I guess it's inevitable come election time, but a cottage industry has arisen of late to spread the word that the US economy is broken and that conditions for all but the rich are actually eroding. This historically has been a winning strategy -- Remember, in late 1992 Bill Clinton campaigned with the absurd (but generally unchallenged in the media) contention that it was the worst economy since the Great Depression. Most of the lamentations about the current condition of the poor and middle class are presented with the standard populist baggage that the economy is zero-sum, and these groups ills are somehow related to and the result of the income growth of the very rich.
Jacob Hacker of Yale now adds to the chorus, arguing that in addition to worse material fortunes, the middle class faces more risk. As someone who gave up a good, high-paying job in corporate America for the risk roller coaster of running by own business, I have little sympathy -- after all, I am part of his trend and I happily chose my path. And its astonishing to me in this day and age anyone can argue that we have too much of a culture of personal responsibility. Please.
However, rather than fisking this in depth, I will leave the task to my much more capable ex-roommate from Princeton, who also happens to be a senior something-or-other at Cato, Brink Lindsey:
But if we're talking about
security from material deprivation, that's a different story. Let's
start with the biggest risk of all: that of premature death. Back in
1970, during Mr. Hacker's golden age of economic stability and
risk-sharing, the age-adjusted death rate stood at 12.2 deaths per
1,000 people. By 2002, it had fallen more than 30%, to 8.5 per 1,000.
In particular, infant mortality plummeted to 7.0 from 20.0, while the
number of Americans killed on the job dropped to three per 100,000
workers from 18.
Next, look at the two main
indicators of middle-class status: a home of one's own and a college
degree. Between 1970 and 2004, the homeownership rate climbed to 69%
from 63%, even as the physical size of the median new home grew by
nearly 60%. Back in 1970, 11% of Americans 25 years of age or older had
a college or higher degree. By 2004, the figure had risen to 28%.
As to consumer possessions, the
following comparison should suffice to make the point. In 1971, 45% of
American households had clothes dryers, 19% had dishwashers, 83% had
refrigerators, 32% had air conditioning, and 43% had color televisions.
By the mid-1990s all of these ownership rates were exceeded even by
Americans below the poverty line.
No matter how the
doom-and-gloomers torture the data, the fact is that Americans have
made huge strides in material welfare over the past generation. And
with greater wealth, as well as improved access to consumer credit and
home equity loans, they are much better prepared to deal with the
downside of increased economic dynamism.
Mr. Hacker leans heavily on his
findings that fluctuations in family income are much greater now than
in the 1970s. But research by economists Dirk Krueger and Fabrizio
Perri has shown that big increases in the dispersion of income have not
translated into equivalent increases in consumption inequality. In
other words, most Americans are able to use savings and borrowing to
maintain stable living standards even in the face of economic ups and
downs. And those standards are much higher than those of the
Mr. Hacker, however, shows little
interest in providing such context or balance. Fully committed to what
could be called a "free market bad, big government good" narrative, he
simply ignores data that point in the other direction. Thus he
lambastes reforms such as Health Savings Accounts and Social Security
privatization for shifting risks onto individuals while failing to
mention that the policy status quo imposes massive risks of its own.
I know Brink has been finishing up his new book. I would love to see him start blogging again.
More Thoughts: I have a couple of thoughts of my own on the risk issue:
- Risk, I guess defined as income volatility, may be higher for the average person today that it was in 1970. However, in a broader context, it is still drastically lower than any time in history or than in most places in the world. Certainly pre-WWII people had substantially more risk in their income, particularly in the agricultural sector, which dominated the economy of this and other countries through most of history. In subsistence agricultural economies, every year even the most productive and competent people face not just the risk of income loss but starvation and extinction through factors wholly beyond their control.
- The vast majority of the risk reduction people experienced in this country after WWII came from the operation of the private market economy, and not from government programs. It was the incredible productivity growth, export growth, and technology growth of American industry that provided whatever security people might be nostalgic for.
- Further, the author worries about a risk-shift. But in the 50's and 60's, there was very little risk in the system. Corporations faces little risk in world markets, executives at corporations faced little risk to their jobs, and most workers faced little risk. There has not been a risk shift -- this implies there was once some Atlas that bore the burden of all this risk and has now shrugged. One might argue that there is more risk in the whole system - corporations are not guaranteed their market share so workers are not guaranteed their jobs. The author tries to make it a populist argument, as if rich folks are shrugging off risk onto the poor. The fact is that everyone faces more income volatility today, from largest corporation to lowest paid worker. The good news, as Mr. Lindsey points out, is that this volatility is around a much higher mean.
- The costs of income security programs were always funded by workers
themselves. There was never a time when this security was provided by a mythical "someone else". General revenue programs like welfare and defense over
the last 30 years have been effectively funded by "the rich", since by
any definition, that is who pays the income taxes. However, programs
like social security, Medicare, and unemployment are all based on
payroll taxes with caps that mean that most of the tax is paid for by
the poor and middle class themselves (some of these are technically
paid as a percentage of wages by the employer, but trust me that they
have the same effect on take-home pay as if they had been deducted
directly from the employee's check). To the extent workers have
security, it is only because they have been forced to buy and pay for
an insurance policy. So again, there can be no shift, because the workers bore the cost of the insurance themseleves. Are they getting good value for this insurance? I don't know --
nobody knows. Many reform proposals the author worries will further
increase risk in fact are structured to put this insurance premium back
in the hands of the worker, to let him or her decide if and how they
want to spend it to insure themselves.
- The current obsession with this topic of risk strikes me as a case of white collar bias. I am not sure anyone but the highest seniority workers ever had this mythological income security in the blue collar sector. Layoffs and technology-based job obsolescence that created turmoil for blue-collar workers never seemed to touch white collar workers in the same way. My sense is that what's new today is that middle class white collar workers are now facing these same forces of change, in many industries for the first time. In fact, a skilled machinist is probably more secure in his job today than an account paybables clerk. For years, the left has joined unions in criticizing companies like GM for continually cutting blue collar jobs without touching bloated white collar payrolls. It's odd to see them jump suddenly to the other side of the issue.
- I hate to point out the obvious, but what government income-risk-management program has gone away since 1970, other than welfare reform? Social Security, unemployment insurance, food stamps -- they all exist, most at levels higher than 1970. Government-funded health care programs cover far more people for far more stuff.
- Certainly some private practices have changed that may affect employee risk. It is interesting that the author mentioned 401K's. To Hacker, shifting from defined benefits pensions to 401K's is an increased risk. I am sure he would point in part to plans like Enron's where 401K holders took a bath because they were encouraged to funnel a lot of their savings into Enron stock. But most 401K plans don't work that way, and it does not matter since defined benefit plans are even worse. Defined benefit plans presuppose that the company you work for will remain financially solvent for decades, and they assume workers will never switch jobs, since they are not very portable. Defined benefit plans are horrible for workers -- it reduces their flexibility and increases their risk. 401K's are a fabulous, worker-empowering invention and are bad only for a few union leaders and large pension fund managers (e.g. Calpers) who gain political power by virtue of the money they control.
- Yes, many jobs are less stable, but there is no evidence that there are long-term unemployed people out there. The nature of the people losing work and the job market today has changed, such that there are much better tools to find new work, and there is more work out there for their skills. White collar workers today probably find new work easier than blue collar workers in West Virginia ever did in the 1950's and 1960's when the mines closed. My guess is that most everyone from Enron has found a new job (or jail cell). There are people in Appalachia who still haven't found a job 40 years after the mine closed.