Social Contract Budgeting: Prescriptions from Economics and History

Policy Paper
Dec. 17, 2012

If there is to be any durable hope for a social contract that transcends left-right partisanship, that contract must rest upon a majority consensus about policies that are efficient, fair, and sustainable. Once the smoke has cleared from this November’s battle over the role of government, what will endure are several policy prescriptions kept alive by an objective reading of economic history and a general consensus among economists.

Economics and history tend to agree on the need for a social contract reflecting different priorities from those implied by the status quo. At this historical juncture, the United States and some other industrialized countries can raise economic growth while reducing poverty and inequality. Among the key strategies are investing more in the young, making social insurance more universal, and shifting to broader and more uniform taxation. This essay argues for these broad strategies, featuring specific recommendations on four fronts:


• Make increasing public investments in the young, with greater urgency for younger age groups than at the university level.

Health insurance:

• Socialized health insurance works better when it covers everybody.

• Liberate health insurance from jobs, and from bias toward the elderly.


• Keep the share of adult life spent on public pensions from rising, by extending the working age for each benefit rate in proportion to the average adult life expectancy of people with similar career histories.

• Index the retirement benefits for each cohort to that same life expectancy at age 60.

• Index annual pension payouts to recent GDP per working-age person.

Broad taxes:

• The two best candidates are addiction taxes and the value-added tax (VAT), two types successfully applied in virtually all industrialized democracies outside of the United States. These can be progressive as well as pro-growth, as long as they are used to fund universal access to health and education, emphasizing pre-primary education.