Thursday, November 09, 2006

Diddling the middling class

"Life choices were limited for children of the middling sort."

Bush never saw it coming. Nobody told him.

This is, after all, a time of record corporate profits, record takeover deals, massive bonuses on Wall Street, rising risk taking, record-breaking day-after-day Dow Jones Industrials. How can it be the stupid economy?

Jacob S. Hacker sets it up better than Guambat:
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.

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.

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 Icoles Normales Supirieure 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.

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.

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. 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.

And just to give examples of how Republicans and others "don't get it", consider these comments.

Ignore Democrat Spin; the Bush Economy Is Solid: Kevin Hassett
The third-quarter growth of only 1.6 percent in the U.S. gross domestic product created broad concern that the economy is headed south. That concern was artfully inflamed by Democrats, who have been warning about the fragility of the Bush economy ever since he passed his first tax cut.

Mindful of the electoral harm that bad economic news can wreak before an election, the White House rushed its best spinmeisters out as soon as the data landed. The bad third quarter, said Edward Lazear, chairman of the Council of Economic Advisers, was a "blip, not a trend."

The collapse in new housing activity and weakness in the auto market are a drag, but strength elsewhere has kept the economic engine operating on all cylinders. And the story for existing homes isn't so bad that we need fear a financial collapse anytime soon.

So the Bush economy is pretty terrific. It will be interesting to see if voters decide to surprise the pundits and reward Republicans tomorrow at the polls.

Record stock market highs; Healthy GDP growth; Real wages increasing; but the Chron says it’s the economy, stupid! by Owen Courrèges
The Chronicle has a staff editorial out today (which I won’t deign to link to) that repeats a common refrain among Democrats and their not-so-clandestine supporters lately — that Republican woes are, in part, driven by the economy, despite robust economic numbers.

I’m not saying this characterization is wrong, mind you, but it’s really about perception of the economy, not the economy itself. During the Clinton years the media was screaming (in effect) “the economy is batsh** crazy good!” at every turn. Today, the media reports the numbers, and then turns around an runs op-eds and editorials such as the Chronicle’s saying that the numbers mean nothing because millions don’t have health insurance, there’s wage disparity, blah blah blah…

Bush isn’t the greatest president, and Iraq hasn’t turned out well, but give credit where credit is due — the left may not like Bush for many reasons, but they look silly when they attempt to claim that the economy isn’t doing great.

And, of course, George W. Bush himself:
"All those forecasts by the Democrats turned out to be wrong," President George Bush said after the latest jobs numbers, championing his controversial tax cuts and crowing over a falling budget deficit.

"And now they're forecasting they're going to win the elections," he said at a campaign rally. "Well, if their election forecasts are as good as their economic forecasts, we're going to have a great day on November 7."

Federal Reserve Board member Janet Yellen lends support to some of the data and Jacob Hacker's conclusions, as reported by Economonitor:
The American Dream: The idea that anybody can become a gazillionaire. America: A country built on the desire to advance, and the institution of climbing up the socio-economic ladder. A country, in other words, built on the incentivizing effects of inequality.

Or not.

Janet Yellen, the president of the San Francisco Fed, gave a big speech on inequality yesterday, and here's her conclusion:

"Certainly some market-determined income differences are needed to create incentives to work, invest, and take risks. However, there are signs that rising inequality is intensifying resistance to globalization, impairing social cohesion, and could, ultimately, undermine American democracy. Improvements in education are an imperative for reducing inequality and an easily justifiable investment, given its high social return. In contrast, improvements in the social safety net entail costs, even when policy interventions are well-designed from an efficiency standpoint. Even so, in my opinion, they deserve high policy priority. Inequality has risen to the point that it seems to me worthwhile for the U.S. to seriously consider taking the risk of making our economy more rewarding for more of the people."

Barry Ritholtz puts some figures on it, and you should read his post to go through the catalogue. His editorial take on the figures is:
Most pundits, politicians and economists have yet to figure out what the public long ago came to realize: We now have a dual economy -- one that distributes gains and losses in a very uneven manner.

Those numbers are precisely why the Middle Class rates the economy only fair to poor, despite the data showing overall (but diminishing) strength.

Depending upon the elections results tomorrow, the Middle Class might force some changes -- in both the economy and the stock market. A minor realignment would produce gridlock, and that would be a good thing: it would act as a check on the profligate spending, and force some of the more heinous lobbying abuses back to merely egregious.

A major shift would reflect a full blown political re-alignment, and that could cause all sorts of mischief as far as markets are concerned. Its more than Iraq, the budget surplus deficit, earnings and inflation. We can expect to hear questions raised about fundamental fairness, given how the benefits of the tax cuts have accrued primarily to the top percentile.

...[I]ts in the great middle where we see all sorts of angst coming out of this "new era."

And, if we are to believe what members of this group are actually saying to pollsters, its that same middle that is likely to impact the mid-term elections in the United States . . ..

And Ritholtz also points us to yet another member of the US economic elite and adds his cautious words "yes, but what about the middle class?":
Former Treasury Secretary Lawrence Summers takes note of the way various economic classes have been impacted by the recent changes. Writing in the Financial Times, he notes:

"Against all odds, we are living in a time of plenty. Neither the after-effects of September 11 2001 nor a tripling in oil prices has prevented the world’s economy from growing faster in the past five years than in any five-year period in recorded economic history...

Two groups have found themselves in the right place at the right time to benefit from globalisation and technological change. First, those in low-income countries, principally in Asia and especially in China, who are able to plug into the global system. The combination of low wages, diffusible technology and the ability to access global product and financial markets has fuelled an economic explosion.

Second, it has been a golden age for those who already own valuable assets. Owners of scarce commodities have seen their returns rise prodigiously. People running businesses that can take advantage of globalisation to source labour less expensively and sell to larger markets have seen their incomes rise far faster than incomes generally. Certainly those in the financial sector in a position to benefit from the asset revaluations associated with globalisation have prospered."

The expression fair to middling, which usually means 'slightly better than average'--it is used especially to understate a feeling of good health--is sometimes used to mean 'below average'.

For a fuller discussion of the phrase and its origin, see this.


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