By most conventional measures, Paul Fredo is an American success story.
The son of a coal miner, he made almost $200,000 in the last year, enough to place him in the top 2% of wage earners. As a financial manager for the U.S. unit of Alstom, the French bullet-train maker, he has lived an expense-account life, spending most nights in hotels and jetting to meetings in Washington and Paris.
But look carefully at Fredo's circumstances and a less appealing picture begins to emerge — one in which, over the last 25 years, economic risk has been steadily shifted from the broad shoulders of business and government to the backs of working families like his.
By the time Fredo joined Alstom here last year, he had become an itinerant executive, a contract worker brought in for a particular purpose, then sent packing. "They tell me every Friday whether to come back," the 57-year-old explained.
Between his last regular job as the chief financial officer of another company and his hiring at Alstom, Fredo was unemployed for nearly two years and saw his income decline by two-thirds. He has long been without health benefits, holidays, paid vacation or job security.
"We come from the old school that you work hard and give it your all, and the job will be there for you," said Fredo's wife of 35 years, Donna. "It's different today."
From his perch several rungs down the economic ladder, Ron Burtless sees the same forces at play — forces that have caused his family's income to swing sharply up and down.
Unlike Fredo, Burtless never aspired to the executive suite. Instead, almost three decades ago, he reached for a union card and went to work as an electrician at a Bethlehem Steel Corp. plant in Indiana. Until recently, he seemed the very embodiment of Middle American stability, with a $60,000 annual wage, two grown daughters, a red Ford pickup and a five-bedroom suburban home.
But in a matter of just two weeks last year, Burtless' finances were thrown into disarray when Bethlehem collapsed and, adding injury to insult, he was badly hurt on the job and saddled with more than $90,000 in medical bills. Having fallen through cracks in the workers' compensation system, he now ponders a wrenching question: "Am I going to have to go bankrupt?"
In their own ways, the problems encountered by Fredo and Burtless can be traced to the same source — a set of economic policies shaped by government officials and corporate executives intent on creating a more prosperous America.
Starting in the late 1970s, the nation's leaders sought to break a corrosive cycle of rising inflation and stagnating output by remaking the U.S. economy in the image of its frontier predecessor — deregulating industries, shrinking social programs and promoting a free-market ideal in which everyone must forge his or her own path, free to rise or fall on merit or luck. On the whole, their effort to transform the economy has succeeded.
But the economy's makeover has come at a large and largely unnoticed price: a measurable increase in the risks that Americans must bear as they provide for their families, pay for their houses, save for their retirements and grab for the good life.
A broad array of protections that families once depended on to shield them from economic turmoil — stable jobs, widely available health coverage, guaranteed pensions, short unemployment spells, long-lasting unemployment benefits and well-funded job training programs — have been scaled back or have vanished altogether.
"Working Americans are on a financial tightrope," said Yale University political scientist Jacob S. Hacker, who is writing a book called "The Great Risk Shift." "Business and government used to see it as their duty to provide safety nets against the worst economic threats we face. But more and more, they're yanking them away."
The yanking may be far from finished.
On the campaign trail this year, President Bush has made the case that people are better off relying on themselves, rather than on business or government, in case of trouble. Under the banner of the "Ownership Society," the president has proposed a series of new, tax-break-heavy accounts to let families pay for their own retirements, healthcare and job training. He also has called for partially replacing the biggest of the government's protective programs — Social Security — with privately held stock and bond accounts.
Such arrangements might help people build up their personal assets. But the approach also would expose them to even more economic risk than they've already taken on.
Leaps and Plunges
Nowhere is the risk shift of the last quarter century more apparent than in the widening swings in working families' incomes.
Although average family income adjusted for inflation has risen in recent decades, the path that most households have followed has hardly been a steady line upward — the historical norm for most of the post-World War II era. Instead, a growing number of families have found themselves caught on a financial roller coaster ride, with their annual incomes taking increasingly wild leaps and plunges over time.
In the early 1970s, the inflation-adjusted incomes of most families in the middle of the economic spectrum bobbed up and down no more than about $6,500 a year, according to statistics generated by the Los Angeles Times in cooperation with researchers at several major universities. These days, those fluctuations have nearly doubled to as much as $13,500, the newspaper's analysis shows.
This growing volatility — and the rising risk it signals — has cut a wide swath. It has touched families from the working poor to those, like the Fredos, near the top of the earnings pyramid. The shifting of risk, in other words, is proving to be a democratic phenomenon.
The Times' analysis is based on the Panel Study of Income Dynamics, which is underwritten by the National Science Foundation and run by the University of Michigan. Unlike most economic measures, which involve taking snapshots of random samples of Americans at different times and comparing them, the panel study has followed the same 5,000 nationally representative families and their offshoots for nearly 40 years.
As such, it is the most comprehensive publicly available record of family earnings and income in the world — and it goes a long way toward explaining why, even in the midst of a recovery such as the one underway, so many Americans feel so uncertain about their economic circumstances.
In using income volatility to gauge risk, The Times is taking a page from the financial markets, where the chief measure of a stock's riskiness is how much its price bounces up and down compared with changes in a market measure such as the Standard & Poor's 500 index.
And just as with the stock market, there can be a big payoff.
Families in the economic middle saw their incomes, adjusted for inflation, climb by almost one-quarter to an average of nearly $50,000 between the early 1970s and the beginning of this decade, the newspaper's analysis shows. At the same time, middle-class families saw their average net worth grow 40% to $86,100 in the last decade alone, according to the Federal Reserve.
The rewards near the top of the economic heap have been even greater. The average income of families in the upper 10% of earners nearly doubled in the last generation to $130,400. Their average net worth nearly doubled as well, according to the Fed, to $833,000.
Free-market advocates cite these pocketbook advances as proof that the economy has been overhauled in the right way.
"On the whole, we have moved toward a freer market, a more competitive economy and a richer one," said University of Chicago economist and Nobel laureate Gary S. Becker. "There has been a shift toward people taking more risk on themselves ... and the economy has gained for it."
But there is another, less sanguine way to view what has unfolded.
The more that a family's income fluctuates, the greater the chance it will be caught in a downdraft when a crisis — such as a layoff, divorce or illness — strikes. Then, it can be extremely tough to bounce back.
Over the last three decades, working families have faced ever-changing — and, for the most part, increasingly more perilous — risk-reward bargains.
During the 1970s, families in the economic middle enjoyed a comparatively favorable run. Although their incomes generally swung up or down as much as 16% a year, they ended each year an average of 2% ahead of where they began. The result by the decade's close was that the reward of extra annual income had more than covered the potential loss from a single year's sudden plunge.
But the story during the 1980s and early 1990s was basically the reverse. The volatility of families' income nearly doubled to as much as 30% a year. But now, instead of growing amid all the ups and downs, average family income dropped at an annual rate of 0.3% in the 1980s and an even steeper 2.3% in the early '90s. The bottom line: more risk for less reward.
Although volatility remained high in the late 1990s, with typical annual swings of as much as 27%, incomes finally began to grow again, improving families' odds of being able to get ahead. But the good times didn't last. Since 2000, incomes have reversed course and fallen about 1% a year, according to recently released census figures. In other words, things are back to the unattractive equation of more risk for less reward.
A separate analysis by Hacker, the Yale political scientist, found even more dramatic changes in income swings. In a study published in May, Hacker and a colleague reported that income volatility among households in the University of Michigan database had more than doubled between 1973 and 1998. The pair concluded that at its peak in the mid-1990s, volatility was roughly five times greater than in the early 1970s.
"The incomes of American families have grown more unstable over the last generation," said Johns Hopkins University economist Robert A. Moffitt, who along with Boston College economist Peter Gottschalk pioneered techniques for analyzing earnings volatility more than a decade ago.
"All other things equal," added Moffitt, who assisted The Times with its analysis, "rising income instability suggests that families from the working poor to those fairly far up the income distribution are bearing more economic risk."
Protector of Last Resort
It was not always so.
With workers' compensation, welfare, unemployment benefits, Social Security, Medicare, workplace rules, environmental regulations, product liability laws and more, government officials spent most of the 20th century adding to the economic protections that Americans could count on — and reducing the risks they had to tackle alone.
"State and federal lawmakers continually expanded the circle of public risk-management programs ... to include workers, the elderly, consumers and, in the end, just about everybody in some form or another," said David A. Moss, a Harvard University economic historian whose book "When All Else Fails" traces Washington's role as a protector of last resort.
Not everyone favored these developments. During the 1935 congressional debate over Social Security, one House member, Republican Charles A. Eaton of New Jersey, fumed: "This is a crazy notion ... that somehow ... the government of the United States can make it ... unnecessary for any of its citizens to face any difficulty, to run any risk."
But so strong was the conviction that working families needed protection, and so firm the consensus that government must help provide it, that leaders of virtually all political stripes sounded as if they were reading from the same script. It would remain this way from the New Deal programs of the 1930s through President Nixon's push for national health insurance and expanded unemployment benefits.
However, by the late 1970s and certainly by Ronald Reagan's election in 1980, new notions began to take hold, ones that turned many an established view about the needs of working Americans on its head.
The sense that something had to change — and that the free market was the answer — was fed by a variety of factors: fear that American business was being overtaken by Japan; concerns that the 1970s near-bankruptcies of Lockheed Corp., New York City and Chrysler Corp. betrayed some deep flaw in the U.S. economy; the influence of economist Milton Friedman, author George Gilder and Wall Street Journal editor Robert Bartley; and Reagan's sunny conservatism.
"Government is not the solution to our problem," the new president famously declared. "Government is the problem." Safety nets that were designed to help people were now said to be ensnaring them. Economic upheaval that was long thought to hurt people was now praised for sifting winners from losers. Ordinary Americans who were once simply seen as workers were now regarded as entrepreneurs and investors as well.
Along the way, wittingly or not, they became something else too: huge risk takers. Consider: