Fear and uncertainty in the time of prosperity

By most measures these are the best of times. We live longer, healthier lives than ever before. Our average income, standards of living and quality of life have improved across the board. Unemployment is at a record low. Inflation is low. Times have clearly been good in the US.

Yet, somehow, Americans are feeling gloomy. Not only are we worried about the future, but don’t seem to value the amazing prosperity we have had in the recent past. To some extent things are not as bad as they seem: the majority of people are pessimistic about the US economic direction, yet optimistic about their own economic opportunities. Nonetheless something is affecting our mindset.

The early thinking on the topic was that the economic prosperity that has accompanied globalization was displacing more people than ever before. However, a recent study of the US labor market shows that the probability of an individual to suffer a 50% or more drop in income in any given year is not greater today than at any time in the past 50 years. As the two congressmen who commissioned the report expecting to show an increase in displacement said: “The US labor market has always been a force of creative destruction”.

John Hacker, Professor of Political Science at Yale and author of “The Great Risk Shift”, believes he has found the answer. While the probability of suffering a 50% drop in your income has not increased over the past few years, if it does happen, you are much worse off than you would have been before as more and more risk has been transferred from corporations and the government onto you. For instance, corporations have moved from defined benefit plans to defined contribution plans and are scaling back on health care benefits expecting us to bear more of the burden.

I had the pleasure to meet John Hacker last Wednesday at a New America Foundation luncheon. While he has been accused of giving personal responsibility a bad name, he did not make a moral judgment against the risk shift. He just said it happened, implied than in many cases it is actually a good thing, but that has people bear more risk, the consequences of losing their job or being sick can become devastating and this latent fear is affecting our national mood.

The idea has merit. The good news is that there are a number of relatively inexpensive ways to address those fears. As an upcoming series of posts on reforming our political economic system will argue, the time has come for a new paradigm where we ditch ideology in favor of focusing on the outcomes we seek and on delivering those outcomes. I will posit that we can all agree that we want to create an environment conducive to economic growth and innovation while helping those in need. I will then argue that we have the economic tools at our disposal to achieve those goals in every field including education, health care, immigration and taxation.

For instance, to address some of the fears mentioned by John Hacker, one could imagine that individuals could have to buy market provided mandatory health care insurance, focusing on preventive care and catastrophic care where the insurance costs are paid by the individual directly for those who can afford it with partial or full payments by the government for those who cannot afford it on a means tested level. Note that the government’s share of the payment would decrease slowly as income increased not to discourage people from making more money (in other words if you earn $1 extra, the government should decrease how much it covers by much less than $1).

True to form, I remain an optimist. While we personally bear more risk than we ever have before, we have the wherewithal to mitigate those risks while pursuing opportunities our forefathers could not even dream of.

  • I read an article in the latest issue of Forbes today that addressed the same issue. According to some research the article quoted, people generally perceive loss as worse than winning. In quantified terms, people need a 2.5X bigger win to mentally make up for the sense of loss of something.

  • right on! when I am in contact with “prosperous” personae who are at the bottom of the slide of despair with no other reason than an unreasonable and irrational panic in front of the potentiality that something might maybe one day start happening (think article 58 of the Soviet Union here) I ask them to travel to some remote dirt poor nations and spend 4 weeks with a starving family of miners. It’s all a question of perspective. When Paris Hilton might dread spending 45 days in jail, some starting kids would simply love to be fed even if the price to pay is to run the risk of being beaten up. Additionally, being able to witness death, misery, worldwide dramatic events as if we were all part of a giant Playstation game changes the paradim of our life and places us in a dichotomic perception: I am either ecstatic or terribly pessimistic. Hence the more and more extreme TV shows (reality) that dramatically swing the masses’ mood levels…. anyway, I am a die hard optimistic and relentlessly send out positive vibes aroudn….if only the government could dish out a few pennies (well billions of dollars) to help 🙂

  • In the late 20th century, average incomes increased as ordinary Americans did better economically. But now average incomes are increasing because well-off Americans are accumulating wealth like never before. While the US economy has experienced strong growth since 2001, the median worker’s earnings, adjusted for inflation, have remained stagnant. This may help explain why ordinary Americans feel gloomy; America is doing better economically, but Americans aren’t.

    What I find most interesting is that the majority of people are pessimistic about the US economic direction, yet optimistic about their own economic opportunities. In light of the prevailing conditions, you’d expect the opposite: optimism about the US economic direction coupled with pessimism about personal economic opportunities. I wonder if recent changes in the distribution of macroeconomic benefits have led to some cognitive dissonance among ordinary Americans, who are becoming increasingly different from average Americans.

  • Steve:

    The median wage has remained stagnant but I think that’s a mirage of the way wages are calculated. If you include health care benefits as part of the compensation americans are getting then the median wage has increased a lot.

    I don’t think that people value that increase much which suggests we should change the health care system but the total cost of employing someone has increased significantly in the US in recent years.

    Inequality per say is not an issue. In the last 15 years in-country inequality has increased dramatically. However over the same period of time, global inequality has sharply decreased as GDP per capita has grown faster in developing countries than the developed world. China alone has taken over 400 million people out of poverty. Yet China has gone from being one of the most equal countries in the world to one of the most unequal, nonetheless its prosperity is a great thing. The more relevant finding seems to be that inequality is acceptable if there is social mobility. Conclusion: we need to improve our education and health care systems dramatically to provide people with opportunities and a safety net.

  • I think its something totally unrelated to what you mention. Contrast people and attitudes in the USA with those in Brazil for instance. 1-The population demographic is older in the USA. A majority of people have greyer attitudes as they age. 2- look at the community/society of Americans. They are not nearly as social as Brazilians. Not as open and friendly. Brazil reminds me of the USA I knew in the 60’s and 70’s in some respects however the USA was never as friendly as southern Brazil! I’m white but I recognize statistically speaking white people are “cold” in comparison. I’d like to meld the warm heart of the Brazilians with the mind of the Americans. I try to embody this myself but hold little hope that it will spread to others.