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.