Sunday, November 05, 2006

Economy Improving, Right?

The front page of the Washington Post indicated yesterday that the joblessness rate is the lowest since 2001. Combined with strong market performance, shouldn't this bode well for Republicans, one might ask. According to an article by Jacob S. Hacker, traditional economic indices such as these are not the ones that Americans are particularly concerned about. Meanwhile, some ridiculous conclusions have been made about the continued dissatisfaction with the economy, as Hacker describes:
Some analysts have described current voter angst as a hangover of economic success. "Americans have developed perfectionist standards," economics columnist Robert J. Samuelson has argued. "We expect total prosperity and are disappointed by anything less." And conservative pundit George Will recently decried the nation's "economic hypochondria" -- an entitlement mentality characterized by a low threshold for economic pain.

As Hacker says, these pundits are looking at the wrong indicators:
But the problem isn't the public -- it's the standard statistics used to judge the economy. Inflation, unemployment and economic growth all capture economic performance at a particular moment or period. Yet a growing body of theory and evidence suggests that to understand public perceptions, one should look at the security and stability of family finances over time. With that perspective, the grounds for unease suddenly look much clearer.

This is absolutely right. Even as a recent and relatively young member of the American workforce, I have to say that my biggest fears are that somehow my retirement savings won't pan out, even though I'm making an effort to plan ahead; that even if I go to graduate school to get credentials for a professional career track, I won't be able to afford increasingly high property values and the better schools that come along with the areas that are home to expensive properties; that my health care premiums will be exhorbitant. Low joblessness and a strong market don't shed any light on such concerns.

However, narrow, short-sighted economic analysis is the way many analysts and politicians in our country look at growth. Consumer confidence and, in particular, strong consumer spending are overly-relied-upon indices in a country whose average savings rate is zero. If people are not saving, there will be a point when our country will have to face the prospect of a large population who cannot afford retirement: at at time when social security dividends will be depleted, the U.S. will need to somehow figure out how to support millions of cash-strapped retirees, or these people will have to keep working. So I fear.

What exactly is behind all of this?
In a path-breaking recent paper, "The Evolution of Top Incomes: A Historical and International Perspective," Thomas Piketty of Écoles Normales Supérieure in Paris and Emmanuel Saez of the University of California at Berkeley have shown that the share of national income held by the richest 1 percent of Americans -- stable at about 32 percent throughout the middle decades of the 20th century -- began to rise sharply in the late 1970s and by 2002 had surpassed 40 percent. In the past few years, most income gains have gone to people at the very top of the income ladder, with middle-class Americans seeing only a small boost in their economic standing.

Income is not rising. Americans are being counted on to spend, to consume, even if it poses great risk to their savings and credit ratings, even if their salaries aren't increasing with inflation. Ultimately, according to Hacker, dissatisfaction wtih the economy boils down to instability:
...There's good reason to think that our economic lives are more unstable than they used to be. Bankruptcy, for instance, is much more common today than it was just 25 years ago and research by Elizabeth Warren of Harvard Law School -- presented in a 2003 law review article, "Financial Collapse and Class Status" -- shows that many of those who file for bankruptcy were once squarely middle class. Princeton economist Henry Farber, in his article "What Do We Know About Job Loss in the United States?" has found that the likelihood that a worker will lose a job over a three-year period has been rising -- and is now about as high as it was in the early 1980s, which saw the worst economic downturn since the Great Depression.

In my own research using the Panel Study of Income Dynamics -- a survey that has traced a large sample of Americans over time -- I've found that family incomes have become much more unstable since the 1970s; the gap between our income in a good year and our income in a bad year has expanded.

Hacker concludes by discussing studies showing Americans have great aversion to loss. Some might counter that the economy is cyclical, that fits and starts are to be expected. Funny how those people tend to be the ones who have never known the fits. Who can blame Americans for being loss-averse: loss is stressful, often traumatic. Such an experience weighs down upon anyone even in better times. In the back of one's mind is the fear of losing it all again. So, just as in 1992, it's the economy, stupid, but the establishment doesn't seem to yet understand why this is a problem for the Republicans.

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