One upside to America’s rather sketchy and underdeveloped welfare state is that when we consider what sorts of things we’d like to do, we can easily look around the world for examples of different approaches to these issues. Isaac Chotiner and Paul Krugman, for example, note that Tony Blair’s targeted anti-poverty initiatives have been very successful in the UK. At the same time, Britain has a health care system that’s not very well regarded compared to other European examples, so we can look elsewhere for models for that.
Jonathan Cohn, similarly, takes a fairly comprehensive look at the successful Danish economic model, which has generated a GDP per capita close to American levels with much less structural inequality. The basic shape of things here is to combine US-style flexible labor market rules with a series of measures designed to make labor market fluctuation much more tolerable — health care and child care services that will always be there come what may, extremely generous short-term unemployment insurance, and very aggressive high-quality retraining and placement services.
UPDATE: Note that Denmark, like Iceland, rates higher on the Heritage Economic Freedom Index, through the Scandinavian combination of massive welfare states and relatively light regulation. The thing to say in response to this is that the Scandinavian countries are really little and it might not work as well in a big country, but I don’t understand what the causal mechanism for non-scalability is supposed to be. I’ll happily grant that it’s politically easier to put a Scandinavian-style system together in a small, homogeneous country, but that’s different from saying it wouldn’t work on the merits.