Thursday, August 04, 2005

Helping Isaac Out

Isaac writes that he doesn't have a convincing rebuttal to this Will Wilkinson post. I have a couple of ideas. Wilkinson writes:
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.
First of all, to ask why anyone should care about the risk of losing a quarter of your income is pretty damn stupid. I *guarantee* that Wilkinson would not be happy losing a quarter of his income. Pretty unhappy, in fact.

The real problem with Wilkinson's argument is that he fails to consider that people don't wait to see how much income they will earn in a year to see how to distribute consumption throughout the year. This is impossible. People usually spend and save money as they earn it. If you aren't anticipating that you'll be fired in September and lose three months of wages (a quarter of your yearly income) then you are in big trouble when that happens. While you're looking for a new job you still have to pay the mortgage, car insurance, taxes, etc. That could easily put someone below the poverty line. If you don't know how long it's going to take to find a new job, the problem is worse. There are a lot of different realistic scenarios you could come up with. But NOT ONE of them involves a person making $40 an hour one day and the next day making $30 an hour.

Another problem is that one makes a lot of commitments to a particular level of income. For example, Britney Spears is working on a new album because she needs the money. What? She needs money? Yes, she is loaded, but a lot of it is in physical goods. She still has to pay for insurance on her Rolls and property taxes on her mansion. That requires a lot of income flowing in every week. Similarly, you might make a commitment to a lifestyle that is sustainable at an $80,000 income but not at a $60,000 income. The transition between an $80,000 lifestyle and a $60,000 lifestyle could potentially be quite costly (and your realized income could be a lot less than $60,000 for a year or two.)

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.
It's likely that, right after the income drop, the family WILL be plunged below the threshold. Only temporarily, yes, but still bad.

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!
This is also pretty damn stupid. Anyone who knows the first thing about moral hazard knows that this kind of insurance doesn't exist in private markets, NOT because there aren't mutually beneficial trades to be made, but because of an information asymmetry. I sometimes can't stand libertarians because statements like Wilkinson's are so prevalent. But these things aren't obvious! In this case, it's quite false.


Anonymous dick said...


7:56 AM  

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