Sunday, December 12, 2004


Kevin Drum sends us to this LA Times story about rising household income volatility, particularly among those at the lower end of the income distribution. I think this is a very important overlooked issue, and gets at why even as some economic statistics over the past couple of decades have been somewhat rosy on the surface, there's still real economic pain out there.

This gets back to what I wrote about once before -- the rising incentives to hold most of your wealth in illiquid form. Obviously for the poor who have no savings at all this isn't all that relevant, but for those who are in more solid middle class terrain, it is a big problem. There is so much incentive to put your wealth in illiquid form - your house (somewhat offset by easy home equity loans, but they don't come cheap), 401K plans with huge early withdrawal penalties, etc... etc... Even for people who are a a bit higher up the socioeconomic ladder and who have a bit of "savings" in some sense, so much of that savings can't be tapped when needed. A moderate income hit or costly life event and you can be pretty screwed up.

It's important to note that there is a market failure here -- insurance markets don't and can't exist which would allow people to insurance themselves against the range of bad hits that can happen to them. While social insurance systems are not without their problems (bad incentives), this market failure is one reason we have them. As the social safety net slips away, and more and more uninsurable risk gets transferred to individuals, life at any particular level of average income gets unambiguously worse.