False Positive

As election day approaches, the Bush campaign seems baffled by the continued reluctance of voters to credit the president for the past year's generally positive economic numbers. On the campaign trail in Ohio last week, President Bush insisted, "The economy is strong, and it's getting stronger." But, according to recent polls, most Americans believe the economy is getting worse or just holding steady, and the number who approve of Bush's economic stewardship has dropped significantly from the beginning of the year.

Pundits have offered plenty of reasons to explain--or, more accurately, to explain away--voters' continuing grumpiness. Until recently, the favored line was that voters simply had not woken up and smelled the economic coffee. Yet, public perceptions of the economy have remained remarkably negative, and they continue to be down sharply from earlier this year.

It's time to embrace a simpler thesis: Voters say the economy isn't getting better because, as far as they're concerned, it's not. And perhaps the best explanation for this perception is that Americans are facing rising economic insecurity even as basic economic statistics improve. In March, for example, unemployment and inflation were both low. But roughly half of Americans agreed that "America no longer has the same economic security it has had in the past," while another fifth thought the statement could be true in the future. By contrast, just 27 percent believed the poor conditions of recent years represent merely the normal downside of the business cycle.

This pervasive public anxiety is the main reason that usually sunny Americans are cloudy about their families' economic futures. It may also explain why voters have proved increasingly skeptical of good economic numbers--not just in this election, but also in 1992 and 1994, when, on paper, the economy was not nearly as bad as voters thought it was. Put simply, the statistics pundits love to cite don't capture what most Americans feel: an increasing financial pinch that is putting them at ever greater economic risk.

To Democrats, of course, it's an article of faith that Americans are struggling. At their convention last week, speaker after speaker decried Bush's "middle-class squeeze"--the economic strains on families caught between stagnant earnings and rising living costs. Vice presidential candidate John Edwards spoke of "Americans who work hard and still struggle to make ends meet." John Kerry invoked the middle class no fewer than eight times in his 50-minute acceptance speech, calling for "an America where the middle class is not being squeezed, but doing better."

The strains are certainly real. As Harvard Law Professor Elizabeth Warren and her daughter, Amelia Tyagi, have documented, middle-class families confront rising difficulties meeting basic expenses--such as housing and tuition--and they are going deeper and deeper into debt as a result. They are also working longer: According to Karen Kornbluh of the New America Foundation, the typical family spends 22 more hours per week at work than it did in 1969.

Yet, the income squeeze that families face is not exactly the same as insecurity. Insecurity is something larger--the risk of large drops in living standards caused by loss of income or catastrophic expense. And, my research suggests, insecurity is something that more and more Americans, even the relatively well off, are confronting.

The signs are everywhere. Fourteen million more Americans lack health insurance now than two decades ago. Meanwhile, corporations have abandoned "defined-benefit pensions" that offer a fixed payment in retirement in favor of more risky "defined-contribution" plans like 401(k)s. And, according to Princeton economist Henry Farber, the effect of job loss on work hours, pay, and prospects for reemployment has worsened substantially since the 1980s. Indeed, in area after area, there's evidence of a vast shift in the economic security of most Americans--a massive transfer of financial risk from corporations and the government onto families and individuals.

This great risk shift has gone surprisingly underreported. Though we've heard about economic hardship, most of the stories concern static measures--poverty, inequality, wages, joblessness. That's in large part because no standard economic statistic tries to assess the stability of family income. We know with great precision how many Americans are rich and poor at any moment and how large the gap is between the bottom and the top. But we know next to nothing about the extent to which their economic status changes over time or what causes these shifts.

In response, I have spent the last couple of years trying to assemble new figures on changes in family income, aided by Professor Nigar Nargis of the University of Dhaka. Our research has centered on the Panel Study of Income Dynamics--a nearly 40-year project that tracks the same families from year to year and, hence, provides unique insights into how and why incomes change over time.

What has become clear from this research is that family incomes rise and fall a lot--far more than one would suspect just looking at income distribution figures. As a result, a surprisingly big chunk of U.S. income inequality--perhaps as much as half--is due to transitory shifts of family income, rather than permanent differences across families.

This is a point conservatives love: Sure, inequality is growing, they argue, but mobility is alive and well, making any comparison of income groups misleading. But this conclusion is as wrongheaded as the image of a frozen class structure that liberals sometimes take from income distribution statistics. Upward mobility is real, but it's usually not dramatic, and nothing suggests it has increased significantly in the era of rising inequality.

Plus, conservative paeans to social mobility miss an even more glaring problem: What goes up also goes down. And, for most Americans, downward mobility is far more painful than upward mobility is pleasurable. In the 1970s, the psychologists Amos Tversky and Daniel Kahneman gave a name to this bias--"loss aversion." Most people, it turns out, aren't just highly risk-averse--they prefer a bird in the hand to even a very good chance of two in the bush. They are also far more cautious when it comes to bad outcomes than when it comes to good outcomes of exactly the same magnitude. The search for economic security reflects a basic human desire to guard against losing what one already has.

Judged on this basis, what my evidence shows is deeply troubling. When I started out, I expected to see a rise in the instability of family income. But nothing prepared me for the sheer magnitude of the increase. At its peak in the mid-'90s, income instability was almost five times as great as it was in the early '70s, and, although it dropped somewhat during the late '90s (my data end in 1999), it has never fallen below twice its starting level. By comparison, permanent income differences across families have risen by a more modest, if still troubling, 50 percent over the same period.

The full explanation for this dramatic rise in instability is still unclear, but two causes loom large. The first, and most obvious, is changes in the nature of work. In today's postindustrial economy, less skilled workers are much more vulnerable than when unionized, manufacturing labor was more of the norm. (Not surprisingly, instability is greater for families headed by less educated workers, though it has actually risen more quickly in the last decade for workers who went to college.) Workplace benefits, such as health insurance and pensions, have been on the chopping block. And corporate America increasingly relies on part-time, contingent, and contract workers--all of whom enjoy precious little security.

The second overarching cause of increased insecurity is a shift we often take for granted: the movement of women from home to work. As mothers have entered the labor force in increasing numbers, families have gained a second income, which most desperately need. But they've also had to take on new expenses and face the increased job insecurity of having two family members in the workforce.

A stunning finding from my research illustrates this double-edged effect: When adjusted to account for the expenses a family of a given size incurs, a family's total income actually falls when a couple starts living together. That's not, of course, because families in which there are two potential earners receive less in earnings. It's because they are likely to receive less in public benefits and to pay more in taxes just as their family size increases--and so their overall economic standing drops. Divorce and separation obviously aren't good for income security. But it turns out that marriage and cohabitation aren't a guarantee of it either.

All this reveals a truth often forgotten amid talk of "family values": The United States has never done much to deal with the income risks that come from having both mom and dad in the workforce--from child care costs, to the need for time off to have kids and care for sick family members, to the increased risk to accustomed standards of living that plague families dependent on two jobs. We live in a twenty-first century economy dominated by two-earner families. Yet, social protections for working Americans have changed remarkably little since the mid-twentieth century--and, when they have changed, they have usually been cut, not expanded.

This isn't a coincidence, of course. The last two decades have witnessed a revival of the American credo of personal responsibility, championed by conservatives as an all-purpose tonic to every social ill. Bush voiced the credo while criticizing Kerry in May: "My opponent is against personal retirement accounts, against giving patients more control over their medical decisions through health savings accounts, against providing parents more choices over education for their children, against tax relief for all Americans. He seems to be against every idea that gives Americans more authority and more choices and more control over their own lives." To the extent government has any role to play in this everyone-on-their-own vision, it is limited to giving people tax breaks to encourage them to save and invest on their own.

Not surprisingly, then, spending on social programs has barely budged over the past two decades, but private-sector spending, subsidized by hundreds of billions of dollars in tax breaks for retirement and health benefits received disproportionately by the well-off, has grown at a much faster clip. Indeed, private expenditures on such benefits now represent more than one-third of all U.S. social spending--an amount that, if added to public spending, would make the American welfare state larger than Denmark's.

And, in fact, in the current campaign, Bush has been calling for a radical acceleration of this trend, integrating his previous proposals for partial privatization of Social Security and Medicare into a larger package of initiatives to wean Americans from their dependence on public programs. The shift is embodied in the campaign's recent theme of an "ownership society"--a shameless appropriation from left-leaning law professors Bruce Ackerman and Anne Alstott, whose 1999 book, The Stakeholder Society, outlined a $255 billion plan for giving all children a government-financed trust fund--in effect, making every kid a trust-fund baby.

Bush's more plutocratic notion of ownership has two parts. The first is reform of existing social programs to increase reliance on the private sector. Although Bush's plan for private accounts in Social Security stalled in his first term, he reportedly plans to revive it during his second. And Bush has already won some of his goals for Medicare reform in the recent prescription-drug legislation--which throws huge new subsidies at the private sector in an effort to increase the role of private health plans within the program.

The second aspect of Bush's ownership society is a bevy of new tax-free accounts for everything from medical care to retirement savings to education. The idea is to encourage Americans to leave behind the semi-socialistic risk-pooling of corporate benefit plans and public programs in favor of socking away their own money. Like his tax cuts, Bush's "ownership society" would be a costly boon to the well-off, who not only save the most, but also get the largest tax breaks when they do. (Instead of making every kid a trust-fund baby, Bush has a program mainly designed to help trust-fund babies.) Worse, crippling private-sector risk-pooling and further encouraging the wealthy to disdain the public sector would make the problem of insecurity much more severe.

Conservatives demand a go-it-alone world of personal responsibility. Yet, the truth is that Americans can't cope with insecurity on their own. Private insurance often works well, but it has inherent drawbacks in dealing with big economic risks. Profit-making insurers simply can't offer reasonably priced protection to high-risk groups, provide affordable insurance for the less affluent, or require that everyone has coverage. Only government can.

This is not a radical or new idea. It's called social insurance, and it's already embedded in America's two most cherished programs, Social Security and Medicare. We now think of Social Security as a soft-headed social measure. Back in 1935, however, it was seen as the cornerstone of a system of basic financial security that was essential to making capitalism work. That's why the original name for the legislation was the Economic Security Act.

Today, we need an Economic Security Act for American families. It should begin with the preservation of existing social insurance programs. But it cannot end there. According to University of Pennsylvania social policy expert Julia Lynch, U.S. social programs are more skewed toward the aged than in almost any other nation. The United States doles out nearly 40 times as much per senior citizen as per child and working-age adult. The currently favored response to this imbalance is to cut spending on the aged. But, rather than slashing existing protections, we should instead work to include families in the bargain. That means spending more, of course, but it also means a system that's more family-friendly, more conducive to having kids, more hospitable to obtaining new skills--in short, more supportive of a large, productive workforce that will lessen the strain on programs for the aged. It also means a system much less imperiled by the demographic shifts that have placed Medicare and Social Security in danger.

Perhaps the most promising idea for creating such a system is a simple proposal I call "universal insurance"--a kind of umbrella insurance policy protecting families against catastrophic drops in income or budget-wrecking expenses. Premiums would be a small share of total income and payouts would be based on the decline of disposable income from its previous base, with the share of income replaced higher for lower-income families.

Universal insurance could, in turn, be coupled with a less regressive and dangerous form of personal accounts than those advocated by Bush. These tax-free accounts would help families manage unavoidable household expenses before they reached catastrophic levels. Each year--and upon the birth of children--the government would contribute small amounts to each account. These public contributions would vary inversely with income, offsetting the regressive distribution of the tax breaks.

Universal insurance would protect Americans before they fell into poverty, lessening the burden on programs for the poor and protecting the dignity of beneficiaries. From the standpoint of income protection, what matters is not whether some are rich and others are poor, but whether all Americans are protected against precipitous drops in their standards of living. Universal insurance would depart from existing social insurance programs in providing general risk protection. Its premise would be that Americans need access to more than existing, highly segmented programs--programs that not only leave glaring gaps, but also lack the ability to respond to a rapidly changing world of risk.

To be sure, a risk-centered economic agenda has, well, risks. For one thing, it's sure to be attacked as tax-and-spend liberalism run amok. But, against the cost, one must balance the savings. Billions in hidden taxes are currently imposed by laws that facilitate bankruptcy, mandate emergency room care, and bail out the politically sympathetic when things go bad. And our current system imposes a huge economic drain when people don't change jobs, don't have kids, or don't invest in new skills because they fear the risks of those choices.

The most powerful criticism of a risk-centered agenda, then, will be the same one the right has been trotting out for years: Risk is good. It creates incentives to work hard and climb the economic ladder. Meanwhile, protecting people against risk is bad. It creates what economists call "moral hazard," a reason to take risks we'd otherwise avoid. If government helps people deal with income losses or family crises, it will just encourage more of what it is trying to prevent.

To some extent, this is true--and that's the whole point. Corporations enjoy limited liability precisely to encourage risk-taking. As David Moss argues in his provocative book When All Else Fails: Government as the Ultimate Risk Manager, the state has been managing risk since the dawn of the republic, gradually extending the reach of insurance from corporations and the affluent to all Americans. Today, however, the circle of protection is shrinking rather than expanding. We still have limited liability for American corporations, but, increasingly, we have full liability for American families.

Conservatives like Bush are right that the dynamism of the U.S. economy generates huge rewards and that trying to eliminate that dynamism through regulation or protectionism would reduce those rewards. Yet, if we acquiesce to the "creative destruction" of American-style capitalism, then we also have to accept that many Americans, at one point or another, will be hit by disasters with which they cannot cope on their own. Conservatives say free markets create more winners than losers. They say helping the losers is a better way of addressing insecurity than restricting the freedom that begets it. It's time voters demand that they put their money where their mouths are.