The Unnerving Risk of Being Wealthy: Becoming Slightly Less Wealthy!

So, here’s Jacob Hacker:

The big economic trends of the past 30 years–deregulation, deindustrialization, increased foreign competition, the decline of unions, the transformation of the family from single breadwinners into two-earners balancing work and kids–have all created powerful new forces pushing toward increased insecurity. Americans are richer than they were a generation ago. But they are also facing much more dramatic swings in their income, as I have argued before in these pages (“False Positive,” August 16, 2004). Over the past decade, moreover, insecurity has moved up the economic ladder. Increasingly, educated middle-class Americans are riding the economic roller coaster once reserved for the working poor.

I’ve been trying to find someone to tell me that people like Hacker are saying something that is more significant than, say, the risk of being hurt in a car accident went way up after most everyone got car. It’s just totally trivial that you can’t face the “risk” of your income dropping from $80 to $60K a year if you never made $80K. But why exactly is it that the “risk” of losing a quarter of your income is a risk anyone ought to care about if you’ll still be pretty damn rich when you hit the downside. I understand what’s going on when people want the state to guarantee a minimum, but I am totally mystified by the normative sensibility behind Hackeresque worries about increasing volatility for the upper and middle classes.

We are richer because of the possibility of swings in income. The efficiency of the economic order, and the overall rate of growth, depends on the ability of the system to dynamically allocate resources to their most valuable use. This entails a fair amount of turbulence inside the general upward trend. Our economic security requires that we be exposed to some income volatility.

If the system isn’t routinely plunging lots of folks below the threshold of sufficiency, then there is simply nothing for a sane liberal to worry about. The implied idea that people have some kind of positive entitlement to a certain level of income once they’ve achieved it, such that other citizens are on the tax-hook to keep them there, is just stupefying. Needing to trade in your Mercedes for a Honda, moving to a smaller McMansion, is not an injustice that demands compensation, nor a loss that may justly be reimbursed by “society.” (This is, it appears, the kind of idea that the left proudly holds up as a stinging retort to the charge that they don’t have any. Amazing.)

Hacker is exploiting the fact that we are subject to a tendency to loss aversion (endowment effects, status quo biases, etc.) to give credibility to the idea that income volatility entails a kind of economic “insecurity” and to thereby move the goalposts of a humane liberal social policy. And volatility certainly is a source of psychological insecurity. But so is girlfriend volatility, Nationals winning streak volatility, etc. Economic security in the good old objective New Deal CES sense meant security against the threat of economic deprivation, which is the kind of security we should care most about. And it is the dynamism of a high-growth economic system that provides it.

If people want wage insurance, then what we need the state to do is to allow the market to provide it. Then, the people who want it can get it by buying it. It’s that easy!

Author: Will Wilkinson

Vice President for Research at the Niskanen Center