Spotlight Exclusives

A Look at Economic Insecurity and the Economic Security Index

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I was recently speaking on a call-in show about the nation۪s continuing economic troubles when a woman named Michelle came onto the line. She was a middle-class woman who confessed a “secret:” she was relying on public assistance to pay for food. She had lost her job during the recent downturn, and could no longer afford to feed her family.

 

Meet the new face of economic hardship. Traditionally, talk of poverty and economic dislocation has focused on Americans stuck at the bottom of the economic ladder. And in a nation as rich as the United States, there are surely far too many such families.

 

Yet the Great Recession has shown us the side of economic deprivation Michelle has experienced: this is the risk confronted by all Americans of tumbling down the economic ladder without an adequate safety net to protect them.

 

This second form of economic hardship which researchers call “economic insecurity” has reached heights not seen for decades. But economic insecurity did not suddenly emerge with the tumultuous economy of the past two years. Instead, the Great Recession has cast in stark relief a trend toward greater economic risk that has been unfolding for at least 25 years. Even before the housing and financial markets collapsed and the job market followed, economic insecurity was creeping into the lives of more and more Americans once free of its reach.

 

This is not speculation. Over the past three years, I have been involved with the development of the Economic Security Index (ESI): the first simple, integrated measure of economic insecurity. With funding from the Rockefeller Foundation and guidance from a technical committee consisting of some of the top economic luminaries in this field, I worked with a team of researchers to come up with a straightforward, understandable index that takes into account three big security factors: income loss, out-of-pocket medical spending, and households۪ financial safety net.

 

The “insecure” in our index are those whose household income went down by at least 25 percent from one year to the next (after adjusting for inflation) and who lacked an adequate financial safety net to make up for the decline. Income included not just earnings but all sources of government and private support, including unemployment benefits, gifts from friends, and retirement benefits. Uniquely, we also measured families۪ out-of-pocket medical spending, and subtracted that amount from income. So our measure looked at big drops in income that occurred either because household income fell or because medical costs spiked.

 

How big is a 25 percent or greater income drop? For a family making $50,000 a year (close to the national median), it would mean a drop to $37,500 or less in a single year. More than half of Americans say they would face hardship if they went between two and four months without income.

 

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We found that behind the ups and downs of the economy, a gradual but persistent rise in the overall prevalence of economic insecurity has taken place. The ESI examines data from 1985 to 2007, with projections for 2008 and 2009projections we validated with an independent nationwide poll. In 1985, 12 percent of Americans were defined as insecure by the ESI. In 2010, that share increased to 20.4 percent, according to our projections. Moreover, the long-term trend has been unmistakably upward. During downturns, economic security has eroded, but between downturns, it has not bounced back to prior levels. The full results are at our website, where visitors are invited to tailor the index to their own interests.

 

Besides the sharp rise in overall economic insecurity, we found that this growing risk is not limited to those on the bottom of the economic ladderit has risen across virtually all parts of American society.  Economic insecurity is an issue squarely confronting the American middle class. To be sure, the extent of economic security varies substantially across the population. Those with the most income and education have faced the least insecurity, while the less affluent, those with limited education, African Americans, and Hispanics have faced the most. But virtually all groups experienced significant increases in insecurity over the past 25 years.

 

The current economic climate is confronting policymakers with a difficult set of short-term policy challenges. But the long-term rise in economic insecurity for all Americans raises more profound questions that we as a society must address. We owe at least that much to Michelleand the many others at risk of sharing her “secret.”

To print a PDF version of this document, click here.

 

Jacob S. Hacker, Ph.D., is the Stanley B. Resor Professor of Political Science at Yale University and the author, with Paul Pierson, of Winner-Take-All Politics (Simon & Schuster, September 2010). Learn more about the Economic Security Index at www.economicsecurityindex.org.

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