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It's Not the Economy, Stupid
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.
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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.
Jacob S. Hacker, a Yale University professor and New America Foundation fellow, is author of "The Great Risk Shift" (Oxford Univ. Press).
