Debating the Bush Economic Record: Increasing Economic Risk

Yesterday, David Brooks published a column in the New York Times called "Inequality Myths." The main message of the column is that "the meritocracy is working almost too well. It's rewarding people based on individual talents." Therefore inequality, which he denies is increasing when he says "workers over all are not getting a smaller slice of the pie ... [w]ages and benefits have made up roughly the same share of G.D.P. for 50 years," is not a serious issue, and has nothing to do with government policy or power relationships. His solution is to implement "human capital policies ... to help them get the intangible skills."

The statistics in his column are examined by, among others, Jared Bernstein and Dean Baker, and the case Brooks makes does not hold up to closer scrutiny. However, columns and arguments like Brooks' come up often so it's worth taking a closer look at what they tell us, and what they leave out.

Much of the assessment of the relative well-being of different classes of workers is based upon the comparison of means or, when large outliers are important, medians. For instance, there has been a lot of attention devoted recently to whether workers wages are keeping up with inflation and changes in productivity, and how the difference in income between classes has changed over time.

But, as discussed here by Yale economist Jacob Hacker, a focus on means and medians misses an important element of well-being, risk. For example, would you take a job offer for $10,000 more in salary if it raised the chances of becoming unemployed by 30%? Mean income is higher if the job is taken, but taking the job does not necessarily make you better off since it also increases economic risk (the decision depends upon tolerance for risk, among other things). Thus, the relatively small increases in compensation for workers in recent years must be balanced against increases in economic risk workers face when examining whether recent economic changes have made workers and their families better or worse off.

Today, workers face increased insecurity about their own and their employer's future as competition is heightened due to globalization. There has been a decline in external buffers such as pension coverage, health care coverage, and other social programs. Workers face increased variability of returns to education due to factors such as outsourcing, and the volatility of personal income has risen since 1975. Jacob Hacker estimates that income volatility has increased 88% from 1978-2000.

These are just a few of the changes causing workers to feel increased anxiety about future economic prospects. For more on the topic of economic risk from Jacob Hacker, a leader in this area, see "There goes the rug," "Economic risk has shifted from the government and corporations to workers and their families," "Social Security as Dramamine" [alt. link], and "The Real Issue Is Risk." The point is that with risk up substantially while compensation has stagnated, it's understandable why households report dissatisfaction with economic conditions. Those who focus solely on relative income, wages, living standards and other measures of mean or median performance miss an important component of the change in well-being, rising economic risk. So long as risk is ignored by some pundits, they are likely to remain mystified as to why typical workers report dissatisfaction with the Bush economy.

This is a guest contribution as part of NDN's ongoing debate about the economy. Read our new report The Bush Economic Record here.