Is Economic Inequality Too Big A Risk?
Q: How do you think about economic inequality and whether it leads to risks in people’s lives?
Jacob Hacker: I think that inequality and risk are very closely related. In this current recession, we’ve seen that growing inequality, with the very top pulling away from the rest of society, has been closely associated with increased risks in the financial markets. Research over the last few years has shown that when you have very large gains at the top, you get a lot of money sloshing around that is used for speculative financial transactions. At the same time, because you didn’t get strong growth in income in the middle, you also saw a lot of extension of credit to middle-class Americans, particularly in the housing market. And those two trends came together in this perfect financial storm in the late 2000s.
Right now the real economy still seems to be trapped under the debris of the financial crisis, but Wall Street is coming back. Corporate profits are back up. Many Americans are looking at this experience and they may not think in terms of risk and inequality, per se, but their lived experience is about the risk they faced over the last generation and especially over the last few years, and the inequality that they see in the aftermath of this downturn.
Robert Shiller: I think that Americans are more concerned with injustice than inequality. I thought that one of the most interesting things in your book, Winner Take All Politics, with Paul Pierson, was how you highlighted elements of injustice that we see in the increasing inequality. Notably you described what you called a “30 Years War,” where the corporate interests were improving their lobbying and efforts to influence Congress and changing a lot of regulations and tax rules and the like to increase their share of the national income. Americans, when they see this, are going to be angry about it, because it seems unfair and unproductive.
Hacker: I think that there is also a very deep connection between what’s happening in this economic crisis and your writings on risk. If you think about the kinds of risk that are hitting people—unemployment risk, the loss of housing wealth, or the loss of housing altogether, medical costs—those are all areas where we’ve seen major problems in the markets to deal with economic risks.
It’s true that a lot of the changes over the last 30 years were pushed for by corporate interests, but they were often justified with a rosy view of the ability of financial markets to innovate and deal with these risks through private means. I know that you have a positive view of private means in dealing with these risks. But when I read Irrational Exuberance and other books, I really get a sense that there are a lot of behavioral biases in financial markets, and there are probably political biases as well, that are going to make it hard to deal with these risks without some major leadership—either public or private.
The real challenge we face now is, how do we get ordinary, middle-class Americans feeling confident again about how the whole system works? People feel like they’re facing a lot of risks while those who helped bring on this crisis are not facing the same consequences—it’s kind of a “heads I win, tails you lose” economy for the financial sector.
Shiller: The Dodd-Frank Wall Street Reform and Consumer Protection Act preamble says that this act is going to end “too big to fail.” There’s already a political movement toward trying to improve that situation. Though it’s not clear how effective Dodd-Frank will be, I think that there is a political groundswell supporting doing something to make our financial institutions more responsible and improve the risk management that we have. I think we have to keep pushing to make more of this happen.
Q: What are the risks that really make a difference in people’s lives and how well are they addressed by the political system and the financial system?
Hacker: I have a team of researchers working with me on a project called the Economic Security Index. We did a survey of a representative sample of Americans in 2009, right in the midst of the downturn. For those surveyed, the most important risk, it seemed, was job insecurity. Unemployment or loss of hours and wages just looms very large in people’s thinking. But there were three other risks that were extremely important: healthcare, specifically the cost of healthcare; retirement, which is a widespread concern, though Americans at the same time feel like it’s the most preventable problem; and the third thing that came up was that people are very concerned about wealth losses, about housing and asset losses. If you boil it down, people worry about those risks that affect their ability to maintain their current standard of living.
Given the way that the downturn has played out, with both historically unprecedented housing market declines and a major spike in unemployment, you can see how this has been devastating to so many people.
Shiller: This is partly a macroeconomic problem. Unfortunately, we’re stymied about solving that. It’s intertwined with this inequality issue, because the idea of stimulating the economy makes people think that it will be done unfairly. They become very concerned that Congress will funnel projects to favored people. And the sense that the U.S. is building up a national debt in an effort to stimulate the economy has created a huge backlash and that is a very serious problem right now. There’s just a sense of anger at Washington. It’s thought to be captive to special interests. And so there’s just a disinclination to let Washington do anything. So we can’t solve any problems very effectively, right now.
Hacker: One poll sticks in my mind: the Pew Research Center did a poll back in 2010 where they asked people whether the federal government had helped a number of different groups a great deal. When they asked about large banks and Wall Street, 53% of Americans said those groups had been helped by the federal government a great deal. When they asked about large corporations, 44% said they’d been helped a great deal. But when they asked about the middle class, only 2% said that it had been helped a great deal.
One thing that has become very clear to me over the last few years is just how deep this trust problem goes, and how much it corrodes faith in any large-scale institutional or leadership response to the challenges we face. The initial response to the downturn was a fairly comprehensive set of measures to try to deal with some of these risks. We had the passage of financial reform in 2010. We had the passage of a healthcare reform bill. We had the so-called stimulus measure that many believe was inadequate but which was a huge attempt to boost the economy. But, fairly or unfairly, many Americans don’t think that the government actually did a whole lot to help them deal with the economic risks that matter to them. I fear that we’re at a kind of crossroads in dealing with a lot of these challenges, because you really do have to have some shared faith in government—or at least in a kind of minimal role for policy—to deal with these challenges.
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