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CEW challenged by “emerging evidence” of income insecurity, loss
aversion and a better-educated consumer/worker environment. Multiple academic studies shared below. KwC It's Not the Economy, Stupid OpEd by Jacob S.
Hacker, Washington Post, Sunday, October 29, 2006; B01 Jacob
S. Hacker, a Yale University professor and New America Foundation fellow, is
author of "The Great Risk Shift" (Oxford Univ. Press). In the final days of
this fall's campaign, Republicans have turned to an unexpected issue: the
economy. President Bush touted the nation's prosperity last week, insisting
that "a strong economy is going to help our candidates." And why not? The Dow
is soaring. Unemployment is low. Inflation is tame. Gas prices are falling. And
the overall economy has been growing steadily. If Americans practice what
political scientists call "retrospective voting" (captured by
President Ronald Reagan's famous question: "Are you better off today than
you were four years ago?"), then one would think that incumbent
politicians should be cruising to victory. There's just one
problem: Despite the sunny talk and favorable numbers, voters aren't happy with
the economy. Though they've become somewhat more positive in recent weeks, they
remain strikingly dissatisfied -- and favor Democrats by wide margins on
economic issues. Many observers have
attributed the disconnect to the war in Iraq. Unhappiness over the conflict,
they argue, is coloring voters' economic perceptions. Yet a similar disconnect
played out in the early 1990s, when voters also felt much more negative about
economic conditions than the numbers would have suggested. Then, as now, conventional economic indicators didn't seem to capture voters'
fundamental anxieties -- the sense that their jobs, health care, pensions and
family finances were ever more at risk. In this climate,
Republicans bragging about the economy may appear not as saviors, but as out of touch -- much as the administration appears on the
other dominant campaign issue, the war in Iraq. Just as events in Iraq
undermine GOP reassurances about the conflict, so anxious financial discussions
in American homes help explain why Republicans are gaining so little from
today's economic numbers -- numbers that once would have seemed like tickets to
victory. In the past, the link
between economic conditions and election results seemed simple. Economist Ray Fair's landmark 1978 paper "The Effect of Economic Events on Votes for President"
in the Review of Economics and Statistics showed that a simple forecast based
on election-year economic numbers (primarily inflation and economic growth) did
a remarkably good job of predicting the result of presidential elections in the
20th century. But models such as
Fair's are becoming increasingly less reliable, according to Dartmouth
political scientist Joseph Bafumi in a recent paper, "The Stubborn American Voter."
For example, Fair's approach overshot President Bush's margin of victory in
2004 by 6.5 percentage points. And the last president to lose an election when
the raw economic numbers predicted otherwise in Fair's equation was George H.W.
Bush, running for reelection in 1992. Some analysts have
described current voter angst as a hangover of economic success.
"Americans have developed perfectionist standards," economics
columnist Robert J. Samuelson has argued. "We expect total
prosperity and are disappointed by anything less." And conservative pundit George Will recently decried the nation's "economic
hypochondria" -- an entitlement mentality characterized by a low threshold
for economic pain. But the problem isn't
the public -- it's the standard statistics used to judge the economy.
Inflation, unemployment and economic growth all capture economic performance at
a particular moment or period. Yet a growing body of theory and evidence suggests that to understand public
perceptions, one should look at the security and stability of family finances
over time. With that perspective, the grounds for unease suddenly look much
clearer. Consider the evidence
of rising income inequality in the United States. In a path-breaking recent
paper, "The Evolution of Top
Incomes: A Historical and International Perspective," Thomas Piketty of Écoles Normales Supérieure in Paris and Emmanuel Saez of the University of California at Berkeley
have shown that the share of national income held by the richest 1 percent of
Americans -- stable at about 32 percent throughout the middle decades of the
20th century -- began to rise sharply in the late 1970s and by 2002 had
surpassed 40 percent. In the past few years, most income gains have gone to
people at the very top of the income ladder, with middle-class Americans seeing
only a small boost in their economic standing. Yet there's another
reason for middle-class dissatisfaction. Many assume that growing income
inequality means that rich people are becoming steadily richer. But virtually
all income statistics are based on annual snapshots of Americans' finances, so
they cannot tell us whether rich people stay rich -- or whether poor people
stay poor. In other words, these statistics tell us about inequality, but not
about mobility -- either up the income ladder or down it. This is a major
oversight, because there's good reason to think that our economic lives are
more unstable than they used to be. Bankruptcy, for instance, is much more
common today than it was just 25 years ago, and research by Elizabeth Warren of Harvard Law School -- presented in a 2003
law review article, "Financial Collapse
and Class Status" -- shows that many of those who file for
bankruptcy were once squarely middle class. Princeton economist Henry Farber, in his article "What Do We Know About Job Loss in the United States?"
has found that the
likelihood that a worker will lose a job over a three-year period has been
rising -- and is now
about as high as it was in the early 1980s, which saw the worst economic downturn
since the Great Depression. In my own research
using the Panel
Study of Income Dynamics
-- a survey that has traced a large sample of Americans over time -- I've found
that family incomes have become much more unstable since the 1970s; the gap
between our income in a good year and our income in a bad year has expanded.
Increasingly, it seems, Americans are living on a financial roller coaster. Of course, roller
coasters go up as well as down, so it's tempting to think that the net effect
of economic instability is a wash. But instability causes hardship even when
the "average" experience stays constant. In their seminal 1979
article "Prospect Theory: An Analysis
of Decisions Under Risk," psychologists Daniel Kahneman and Amos Tversky showed that people dislike losing things they already have
much more than they like gaining things they don't have -- a phenomenon known
as "loss
aversion."
As a result, losses in income are psychologically difficult even when followed
by equal or even larger gains. And, of course, it's on those downward trips
that people lose their houses, their jobs, their retirement savings and other
staples of middle-class life. Loss aversion is
surprisingly strong. In a recent nationwide survey by the polling firm Lake Research Partners, respondents were asked whether they
preferred "the stability of knowing your present sources of income are
protected" or "opportunity to make money in the future." By a two-to-one margin, Americans chose
stability over opportunity. This helps explain why
Americans are so dissatisfied with the current economy. They see the overall
gains, but
they don't think that those gains have translated into greater security for
their families,
and they're worried about the risk -- whether it be the loss of a job, unexpected
medical costs or some other setback. A majority of registered voters say the
economy is getting better, according to a Washington Post-ABC News poll last
week. But more than three-quarters still say they are either falling behind or
just holding steady. The actual
or possible
erosion of safety
nets (such as
Social Security, guaranteed pensions and workplace health insurance) only
heightens such concerns. Loss aversion may also
help explain the muted public reception to Bush's "Ownership Society"
agenda, which was shelved after his proposal for private Social Security
accounts crashed and burned (though, much to the dismay of Republican
candidates, Bush recently said he wants to tackle the issue again). According
to polls, many voters thought they would do better with private accounts. Yet
they intensely feared the risks, such as a stock-market downturn or outliving
their savings. Does all this foretell
a major shift in U.S. politics, as increasingly insecure Americans demand
change? Democratic pollster Nancy Wiefek
thinks so. "The main political cleavage now is no longer income but risk," she said. And in Europe,
according to recent studies by Harvard scholar Torben Iversen, voters appear capable of figuring out how at
risk they are, and supporting
or opposing specific social policies in response. However, competitive
left-of-center parties in Europe put ambitious alternatives on the agenda. In
the United States, despite public unease, Democrats have talked mostly about
the minimum wage and Wal-Mart, rather than trying to mobilize the risk-fraught
middle class. The continuing
economic disconnect carries a clear prescription: Republicans would do better
to acknowledge middle-class strains, rather than to just repeat the
strong-economy mantra. In a 2005 strategy memo, Republican political consultant
Frank Luntz put "insecurity" at the top of
his list of "words that work" in connecting with voters on the
economy. It still works -- but it's likely to be working for Democrats, not
Republicans, on Nov. 7. http://www.washingtonpost.com/wp-dyn/content/article/2006/10/27/AR2006102701485.html |
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