May 18, 2013
Jeff Madrick on ‘High Wire,’ Peter Gosselin’s Look at the Economic Meltdown
Posted on May 2, 2008
By Jeff Madrick
It would be a pity if Peter Gosselin’s new book, “High Wire: The Precarious Financial Lives of American Families,” gets lost in the current turmoil over subprime mortgages and deepening recession. He has done the most convincing job I’ve seen in capturing the failures of America to deal with a changing, complex and far less generous economy than it has known in the past. That economy, despite cyclically painful periods, was so generous compared to the rest of the world over its 200-year history in terms of the rate at which it expanded the typical American’s standard of living that the country’s national character was formed by it. The resulting tendency in America, though thankfully violated from time to time, is decidedly toward a laissez faire philosophy of government.
But that national character is now being tested in a less friendly economic environment. Are America’s reflexes, honed over a couple of centuries, up to the task? It is not clear.
Peter Gosselin’s admirable objective is to show how many people of all income levels are now insecure and afraid in an economy that Americans are constantly told, by Republicans and Democrats alike, has long been back on track. At least, that was the conventional wisdom until a year or so ago, when the current hydra-headed crisis emerged. But, in truth, the American economy has not been on track for a generation now. Even the Clinton interlude was, as we now know, prompted by intense and unsustainable financial and housing speculation.
The main theme of Gosselin, a veteran reporter for the Los Angeles Times, is the rise of deep-seated financial, health and material risk. He gathers the many pieces of the new economic America together quite beautifully, even elegantly, and brings them alive with interesting and not the usually predictable individual examples. I learned many things in this book, and I’ve been covering this territory for a long time.
Take pension and health-care coverage. Most of us who read about these matters know about, and too many of us have already lived through, the growing failure of America’s pension and health-care system. Americans depend on having a good job for having a good pension. Now pensions are being frozen by major companies like IBM, many industries from autos to airlines are on a downward slide and their pension funds won’t pay off, and the Enrons of the world caused many to lose hundreds of thousands of dollars of retirement savings through fraud.
Less well known, half of Americans work for a company today that offers no retirement plan at all.
And then there are the 401(k)s. Gosselin says the major shift in America toward a riskier society regards retirement. Three out of five employees who are fortunate enough to have a private retirement plan now don’t have a pension at all but rather a defined contribution plan like a 401(k) to which they must contribute, and then manage the money. Many and probably most will save too little and invest unwisely. As for health-care plans, co-pays are going up, employees are losing coverage and the health plans don’t pay off as they promise, the latter a scandal that needs far more airing.
As for health care, few can remotely afford a policy that is not financed by the job. And more than 15 percent of Americans have no health insurance, anyway. Many of those work or are in a family with a worker. The deaths caused by lack of insurance should startle the nation.
But what makes Gosselin so interesting is that he digs further for the pertinent government failures. For example, the Employee Retirement Security Act (ERISA), passed in 1974 originally to protect workers, now, as he writes, protects big companies. The reason is that ERISA prevents companies from being sued by employees. In the current age, “[ERISA] has become a crucial vehicle for shifting economic dangers that our employers once helped us manage onto our backs.” And then Gosselin gives a few poignant examples of the injured parties. Like the woman, Debra Potter, who was denied medical coverage though she had multiple sclerosis. (ERISA’s reach has been expanded to include health-care coverage.) She couldn’t sue to get her benefits and got far less than needed. I for one was not fully aware of this outrage.
A former insurance consultant told me recently that some employees are paid at insurance companies according to how many claims they can deny. I was shocked. Naive me, and after all these years. Of course, that is how the companies operate. Create incentives to maximize profits.
Gosselin’s central claim is based on some research he did to show that the proportion of American families whose incomes are likely to fall substantially has risen sharply since the 1970s. I can’t vouch for the methodology, but it seems correct on a quick reading (and he defends it persuasively against other views in a section on methods). More precisely, the probability that income for a family will drop by 50 percent in any two-year period has risen from one in 20 families to one in 10. One in 10 is pretty darn high, and that’s in any two-year period. Over time, more will fall into the category. What’s more, there is much less chance of making a big comeback and rising to one’s old income level than there was 30 years ago.
Gosselin computes, using another methodology, that incomes in general fluctuate more—by as much as 26 percent on average for the typical family as opposed to 17 percent years ago. When families depend on two incomes, as many do today, such wide fluctuations make sense. Family incomes are up if modestly over 30 years, but mostly because the spouse now goes to work. If the spouse leaves the work force for whatever reason, the income falls sharply in percentage terms. That wouldn’t be bad if that income were just frosting on the cake, but spousal income is often critical to well-being now because wages have stagnated for so many.
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