Over at the CBO Director's Blog we read that based on the CBO's own research "household income is much less volatile than individual worker’s earnings, and that household income volatility has not increased over time — and perhaps even declined slightly." The period being studied here is from the early 1980s to the present. These results run contrary to the work of Jacob Hacker of Yale University who finds that the volatility of family income doubled between 1973 and 2004. Professor Hacker's response to the CBO Directors Blog can be found here.
A question: what role does the 'Great Moderation' play in this debate? A well documented fact is that there has been less volatility in aggregate economic activity since the early 1980s and this development is called the 'Great Moderation.' One study has found real economic activity volatility has fallen 50% over this time. Would not some of this decline in aggregate economic volatility be felt at the household or individual level? Is not the low U.S. household saving rates one indication of this development?
Some observers may look at the low U.S. saving rate and say it is the result of the global saving glut or the U.S. asset price booms. I am not convinced, though, these answers can provide the full explanation for the sustained downward trend in U.S. household savings. A more complete answer has to account for the possibility of improved household expectations arising from the long economic expansions of the past two decades that were interrupted by only mild economic downturns (i.e. the 'Great Moderation'). Any thoughts?