Thursday, May 29, 2008

A Question for Jacob Hacker

Jacob Hacker is back with revised estimates on family income volatility (ht Mark Thoma). In his earlier work he found a marked increase in the volatility of family income between 1973 and 2004. These conclusions were later challenged by findings from the CBO. In turn, Hacker responded to CBO here. Now, if Hacker could be so kind as to respond to another question, one that I raised earlier:
[W]hat 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').
Clearly, this question reflects my macro background. But it is the question that keeps coming up in my mind when I read this family income volatility debate.

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