saving them and are instead looking to improve and expand 401(k)s.

Sperling, for example, proposes a universal 401(k). Employers could pay in and make matching contributions, but even those with no 401(k) at work could begin saving, and those who switch jobs could keep doing so without interruption. Under Sperling's plan, the government would also offer a match, based on your income, a benefit that might spur employers who don't offer 401(k)s to get with the program.

As with Romneycare, this has crossover appeal - it shows that Democrats share some of Republicans' economic optimism and faith in free markets.

Income Security: Help us stay in the game.

If global competition for labor is the future, then government has a role to play in helping us compete. That starts by making sure we have the education to stay a step ahead of Chinese and Indian workers.

But in the world of tradable services, Blinder notes, it's tougher to guess which kinds of training will pay off. Hacker says this makes higher education a necessary but risky bet, especially as tuitions rise.

Obviously, policies aimed at making college and retraining more affordable would help.

It may be time to rethink unemployment insurance, as well. Today's system is based on an old model: Workers lost their jobs when the economy slowed, then returned when things picked up.

But what happens to workers whose entire profession shrinks? Many take jobs with lower pay, so Democrats are talking about creating wage insurance to help people make up salary declines.

Layoffs aren't the only source of income volatility. Since the 1970s, middle-class families have increasingly depended upon women's salaries. But women often leave their jobs to take care of children (and some men do too).

Salam sees an opportunity for conservatives here. Before the election, he co-wrote a cover story for the influential journal The Weekly Standard arguing that Republicans should do more to help the middle- and working-class voters who had been key to their political dominance.

Among the proposals: bonuses or expanded tax credits for having children, and subsidies for parents who stay at home to care for children, including, perhaps, tuition assistance to help them retrain when they go back to work.

"Republicans have a chance to frame the agenda," says Salam. "Raising children is important, so important that it's unfair it's not recognized."

How much of this will see the light of day, given a costly war and a huge federal budget deficit?

An emboldened Democratic party may not be looking to work with Bush, who hasn't exactly been a model of bipartisanship. Then again, Democrats need to show they can govern.

And the lame-duck President is thinking about his legacy. That may be enough to get a real conversation going about how to reshape public policy to lessen the stresses of the Anxiety Economy - without losing the opportunity of the New one.  Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.