Thursday, July 22, 2010

New Economic Indicator to Complement Poverty Index

Scholars created the Economic Security Index and have unveiled their report today at a forum. Jonathan Cohn blogs about it today at The New Republic. The findings of the new index show that American insecurity is higher this past year than anytime in the past 25 years. A portion of Cohn's post follows:

On Thursday, a group of scholars led by Yale's Jacob Hacker and backed by the Rockefeller Foundation are unveiling a new statistic to measure hardship. They call it the “Economic Security Index.” The official unveiling is at a forum, being held at the New America Foundation. But the full report itself is already online.

In an interview on Wednesday, Hacker walked me through the basic concept. The ESI measures the number of Americans whose “available household income” falls by more than a quarter from one year to the next and who cannot replace this lost income.

The goal is to capture the effects of three things that can sometimes happen simultaneously: People lose their job, face high health care bills, and lack savings or other resources to meet their obligations. (The formula's variables household out-of-pocket medical expenses as well as income and wealth.) As the report explains:

Prior research has focused primarily on individual sources of economic insecurity, such as earnings volatility and the incidence of large medical expenditures. The ESI, by contrast, represents the first attempt to incorporate several key influences—income declines, medical spending shocks, and financial wealth buffers—into a single unified measure.

Using this measure, Hacker and his colleagues determined that the proportion of Americans economically insecure in 2009 and 2010 was higher than at any time in the last 25 years. This reflects the impact of the recession, obviously, but it’s also indicative of a long-term trend towards greater vulnerability. The percentage of insecure Americans was 13.7 percent during the recession of the early 1990s and 17 percent during the recession at the beginning of the last decade. For this recession, it’s 20.4 percent. (Note: That’s a projection, since not all the relevant data is available yet.) And not only more people people experiencing severe income shocks. It’s taking them longer to recover when they do. “The typical individual who experiences a decline of at least 25 percent in household income requires between six and eight years for their income to return to its previous level,” the report summary says.

Note, by the way, that the ESI for the 2000s recession is higher than it was for the 1990s recession, even though unemployment and poverty--the statistics we use most commonly in politics--were lower. (See table below.) That's one reason the new measure is so potentially important: It gives us a better picture of who is suffering when. Of course, it is also important as a reminder of just how widespread insecurity can be.

Hacker’s four colleagues Gregory Huber of Yale, Philipp Rehm of Ohio State, Mark Schlesinger of Yale, and Rob Valletta of the Federal Reserve Bank of San Francisco. The group consulted a technical committee that included Henry Aaron and Gary Burtless of the Brookings Institute, as well as Robert Solow, winner of the Nobel Prize for Economics in 1987.

The research team intends to update ESI regularly in the apparent hope that, like Orshansky's poverty index, it becomes a staple of political and policy conversation. I hope it does. I think most people assume that economic hardship is confined to a very small group of people who are very poor. The more people realize that it's actually pretty widespread--reaching up even to middle-income groups--the more likely they are to do something about it.

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