Economic Security and Income Volatility

And no, I didn't pick that title for the sole purpose of discouraging as many people as possible from reading further. This really isn't going to be a dry numbers post, I promise. Reader Bailey directed my attention to a series of articles in the LA Times which chronicles the financial ups and downs of a series of American families.

What the articles do a great job of is putting a human face on the impact of often abstract sounding benefit programs. Reading the stories you get a sense of how bad decisions and sheer bad luck can combine to put people in a tough situation and how much of a difference social welfare programs can make in these situations.

The Times analyzed data from the Panel Study of Income Dynamics, one of the most wide-ranging longitudinal (following the same subjects over a long period of time) family studies ever conducted. What they found was that, although average incomes have risen since the 1970's, volatility of income has been rising even faster, so that increased wealth has seemingly paradoxically coincided with increased economic vulnerability (i.e. if you make $70k/year for 2 years and $0 the next year you will make more money total than if you just made $40k/year for 3 years but you'll also be much more at risk of having a financial crisis - especially if you bought an expensive house during the $70k/year days...)

My one criticism of the articles is that they don't do a particularly good job of analyzing the data. For instance, they don't make any effort to determine what part of the increased volatility can be attributed to the reduction in the welfare state and how much is due to external factors, nor is there any attempt at comparing the American experience to other countries. So if you're looking for good ol' number crunching, this won't satisfy you - but if you're interested in some human stories of adversity and governments role in helping families deal with that adversity, read on.