How long has it been since you felt warm and fuzzy about auto companies, airlines, and banks? If you're like most of us, the answer is probably quite a while. But plenty of companies in these industries want you to know they feel your pain. Hyundai is promising that if you lose your job or your small business declares bankruptcy, you can return the new Korean speedster you financed or leased--no strings attached. JetBlue's "Promise Program" will provide a full refund if you book a flight and then lose your full-time job. And Bank of America will cancel mortgage payments for up to a year in the case of involuntary job loss.
A surprising number of corporate giants are suddenly making affectionate offers like these. And, while they're surely trying to burnish their tarnished images, they're also making a hardheaded business decision: With family incomes increasingly uncertain, companies recognize the need to provide a new economic contract with built-in risk protections to get consumers to purchase their products.
Unfortunately, many politicians and pundits don't seem to be getting the same message: We're not just facing a short-term financial crisis; we are facing a fundamental shift in our economy that has pushed more and more risk onto Americans' backs. And the only way to give working families the confidence they need to make the investment and spending choices on which their--and our economy's--future depends is to rethink our nation's social contract, to rebalance risks and rewards in American capitalism.
We've been following the corporate "buy-now-pay-never" movement with more than a passing interest. That's because, for the last few years, we have also been closely examining what economists call "income volatility": the up-and-down fluctuations in what families bring in through work, investments, and government and private benefit programs. Our main finding is that family incomes are lot less stable than they used to be. In particular, the chance that families will experience catastrophic drops in their income has risen dramatically over the last generation. In the data source we have used, the University of Michigan's Panel Study of Income Dynamics, the chance that a working-age individual will experience a drop of at least 50 percent in family income over a two-year period has more than doubled from around 4 percent in the early 1970s to almost 10 percent in the early 2000s. The risk of at least one 50-percent drop in income over a five-year period has grown from about 15 percent in the early 1970s to about 23 percent in recent years.
Recessions exacerbate the problem substantially: Every recession since the early 1980s has ratcheted up the risk of a big income loss, with the relatively mild recession of 2001 producing income swings greater than those seen during the deep twin downturns of the early '80s. Now that we're facing a recession potentially far worse than that of the early '80s, it is safe to assume--though the data does not yet exist--that the instability of family incomes in the next few years will dwarf anything our nation has seen for decades.
What's more, the profile of the economically unstable is also changing. The job insecurity that once affected only the working poor is reaching into higher echelons of the labor market. Over the last generation, income instability grew faster among college-educated Americans than among those with just a high school degree. (And, no, it is not driven by the increase in the number of working married women who leave the workforce for short periods to have or raise children--the rise in income volatility has occurred among single workers as well as two-earner couples.)
When we first started sounding alarms over these findings, critics countered that they simply reflected a riskreward trade-off. Sure, people were taking on more income instability, but the return was higher wages and incomes. But who can believe that now? Increased income insecurity has occurred alongside slow (or no) income growth for all but the richest of Americans--among the well-educated as well as the poorly educated. In that same period, middle-class incomes barely grew at all, and what little growth did occur came only because families were putting in more hours of work. And what did they get in return? Less predictable paychecks, less comprehensive health insurance, less secure retirement savings, all adding up to family finances perched on the brink. The risk-reward trade-off looks more like a risk-reward rip-off.
The other common response when we warned of income instability was, "Don't worry, people can borrow to smooth their incomes." And, indeed, people did borrow, spurred on by a Wild West system of consumer lending whose irresponsible practices were heralded under the banner of "financial innovation. " Some of the explosion of consumer debt was the result of overspending and poor financial planning, but much of it simply reflected the reality that families were taking on more risk--shouldering a precarious burden of mortgage, credit card, and tuition-related debt--without much higher earnings or a better public safety net to cushion the blow.
Now, of course, some help is on the way through the economic recovery package. But, without a major shift in America's approach to social policy, the "new normal" that materializes whenever we emerge from the current recession will be characterized by a persistent and increased risk of catastrophic income loss. The fundamental problem is that we have a framework of social insurance premised on the world of two or three generations ago--a world of strong unions, globally invulnerable companies, modest health care costs, manufacturing jobs that don't require a college degree, and parents (read: moms) capable of serving as all-purpose safety nets within the home.
Today's world requires a different set of assumptions. America's globally integrated economy means less job security, more mobility, and ever-higher skills requirements for workers. Health care and education costs are rising. With most families relying on two incomes, the cost of caregiving is a real and growing pressure on millions of families struggling to support both young children and elderly parents. The combination of these rising costs and a volatile labor market means that families need to be continually prepared for change. For too long, we've left them to go it alone, and we're seeing the disastrous consequences of that approach today.
The time has come for a coherent policy strategy that retools Roosevelt's "cradle-to-grave" social insurance vision for today's realities. To begin with, we need an updated focus on income protection, which motivated the New Dealers but has not been seriously revisited in the many decades since. Our 1930s-era unemployment insurance system, for instance, covers only around one-third of unemployed workers and benefits often run out before workers find new jobs. It provides little help with the crucial skills training that today's unemployed need. And it utterly fails women balancing work and family as well as part-time, low-wage, and contingent workers--the very workers most in need of protection.
Provisions in the stimulus bill aimed at modernizing the unemployment insurance system will help rectify these problems, but, absent a major overhaul, unemployment insurance will remain patently inadequate to the employment insecurities of our day. Job loss is a risk faced by all workers, and that means unemployment insurance must be truly universal, with strong national standards and improved long-term funding. And unemployment benefits, valuable as they are, must be tied to a reformed job-training system that supports workers' efforts to retool their skills.
Job loss, however, is not the only risk to income faced by today's working family. Paid sick days and parental leave would greatly alleviate the financial risk of parenthood--a leading cause of poverty spells in America today. The ultimate goal should be basic income protection available, on a progressive and proactive basis, for a wide range of economic shocks. As a starting point, the Earned Income Tax Credit could be made a better source of income insurance, keeping families afloat when economic disasters strike, rather than a retroactive tax refund for the working poor.
Meanwhile, in health insurance and other core areas of economic security, we need to move away from reliance on tax-subsidized workplace benefits, freeing corporations to focus on their core mission of bolstering employment and productivity. Health care comes first, but our nation's retirement system is also in serious need of repair to lessen the burden of retirement income risk and long-term health care on workers and employers. (Frighteningly, the implosion of job-based benefits does not even show up in our measure of instability, since we are looking only at family incomes of working-age adults, not their expenses or retirement experiences.)
In short, we need to rebalance the risk-reward trade-off. Otherwise, we may find ourselves where many corporations are today: facing scared Americans who won't invest in the future. Instead of buyer protection plans offered by the private sector, we need a worker protection plan spearheaded by government. American capitalism has not shown us how to do much right lately. But the latest flash of corporate benevolence casts a small bright light on the path to broader security and opportunity for all Americans.
Jacob S. Hacker is professor of political science and co-director of the Center for Health, Economic, and Family Security at U.C. Berkeley. Elisabeth Jacobs is the American Sociological Association's Congressional Fellow.
By Jacob S. Hacker and Elisabeth Jacobs