Fear and uncertainty in the time of prosperity

May 24, 2007

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.

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