The Great Risk Shift
That is the new book by Jacob Hacker which should, and probably will, have a big impact on national debate. The main argument is that American incomes have been growing steadily riskier. (Here is a related article by Hacker, and here is U.S. Census data.) A few points:
1. The most convincing of the graphs is the one which shows "Americans’ Chance of a 50 Percent or Greater Income Drop." In 1970 this risk was at about 7 percent; it has been rising upward and now stands at a little over 16 percent. I would be happier if the relatively wealthy were excluded from this diagram, although I doubt if those people are driving the results.
2. Chapter two blames the new ethic of personal responsibility, and associated policy changes, for increased income volatility. Data suddenly are absent, and I cannot help but note that most forms of domestic government spending, including social insurance programs, have grown steadily. Nor can Clinton welfare reform be blamed here. This is the weakest chapter in the book.
3. Chapter three on risky jobs is not strong on data compared to the contrasting results found in this working paper and also the writings of John Haltiwanger and others.
4. Chapter four on families discusses divorce, but we do not learn how much of the growth in income volatility stems from family splits. The author does point out that the divorce rate peaked in the 1980s yet income volatility continues to climb. The relative importance of divorce is the one question this book should have answered, and could have answered, but didn’t answer.
While divorce raises income risk, it may lower utility risk, especially for women.
I am also dismayed that the author cites a U.S. savings rate of zero, overstates the risk of housing investments (if all homes exogenously became very cheap even homeowners are better off), and cites the dubious book The Two-Income Trap. There is not enough discussion of asset values and new possibilities for consumption smoothing. How volatile are the data on consumption?
5. Chapter five on risky retirement focuses on pensions and nails it.
6. I don’t buy chapter six on "Risky Health Care." The real risk of dying too young, or being severely crippled too young, has never been lower. Again, risk is more than just financial risk.
The bottom line: We do need pension reform. Otherwise Hacker needs to separate out the importance of divorce and better distinguish financial risk from utility risk. If people are spending more money to lower their utility risk — most of all spending on divorce and healh care — the results are suddenly less troubling. I am far from certain this is the relevant scenario, but Hacker does not establish, or even try to establish, the contrary.
Addendum: Arnold Kling argues that, in a risky world, we should strengthen incentives to save.