Lower Outlook as Americans Continue to Lose Ground
Life + Money

Lower Outlook as Americans Continue to Lose Ground

A new index measures 25 years of economic insecurity

As much as Americans suffered in the recent Great Recession, the decline in their economic well being actually began 25 years ago.  That’s the result of a new Economic Security Index developed over the last three years by Yale University political scientist Jacob Hacker and a team of researchers and policy experts, with funding from the Rockefeller Foundation. 

The index monitors how many American households have seen their inflation-adjusted “available household income” drop by 25 percent or more from year to year, and who do not have adequate savings to make up for the lost income. 

The initial data show that the economic insecurity of American households in 2009 and 2010 was higher than at any time in recent history, with about one in five Americans, or 20.4 percent, suffering from a decline of 25 percent or more in available household income. But American households’ available income, including private and government sources, has been in continuous decline since 1985, even in times when the economy was booming. The data account for major income loss, the largest driver of instability, rises in out-of-pocket medical costs, the second largest factor, and lack of available cash reserves to temper the first two risks.

In 2007, about 46 million Americans were considered economically insecure, compared to 28 million in 1985. “What’s really clear is that the chance that Americans have of falling down the economic ladder without a safety net beneath them has increased gradually but inexorably,” Hacker said, adding that each recession between 1985 to the present produced a higher level of economic insecurity than the previous one for virtually every age and ethnic group, except Hispanics. “Of course people are insecure today,” Hacker said. “But … this was true even before the downturn.” 

Gary Burtless, a senior economics fellow at The Brookings Institution who served on an advisory board for Hacker and his team, notes that economists often refer to the period between 1985 and 2007 as “The Great Moderation,” because economic expansions lasted longer, recessions were less severe, and the quarter-to-quarter fluctuations in national output were smaller than in the postwar period of 1945-1985. “There was this rise in instability in American household incomes in contrast to smoother sailing of the overall economy,” Burtless said. “The puzzle … is why in an environment when the economy is growing more stable on the whole, is there growing variability in income and fortunes at the household level?”

A central purpose of the new index is to prompt study of the reasons for rising instability in family incomes, said Hacker.  One conclusion of the team’s findings so far is that a spike in out-of-pocket medical costs pushed a lot of people into being considered insecure. “That’s particularly true for the elderly, who don’t have very high risk of income losses, but high risk of large uncovered out-of-pocket medical costs,” he said.

Hacker, whose book , The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream, was published in 2006, says that when he was approached by the Rockefeller Foundation about creating a new measure of well-being, he wasn’t sure it could be done. “But as I built a team and worked on it … we came up with a simple idea that security is really captured well by looking at the chance that an individual will experience a big drop in available resources — their income after medical costs.”

While much research and analysis still needs to be done, “It’s not very complicated from an economists’ standpoint,” said Burtless. “If our institutions have changed in a way that companies can force individual workers to accept bigger ups and downs in their pay, maybe because pay is more linked to firm performance that generates more ups and downs in the incomes of the workforce.  Economic performance for these companies may be getting more stable, but that is being achieved at the cost of more ups and downs in the fortunes of individual households.” A recent study from the Pew Research Center shows that among employed Americans, 23 percent say they have had their pay cut during the recession.  

“You can quibble with it — and every analyst who looks at it will have questions. But the abiding virtue is that you can understand it,” said Henry Aaron, a senior fellow at The Brookings Institution who also served on the advisory committee for the new index.  (Aaron also writes an occasional blog for The Fiscal Times.)

One long-term goal could be to have the new index adopted by the federal government, which already measures the unemployment rate, the poverty rate, the GDP growth rate and the Consumer Price Index, to name a few. “We’re entering into a period where there is going to be significant squeezing of resources for the rest of discretionary programs … so that may have a bit of an inhibiting factor here,” said Robert Greenstein, executive director of the Center on Budget and Policy Priorities, a Washington think tank, who also advised Hacker’s team.  For the idea to gain traction with the federal government, major players in the White House or chairs of key congressional committees would need to get interested in the idea, he said.