JONATHAN COHN JULY 22, 2010
You may not be familiar with Mollie Orshansky. But you’re probably familiar with her work.
Orshansky was a researcher and statistician who joined the Social Security Administration in the late 1950s. One of her jobs was to measure income adequacy and, in the early 1960s, she devised a formula based roughly on three times the price of a basic, nutritionally sufficient diet. It was a crude formula, based on previous research showing that people spent roughly a third of after-tax income on food. But it was good enough. Eventually somebody (possibly Orshansky--I'm not sure) decided to give this number a name: The poverty index.
We still use the poverty index today, not just for describing our society but to make policies for it. The subsidy levels in the new health care law, for example, are based on people’s incomes relative to the poverty level. But, for some time now, experts have felt it was an inadequate measure of economic insecurity. Subsequent attempts, like the “misery index” that combines unemployment and inflation data, are helpful but equally crude.
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.
I'm hardly qualified to evaluate the more technical aspects of the report. But the researchers behind this are are highly respected and, in the case of Hacker and Aaron, well-known to TNR readers. In the coming days, I'll try to solicit some opinions both on the economics and, no less important, its implications.
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.
Note: I tweaked the prose for clarity.