The Social Democratic Sharing Economy

In a new piece in Democracy Journal, Nick Hanauer and David Rolf argue that, in response to the rise of the sharing economy, we need to transition away from our employer-provided welfare benefit system to a more public system. Jeff Spross had a nearly identical (though considerably shorter) argument in The Week earlier this month. While I obviously am a huge fan of taking welfare benefit delivery out of the employment relationship, the approach outlined by Hanauer and Rolf has a lot of flaws.

As an initial matter, it’s worth noting that Hanauer and Rolf basically just reinvented a social democratic welfare state without seeming to realize that’s what they were doing. This is not a knock against them per se. In fact, it’s very heartening to see people independently reach the same conclusion about how best to run an economic system. However, reinventing social democratic institutions in a vacuum without looking at and borrowing from other social democratic states is bound to lead to oversights. Hanauer and Rolf’s social democratic proposals are first drafts while the social democratic systems that already exist are on their 50th or later version by now.

Flat Taxes and Shared Security Accounts

The first big flaw in Hanauer and Rolf’s plan is that, despite nominally trying to delink welfare benefits from employment, they end up constructing a system that is almost obsessively keyed to earnings.

At the heart of the proposal is a Shared Security Account given to each worker, which is effectively financed by flat taxes on earnings (they call it “prorating” but it’s the same thing). They describe it this way:

The obvious solution to the explosion of part-time work—voluntary or otherwise—is to prorate the accrual of benefits on an hourly or equivalent basis. For example, if Zoe works 30 hours a week at the hotel, she should earn three-quarters of the benefits offered by a full-time 40-hour-a-week job; if she works 20 hours a week, she should earn half the benefits. There is no doubt that many employers push their employees into part-time work in order to avoid the added cost of paying any benefits at all. Proration would eliminate this perverse incentive and the economic distortions and inefficiencies that come with it.

To be clear, proration is not a radical idea. Social Security and Medicare have always been prorated: Zoe’s employer pays half of her 15.3 percent combined Social Security and Medicare tax, regardless of how many hours she works. But all mandatory benefits that normally accrue to full-time employees on a daily basis—sick days, vacation days, health insurance, unemployment insurance, workers’ compensation insurance, retirement matching, Social Security, and Medicare—should also accrue to part-time employees (hourly, salaried, or contract) and sharing-economy providers on a prorated hourly or equivalent basis.

There is a lot wrong and just unnecessary about this. For starters, health insurance is not able to be “prorated” like all of the other stuff: you can’t give someone 50% of health insurance because they have 50% of the earnings of someone else. Health insurance is not really divisible in that way. This is why normal countries guarantee health insurance as a right unrelated to earnings or anything else.

Even for benefits where prorating is practicable, it’s not a good idea. What prorating envisions is a system where, for example, every person pays 3% of their earnings to unemployment insurance taxes and then receives 60% of their earnings in unemployment benefits should they find themselves unemployed.

This might seem like a very clean implementation (same percentages for all people!), but the cleanness is an unnecessary and ultimately unhelpful gimmick. Instead of dedicated prorated taxes, it makes more sense to use general taxes that levy more from higher market incomes where possible. Instead of prorated earnings-related benefits, it makes more sense to have earnings-related benefits with wage replacement rates that taper off for higher earnings (e.g. unemployment benefits that pay out 75% of earnings for first $40,000, 50% of earnings for next $40,000, and 25% of earnings for remaining income). This makes basic functional sense because people with lower earnings need higher replacement rates to be able to avoid hardship and it helps to cut inequality in the process. I use unemployment insurance as the example here, but the analysis equally applies to retirement, worker’s compensation, disability benefits, and other medium to long term job leave.

Missing Benefits

Because Hanauer and Rolf are so honed in on earned prorated welfare benefits, they predictably miss important benefits that don’t really operate that way. Certain benefits like retirement and disability and sick days can easily be fit into the prorated Shared Security Account framework (even if unwise). Other benefits like child care, education subsidies, and child allowances simply cannot. Which is to say: family benefits necessarily get short shrift in this kind of scheme.

For parents of children, flat and equal child benefits (not earnings-related prorated benefits) are the far superior option. It wouldn’t make sense to provide prorated child care benefits because child care costs the same regardless of how much money you make. Similarly, it wouldn’t make sense to pay out a prorated child allowance: clothing, feeding, and housing children costs the same regardless of how much money the parent makes. Education operates the same way.

You could theoretically hive off the benefits that don’t really fit into the prorated Shared Security Account scheme and run them through some separate scheme, but this is inefficient and duplicative. An ideal social democratic system will have one social insurance institution that is able to coordinate all transfer payments. Having some payments run through this Shared Security Account gimmick and others through some other systems creates needless complexity that would also likely recreate certain stigma problems we already have wherein things like Social Security transfer payments are treated as legitimate and good while other transfer payments are seen as shameful and bad.

Decommodify Totally

Finally, the Hanauer and Rolf social democratic proposal is flawed in that it gets off on the wrong philosophical foot, which also contributes to its technical limitations. For Hanauer and Rolf, these welfare benefits are supposed to be essentially job benefits, even though they are administered publicly. This differs from the traditional reason for these benefits, which is to provide for people’s basic material security in a decommodified way that is significantly detached from earnings and jobs.

The decommodified approach says that everyone deserves health care, education, and an adequate minimum income regardless of the market and regardless of their location in the economic system. Building out these welfare benefit structures through dedicated prorated taxes on earnings that fill up dedicated individual social security accounts that pay out dedicated prorated benefits does nothing to delink the benefits from market actions and thus recreates a lot of the same problems employer welfare benefits have (including the inability of employer welfare systems to really provide for lower earners).

Under a decommodification approach, you would never get stuck in all of the needless prorating and account-making mistakes discussed above. Instead, you’d identify basic needs, figure out what welfare institutions would satisfy them, and then establish a tax level high enough to fund them.

The sick and injured need health care, so you provide universal health insurance. Children need care, education, and income (they don’t work), so you provide child care, education, and transfer payments to their parents. Unemployed people need income. So you provide them income, most likely in a way that is related to their prior earnings for smoothing purposes (but not based on some fictional account they have contributed to). Retired people and disabled people also need income and so you also provide that and also do so most likely in an earnings-related way (with wage replacement rates that taper as earnings go up) for smoothing purposes. And so on.

If we are going to transition into a new welfare benefit scheme in light of the rising sharing economy, that scheme should not try to recreate the existing work-pegged system in public form. It should break from that model entirely, focusing instead on creating a universal public scheme aimed specifically at meeting everyone’s needs, not administering “earned” benefits.