In the early 1970s, the inflation-adjusted incomes of most families in the middle of the economic spectrum bobbed up and down no more than about $6,500 a year, according to statistics generated by the Los Angeles Times in cooperation with researchers at several major universities. These days, those fluctuations have nearly doubled to as much as $13,500, the newspaper’s analysis shows.
…Families in the economic middle saw their incomes, adjusted for inflation, climb by almost one-quarter to an average of nearly $50,000 between the early 1970s and the beginning of this decade, the newspaper’s analysis shows. At the same time, middle-class families saw their average net worth grow 40% to $86,100 in the last decade alone, according to the Federal Reserve.
The basic theme is that as overall incomes have risen, volatility has gone up, also. Some economists (Brad Delong, Bob Shiller) are convinced that this provides a rationale for more government intervention in the economy, to protect people from unfavorable swings in income.
My first thought is that people ought to save more in today’s economy. I call this the Millionaire Next Door mindset.
My worry about the risk-mitigation wonks is that their ideas will be translated by Congress into piecemeal programs to protect middle-class families from all of the major contingencies. The net result would be to lull people into a sense of security and entitlement, with all the moral hazard that results.
I think that the least harmful approach to paternalism would be to encourage more saving. For any given family, more saving ultimately might be used to deal with an employment interruption, a large health expenditure, a divorce, or some other common financial setback. But generically learning to save to protect against risk seems better than generically learning to treat government like a rich uncle who will indulge you no matter what.
For Discussion. What would be the most effective ways to encourage more personal saving?