Winners and losers from volatility
An Economonitor reader in Canada points me to Jacob Hacker‘s piece in the Washington Post this weekend, in which the Yale political scientist posits that voters care more about risk and volatility than they do about absolute levels of well-being. The Republicans can’t count on the economy to help them in the midterm elections, he says:
Princeton economist Henry Farber has found that the likelihood that a worker will lose a job over a three-year period has been rising — and is now about as high as it was in the early 1980s, which saw the worst economic downturn since the Great Depression…
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.
There’s an interesting echo here of a discussion Brad DeLong has been having about compensation packages for senior executives – who comprise the one segment of the population who have done unambiguously well over the past six years. Notes DeLong:
At-the-money options do not make CEOs “long” their company as much as long the volatility of their company.
Brad’s right: options increase in value with the volatility of the stock they’re written on. So senior executives with stock options have every incentive to send their employees on the kind of rollercoaster ride that makes most Americans today pretty wary about the state of the economy.
Hacker sees an opportunity for the Democrats here: they could start proposing European-style social safety nets which serve to even out the path of the rollercoaster. (Larry Summers seems to be thinking along the same lines.) So far, however, they haven’t:
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.
No Responses to “Winners and losers from volatility”
Guest • October 30th, 2006 at 1:21 pm
Small comfort to the middle class, but interesting that Bloomberg is looking to Brazil and Turkey for safety net models(?)
“…Robert Holzmann, Director of the Social Security Department of the World Bank, has stated that the Mayor of New York Michael Bloomberg, influenced by the success of the program in Brazil and Turkey, says that they would like to launch an income support project to enable children of the poorest parts of town to have access to education and health services…” http://www.zaman.com/?bl=economy&alt=&trh=20061011&hn=37228
