The Great Risk Shift and That Consumption Inequality Canard
Jacob Hacker’s The Great Risk Shift was reviewed by Brink Lindsey who writes:
Mr. Hacker leans heavily on his findings that fluctuations in family income are much greater now than in the 1970s. But research by economists Dirk Krueger and Fabrizio Perri has shown that big increases in the dispersion of income have not translated into equivalent increases in consumption inequality. In other words, most Americans are able to use savings and borrowing to maintain stable living standards even in the face of economic ups and downs.
Kevin Drum has an excellent critique of Lindsey’s review, which includes this gem:
Hooray! Life is riskier for today’s family’s, but they manage to eke out a bit of stability anyway by maxing out their credit cards and spending down the money in their retirement accounts.
Kevin has a very different interpretation of the evidence than the one offered by Brink Lindsey. But didn’t we review the paper by Dirk Krueger and Fabrizio Perri as well as a related paper?
the observed rise in household debt relative to income over the past 30 years is attributable to rising income inequality. Iacoviello’s model predicts that consumption inequality grows less than proportionally as income inequality grows, while wealth inequality grows more than proportionally. Examining the distribution of current consumption misses the point that living standards should be gauged across individual’s lifetimes. While the very wealthy have ample resources for old age retirement, the evidence suggests that the working poor may not – unless we retain the Social Security Trust Fund as a vehicle to supplement their retirement benefits.
It seems our review of what these two papers have to say is more consistent with Kevin’s view.