The U.S. economy has nearly recovered. Now someone has to convince Americans. Nearly half think the United States is still in recession, according to a recent Wall Street Journal poll. Some 76 percent don’t think their children’s generation will have a better life than they did. Americans are right to think they are worse off: Even if they have recovered financially, they have become aware that the economy is riskier than it used to be. They might never bounce back from that.
Economic well-being is not limited to wealth, earnings, and employment; security matters, too. All else being equal, a riskier environment is worse, economically speaking. Financial markets may be less volatile, but structural changes in the economy have increased risk for most Americans’ largest asset: future earnings.
Lifetime earning power has been getting less certain for decades, but it took the recession to make people realize it. In 2002, one out of two Americans expected real income gains in the next five years, according to the Index of Consumer Sentiment; by 2013, only one in three did. It is well known that real median earnings didn’t increase in the last 20 years; overall earnings have become more volatile, too. The amount that the average household’s earnings fluctuate each year has been increasing (PDF) since the 1980s. Household finances also are less secure because people have less liquid savings and more debt. The economic stress associated with the recession made these trends more apparent.
The future of U.S. children also looks precarious. Tyler Cowen argues that changes in technology and trade are hollowing out the middle class, leaving a larger chasm between economic winners and losers, with very few in the middle. People who thrive in the future will do very well. The rest will have a harder time getting by. Previously, parents could safely assume that their children had good shots at landing middle-class lives. The stakes are now higher and the risk of failure larger.
Younger Americans may never recover from the recession’s wake-up call to risk, and the economy might suffer for that. The Great Depression scared a generation away from taking financial risk: Many Americans who came of age during the Depression never invested in the stock market. To be fair, they never had to because many had company-sponsored pensions to support them in retirement. Millennials have internalized the same fears, with 13 percent describing themselves as financially conservative, a rate matched only by World War II babies (now ages 68 and up), according to a recent UBS survey (PDF). They are holding more in cash and less in stock than other generations have done.
The fortunes of the Depression’s children were eventually bolstered by a wartime economy and postwar boom. Millennials face no such relief on the horizon. Downturns have historically pushed previous generations (PDF) into entrepreneurship, but that’s not happening either. The youth self-employment rate has fallen each year since the recession and shows no sign of turning around. In 2003, 8.3 percent of Americans aged 25 to 39 were self-employed, by 2013 only 6.8 percent were.
The economic recovery cannot be measured only by market returns, growth in gross domestic product, and housing starts. Psychology counts. Heightened fear can hurt career and investment decisions for decades. Put another way, economic well-being requires a certain level of optimism, a firm belief that success is possible, even when times are hard. Markets crash. Businesses fail. But if people today unwilling to take measured chances, we haven’t recovered at all. That may affect career and investment decisions for decades.