A tale of two economies?

My book review of Jacob S. Hacker’s The Great Risk Shift.

About a century-and-a-half ago, English novelist Charles Dickens began his famous book “A Tale of Two Cities” with the line “It was the best of times, it was the worst of times . . .” a phrase that elegantly describes the central thesis of Yale University Political Science professor Jacob Hacker’s “The Great Risk Shift”. In his meticulously researched book that is accessible to generalist readers without a background in policy analysis, he threads together a compelling case that the strength of the present-day US economy is to a large extent nothing but a mirage—with what appears to the untrained eye to be safe and full of limitless potential is in actuality being fraught with peril for most working families. Regardless of education, skills and work ethic, he paints a vivid picture of many workers walking a daily tightrope of trying to create a financial safety net for their families to replace the one their employers and government have quietly chipped away at in recent decades.

Hacker presents a flood of data indicating that economic insecurity is on the rise for all American workers, even the ones with graduate degrees and high tech skills. In the past, workers could rely upon the pension and health insurance plans that were provided by their employer; today, corporate America and a federal government asleep at the switch have turned to a new philosophy of “Personal Responsibility” where everyone is left to fend for his or herself. He documents how many apparently upwardly mobile, two-income families are just a single medical crisis or stretch of unemployment away from experiencing bankruptcy and financial disaster.

“The Great Risk Shift” unveils just how fragile the American Dream is in the 21st Century and analyzes the economic policy decisions made by the government that led to the social compact signed between government and the people generations ago to protect the vulnerable being torn to shreds, as well as offering up some common-sense prescriptions for policy changes that would help make the economy more stable and secure for average Americans.

In the opening pages of his book, Hacker presents evidence that economic instability, that is, the variability of a worker’s income from year to year, has grown rapidly and is much greater problem than economic inequality is. He notes that while “Americans have gotten richer in the last thirty years, they have also faced rapidly growing economic insecurity . . . over the past generation the economic instability of American families has actually risen much faster than economic inequality.” (Emphasis in original)

This is among the most important insights underpinning Hacker’s theory, because many liberal academics and policy advocates who have written and advocated for a fairer economy for the Middle Class have tended to focus on the unequal playing field, for example, the role tax cuts for the wealthiest Americans and corporations as well as cuts in social spending have helped make the rich even richer and caused the rest to fall further behind in relative terms. While explicitly acknowledging this problem, Hacker chooses to highlight what is an even bigger problem for all workers regardless of where they fall on the income spectrum.

Another important point Hacker makes is that compared with other rich democracies, the US relies far more heavily on the private sector in order to provide its citizens with benefits like pensions and health insurance rather than offering them primarily through the public sector and government programs—a setup that significantly increases economic risk.

According to Hacker: “With the help of hundreds of billions of dollars in tax breaks, American employers serve as the US’s unique mini-welfare states—the first line of defense for millions of workers buffeted by the winds of economic change. The problem is that these mini-welfare states are coming undone, and in the process, risk is shifting back onto workers and their families. Employers want out of the social contract forged in the more stable economy of the past. And because they do not need to answer to the broader public that depends on the jerry-rigged systems of security they provide, employers are getting what they want.”

With these two sentences, he has effectively exposed the fatal flaw of “Personal Responsibility” advocates who argue we should look to Corporate America and a largely-unregulated free-market to protect workers. While privatization may be appealing for libertarians on the grounds that it can be cheaper and more efficient in its provision of goods and services compared with the public sector, private employers are motivated solely by the profit motive and the maximization of shareholder value and are not to the same extent accountable to the public for the decisions it makes.

It is the government, not the private sector, who should be responsible for ensuring the existence of an economic safety net for all Americans, not employers. Reliance on the private sector for this function has led to such developments as previously guaranteed “defined benefit” employee pensions being supplanted by riskier “defined contribution” 401(K) and an increase in number of people who lack health insurance due to employers cutting back on coverage.

Hacker peels back the carefully constructed mythology presented by those who argue against an activist, interventionist government and instead claim market forces ought to determine the economic fortunes of American workers. While conservative pundits claim that the US has been experiencing a “miracle” economy where anyone who works hard enough and invests in education and job skills—in other words, a “responsible” worker—has the opportunity to increase their income. The only problem with this narrative, however, is that it is contradicted by the facts.

He notes: “Income inequality is growing to levels not seen since the Gilded Age, but social mobility is not increasing at anything like the same pace: would-be Horatio Algers are finding it no easier to climb from rags to riches, while the children of the privileged have a greater chance of staying at the top of the social heap.”

He points out the troubling reality that in the US, income mobility across generations is currently lower than in other affluent nations. And education, even for those workers earning graduate degrees, does not provide protection from economic risks like unemployment, lack of health insurance, being unable to pay their mortgage or being forced to declare bankruptcy. While economic volatility is about twice as high for less-educated workers than more educated workers, Hacker explains, volatility has nevertheless risen by roughly the same amount for all workers in the past three decades.

A vivid illustration of this seemingly counter-intuitive phenomenon is the computer programmer who went from having her services highly in demand by employers and commanding a six-figure salary with high job security in the 1990s to being forced to work several part-time temporary jobs without benefits after the dot-com crash of 2001. The evidence demonstrates that insecurity is in fact rising for skilled workers, and according to Hacker, “the previously most-insulated white collar workers are actually the ones who have seen the greatest erosion of their workplace preeminence over the past thirty years.” Increasingly, even the most educated workers are riding what he describes as an “economic roller coaster” that was once faced only by the working poor.

The prevalence of economic risk faced by working Americans and their dependants is higher than the public is aware, and poverty affects far more workers during some point of their lives than even a knowledgeable policy analyst might anticipate: For example, about 59% of Americans will spend at least a year living below the national poverty line during their working years (between the ages of twenty to seventy-five) and the probability of this occurring has, in Hacker’s words “increased substantially” in the past thirty-five years.

The most useful and thought-provoking section of the book is left for the end, when Hacker has finished diagnosing the current state of economic security for the working poor and middle class Americans today, and turns to offering up some practical and common-sense economic policy prescriptions for addressing this critical challenge. Reminding us that “economic security is a cornerstone of economic opportunity”, he suggests ensuring a simplified, progressive income tax code and cracking down on corporations that don’t fully fund their employees’ pension plans.

He is also clearly against privatizing Social Security or Medicare via private accounts as proposed by the Bush Administration and other Republican lawmakers, concluding: “Allowing companies to underfund their defined-pension plans, as new pension ‘reforms’ now on the agenda would, does harm. Piling tax break after tax break permitting wealthy and healthy Americans to opt out of our tattered institutions of social insurance, does harm.”

And make no mistake, he is making a passionately argument for government to get involved immediately, claiming that waiting for the private sector to address this problem is an “unfounded hope, not a realistic aspiration.” This would involve passing legislation creating “portable savings accounts” for workers, in order to help their families handle any temporary shocks to their income and savings. But the key, according to Hacker, is ensuring that the accounts are separate from the job benefits being provided by their current employer and are able to move seamlessly to their next job. Funding such social spending is absolutely essential, as is believing job-based private insurance can somehow replace it. Whether this is politically feasible in Congress is not a topic that is addressed here head-on, and any such discussion would have been irrelevant as the book was written before the Democratic Party’s November 2006 takeover of Congress. But not only would it help workers, he argues, it would also help corporations dealing with enormous financial strain for providing their employees with health coverage and other benefits.

Such government spending at the state level on unemployment insurance, which has declined in the past few decades, would even pay for themselves, he asserts, due to higher worker productivity, and he cites a National Bureau of Economic Research (NBER) study to back his claim. It is worth noting that the benefits flowing from investment in human capital is currently a much-contested debate among economists.

Other suggestions he offers include taking the current focus of our social insurance policies on the elderly and shifting it to the young adults and families with children that are at greater risk, surely an idea that would meet with strong resistance from the American public and AARP, as well as taking into account the reality of workers facing longer layoffs in unemployment benefits. He also suggests offering job retraining vouchers as part of long-term unemployment benefits, probably a politically viable reform.

He believes the solution for reforming Social Security revolves around funding the projected future shortfall by making both the benefits as well as the payroll taxes that fund it more progressive, tying benefits to the increased longevity of employees in the future and shifting the financing burden from payroll taxes toward wage-based levies and capital income. He similarly proposes radical reforms for Medicare, creating what he calls “Medicare Plus” and finally puts in a pitch in for universal insurance, where all workers would be covered with portable benefits that provide relief from “severe economic shocks”. This would certainly be a difficult sell for conservative lawmakers, a fact Hacker seems to implicitly acknowledge by placing this section at the end.

One area his proposals conspicuously do not address is the growing income inequality in the US, as the wealthiest Americans continue to see their salaries and assets rise as the lower and middle classes tread water thanks to tax cuts, a flat minimum wage and slashed expenditures in social welfare programs. He seems to recognize in the beginning of the book that it is a troubling feature of our current economy, so a reader can only presume he believes that addressing the growing economic risk is such an important short-term priority that dealing with this will address the profound issue of poverty in this country.
This may have also been a conscious decision to avoid his argument being framed by conservatives as instigating a “Class War” between the wealthy and Middle Class; rather than focusing on the radical differences among American workers’ prosperities, he chooses instead in his book to concentrate on the common risk facing all Americans.

Indeed, several of his proposals, such as ensuring a progressive tax code, would address both economic inequality as well as insecurity, although he doesn’t note this. However, it is probably advisable that he constrained this book to insecurity, as his current policy proposals are certainly politically ambitious enough for the near-term.