Monday, January 14, 2008

Overblown Income Instability?

Much has been made in recent years of two trends: rising income inequality and rising income volatility. These two are generally mentioned as part of arguments for more progressive taxation, taxing of carried interest as if it were regular income (preventing private equity types from taking the bulk of their compensation at capital gains rates), the sunsetting of the 2001 Bush tax cuts, reversal of the slide in union power, increases in the minimum wage, or anything else the author can think of to take the sharp edges off of capitalism.

This route has been taken by books from academics, like Jacob Hacker at Yale, and also by social critics like Barbara Ehrenreich. Hacker's latest book argues that the top of the economic food chain is shifting all the risk onto the lower rungs of the latter, screwing the middle and lower classes. Ehrenreich is probably most well known for Nickled and Dimed, in which she takes a few bottom of the food chain jobs and then tries to get by (rather unsuccessfully). The income volatility aspect is considered particularly serious, as they write of hordes of Americans struggling to get by, with little to no safety that when they experience a sharp dip in income, they have nothing to cushion the blow (leading to all sorts of bad physical and mental end states).

The interesting bit: the CBO is reporting findings that income volatility has apparently been relatively constant since the early 1980s:
...CBO has now examined the volatility of household income (rather than workers’ earnings volatility, the subject of our study in 2007). The preliminary results suggest that household income is much less volatile than individual worker’s earnings, and that household income volatility has not increased over time — and perhaps even declined slightly. Some other recent studies relying on other data sources have suggested increases in household and family income volatility, but various problems in the surveys used in those studies may be contaminating those results.


amar rama said...

Talking about economics, I came across this article on Huckabee's tax plan. Fun read -> Slate Article

Corbett said...

Yep, I saw that off linked off of Mankiw's blog the other week. For much more detail, Bruce Bartlett has this huge PDF analysis: Bartlett Analysis

The Reader's Digest version of the PDF was done as a Boston Globe article here: Boston Globe Article

I'd read the Boortz/Linder book when it came out, and while interesting, it seemed light on rigor and heavy on handwaving and anecdotal explanations. I've heard Boortz say that Bartlett has no idea what he is talking about (I think I heard that before I'd seen the PDF above, so I'm not sure if Boortz was referring to that analysis, or to other comments Bartlett had made). Given Boortz's tax policy credentials (none, other than the book, AFAIK) compared to Bartlett's...I'm inclined to give more weight to the debunking in detailed studies like the Bartlett PDF.

Boortz/Linder do have a new FairTax book coming out pretty soon (February), with the idea being to address all of the major criticisms that have been levied against it since the first book's we'll see. Huckabee has no shot anyway (there aren't many primaries left where ~60% of the turnout self-identifies as evangelical Christians), so it's pretty moot. I would argue that the tax code is way overdue for a radical simplification and cruft-cleaning, but it's not going to happen via a FairTax route.

Megan McArdle has commented on it a few times, with her most recent being this, I think.