Privatizing Risk

Bush and Republicans repeatedly state that our economy is excellent. Productivity and economic growth are up. They don’t understand why polls report that most people are dissatisfied with our economy. Experts note that while productivity and economy is growing, benefits aren’t going to workers. With income gains (both before and after taxes) occurring only among those with the highest incomes, there is growing inequality.

But this isn’t the whole (maybe not even the main) story behind people’s dissatisfaction. The less noticed and reported story is the greater volatility of both income and expense. More people are experiencing financial crises, due to sudden loss of income or increase expenses. Financial crises have always occurred among the poor. Now they are occurring among people with upper middle incomes. While an ‘Opportunity Society’ is developing for the very rich, for everyone else, it’s a “Risk Society’. Our history prepared us to pursue the American Dream. Now it is at risk.

The Golden Era

During the 30 years following World War II, jobs became plentiful, incomes rose and our public-private safety net improved. The GI bill enabled veterans to increase their education. VA and FHA loans enabled easy purchase of homes. Many had manufacturing jobs and belonged to labor unions. Employees received benefits, including health and disability insurance and defined benefits retirement insurance.

The government provided retirees with Social Security and later Medicare. Johnson’s poverty programs lifted many above poverty. Medicaid provided health care for the poor. Although we created a much weaker government funded safety net than most European nations, when our employer funded safety net was included, our safety net was similar if somewhat less inclusive.

The Stagnant Years

Then in the mid-70’s, oil prices soared. Fueled also by the unfunded guns and butter budget deficits during the Vietnam War, inflation increased. Imports from Japan and elsewhere replaced jobs at home. During the Carter administration of the late 70’s stagflation occurred. Paul Volker increased interest rates to stop inflation and unemployment increased.

Facing stagnant incomes, people adopted 3 strategies. They supported tax cuts. Women sought paying jobs. People borrowed on their credit cards. Reagan initiated popularly supported tax cuts, causing Keynesian budget deficits and increasing inflationary pressures. Volker kept interest rates high. In 1982, our economy crashed with the highest unemployment since the Great Depression.

Newer technologies increased manufacturing productivity. Fewer employees could produce the same manufactures. Japanese competition transferred manufacturing jobs abroad. Manufacturing jobs declined. We changed from a manufacturing to a service economy. Union jobs declined, assisted by Reagan’s replacement of striking air controllers. Since the mid-70’s, the spending power of most workers has stagnated.

The Risky Years

Tax changes during the Reagan years made loan financing more advantageous than equity financing. Mergers and buyouts funded by junk bonds made paper profits more important than producing quality products. To elevate short term profits, investments were cut, retirement funds raided, highly paid employees laid off, and companies hollowed out. Employees were no longer valued assets and partners in production and revenues.

Our private safety net fell apart. As health insurance became more expensive (due to provider monopolies and private insurance administrative costs, employers transferred more costs to their employees. Fewer employees were covered. Defined Benefit pension plans were replaced by Defined Contribution plans or dropped altogether. Our already weak public safety net was weakened further. Requirements for unemployment insurance and welfare were increased, such that fewer receive payments.

Houses were more expensive and more highly leveraged. College education is more expensive and financing more expensive. Health costs have soared. So have energy costs. With stagnant incomes and rising expenses, personal savings have plunged and personal debt has soared.

Globalization and communication advances bring more foreign competition from both imports and outsourcing. Not only are jobs paying fewer benefits, but the jobs themselves are more insecure. Many households are now experiencing financial crises, due to a member losing a job, an illness which costs more than insurance provides or a divorce (often caused by the stress of two parents working and caring for children).

Bankruptcy rates among parents are now higher than divorces. Our conservative congress just passed legislation to restrict the debts that people can escape through bankruptcy. Lose a job or two, experience an expensive illness, get a divorce and your financial situation is toast. You are back where you were when you first started working, but with more obligations.

Restoring the Golden Years

Competitive globalization is here to stay. Businesses can no longer provide half of our safety net. To reduce vulnerability to risks, our public safety net must be expanded to assist everyone to deal with health crises, education, unemployment and retirement. We must provide support to stressed parents.

Creating an adequate safety net requires (1) reducing the ability of private insurers and others to corruptly block expansion of our safety net, (2) installing cost controls for our safety net, (3) rationalizing the variety of unintegrated politically motivated safety net programs, (4) restoring fair progressive taxation to produce traditional levels of federal revenue, (5) eliminating non-beneficial federal expenditures, such as subsidies for rich and powerful energies and military expenditures oriented to non-existent threats. These reforms will be addressed in more detail in other commentaries. Dave Thomas

Recommended Books

Civil Rights

Thom Hartmann, 2002, Unequal Protection, The Rise of Corporate Dominance and the Theft of Human Rights

Marjorie Kelly, 2001, The Divine Right of Capital, Dethroning the Corporate Aristocracy

Richard C. Leone and Greg Anrig, Jr., 2003, The War on Our Freedoms, Civil Liberties in an Age of Terrorism

Collapsing Private and Public Insurance

Robert Kuttner, 1996, Everything for Sale, The Virtues and Limits of Markets

Daniel Altman, 2004, Neoconomy, George Bush’s Revolutionary Gamble with America’s Future

Jacob S. Hacker, 2006, The Great Risk Shift, The Assault on American Jobs, Families, Health Care, and Retirement and How you can Fight back

Michael A. Hiltzik,2005, The Plot Against Social Security, How the Bush Plan is Endangering our Future

James Lardner and David A. Smith (eds.), 2005, Inequality Matters, The Growing Economic Divide in America and Its Poisonous Consequences

Max J. Skidmore, 1999, Social Security and Its Enemies, The Case for America’s Most Efficient Insurance Program

Psychological Impacts of Increased Risks

Thomas Frank, 2004, What’s the Matter with Kansas? How Conservatives Won the Heart of America

Michael Lerner, 2006, The Left Hand of God, Taking Back Our Country from the Religious Right*

Restoring Risk Protection

Ted Halstead, 2004, The Real State of the Union, From the Best Minds in America, Bold Solutions to the Problems Politicians Dare Not Address

Gene Sperling, 2005, The Pro-Growth Progressive, An Economic Strategy for Shared Prosperity