Income Pain: Inequality, Volatility or Just Too Litte?

David Leonhardt's story in the New York Times this morning is about two widely used measures of middle class squeeze:  income inequality and income volatility.  He points out that inequality has increased shaprly over the past 20 years, but that a new report from the GAO suggests that volatility may not have increased.  He uses this certainty/uncertainty dichotomy to suggest that policies should be aimed toward the thing we're sure has increased (inequality) rather than the thing we're less sure has changed (volatility).  According to the GAO, one in five people experiences a drop of 25% or more of their income each year, a proportion that was about the same in 1980, and, by implication, not an issue worth worrying about. 

I applaud Leonhardt for asking for more hard data and always cross-examinging the data available, and I suspect Jacob Hacker will have something to say about the GAO report.  But for now, it is the policy claim that puzzles me.  From my perspective, the harm to middle class families is the combination of stagnant incomes combined with rising costs. That combination means that volatility hurts more today than it did in the 1970s when families could put aside 11% of their pay in savings, when consumer debt was less than 2% of income and when two-parent families had a worker at home who could go into the workforce in a time of crisis.  When a family has no savings, no back up worker, and is loaded with debt, every income disruption is more painful--and more dangerous. 

Leonhardt talks about families feeling more stretched, which he relates this to inequality of income.  But flat wages and rising expenses have stretched the middle class--not the increases in salaries of the top 10%.  He might have made a distributional argument that wages would have risen for the middle if the top hadn't gobbled up all that money, but that's a very different argument involving a very different set of policy proscriptives.  Instead, his focus on inequality misses the point that if incomes had risen faster than expenses for the middle, families wouldn't be in such pain--even if incomes had risen even faster at the top.

Ultimately Leonhardt embraces policy proposals that would help out families caught in the squeeze:  cut costs with better support for health insurance, retirement, children's education and other basic needs.  But when he is chiding others about the importance of having the right identification of the problem in order to find the right policy solutions, then his focus on inequality seems somewhat misplaced.

Comments

[Archit Shah]

Maybe inequality isn't the right word, but it is hard to avoid when yesterday's New York Times reported this:

Combined, the top 25 hedge fund managers last year earned $14 billion — enough to pay New York City’s 80,000 public school teachers for nearly three years.

To make [the top 25] list, a manager needed to earn at least $240 million last year, nearly double the amount in 2005. That is up from a minimum of $30 million in 2001 and 2002.