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October 19, 2008

The Fix We're In: Jacob Hacker on the "Great Risk Shift" hitting home

With the stock market nosediving, credit lines freezing, retirement savings disappearing overnight, and the state budget on the chopping block, we are facing an economic peril as great as any since the Great Depression. What are we to make of these frightening times? We asked some leading voices in the world of economics, political science, and public policy to help make sense of the tumult we find ourselves in. See all of them here. Below, Great Risk Shift author Jacob Hacker:

What is going on with our economy?

The stories in the headlines are about the financial crisis at the top. But the story that explains our deeper economic anxieties is the slow-moving financial crisis facing the rest of us. Over the last generation, as I wrote in my recent book, The Great Risk Shift, economic risk has shifted from the broad shoulders of government and corporations onto the fragile backs of American families.

The shift has occurred in nearly every area of our economic lives — our jobs, our health care, our retirement savings, our family finances. It is at the heart of Americans’ economic worries today. And addressing it is our nation’s biggest long-term economic challenge. More and more Americans are feeling insecure — and they’re right to. Job-based benefits like health insurance and retirement pensions are either disappearing or shifting more costs and risks onto workers, as in the shift from guaranteed pensions to 401(k) accounts. Bankruptcies and foreclosures are stunningly more common today than a generation ago, and most who experience these dislocations are in the middle class before they do.

No less telling, research I have done using the Panel Study of Income Dynamics, shows that the instability of family incomes has risen substantially since the early 1970s. The gaps between the rungs on our economic ladder have increased, but what has also increased is how far people slip down the ladder when they lose their financial footing.

These are not simply problems confronted by workers with limited education. More than one in three recent college graduates start their first job without health insurance. In recent years, people who have gone to college have experienced more family income instability than high-school dropouts did in the 1970s.

You might hear that people can still spend even when their incomes drop. That may have once been true, when growing home values provided a last-resort ATM for struggling middle-class families. But now that ATM is broken. Outside of their home, middle-class families have strikingly little in the way of liquid wealth with which to deal with short-term income fluctuations. Indeed, according to a recent analysis of working families with incomes between two and six times the poverty level, more than half of middle-class families have no net financial assets besides their home.

The late Herbert Stein, chairman of Nixon’s Council of Economic Advisers, reportedly once pronounced that “Things that can’t go on forever, won’t.” Families cannot maintain consumption through borrowing forever, and the bill that eventually comes due can devastate family finances.

It is common to say that providing Americans with a basic foundation of security will drag our economy down. But it is a grave mistake to see security as opposed to opportunity. We give corporations limited liability, after all, precisely to encourage entrepreneurs to take risks. If middle-class Americans are to make the risky investments necessary to thrive in our new economy, they need an improved safety net, not an ever more tattered one. We cannot bailout Wall Street and say “toughen up” to Main Street.

First and foremost that means affordable health coverage that moves with workers from job to job. In a policy brief released last year, I outlined a proposal called “Health Care for America” that would extend good insurance to all non-elderly Americans through a new Medicare-like program and guaranteed workplace health insurance. Happily, the Lewin Group, an independent health care consulting organization, estimates that Health Care for America would cover everyone younger than 65 without any additional national spending on health care — and for the relatively modest federal costs of around $50 billion — while saving $1 trillion in national health spending over the next ten years.

Some worry that we cannot afford to provide health and economic security to all. What recent events suggest is that we cannot afford not to.

Jacob S. Hacker is professor of political science and co-director of the Center for Health, Economic, and Family Security at the University of California-Berkeley. He is also a fellow at the New America Foundation in Washington D.C.  His most recent books are Health At Risk: America’s Ailing Health System  — And How to Heal It, and The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream.

See Jacob Hacker's 2007 Conversation with CommonWealth magazine here.

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