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Nobody Immune From Income Volatility, Even Rich

Author: Peter R. Orszag
May 8, 2012


Over the past three decades, the highest incomes in the U.S. have risen dramatically, and that has appropriately received lots of attention. At the same time, however, these high incomes have also become much more volatile, and that has gone almost unnoticed.

Conventional wisdom suggests that low-income households experience the greatest changes in response to macroeconomic conditions -- their income falls the most when the economy weakens, and it picks up the most when the economy recovers.

That conventional wisdom is in need of some updating. Today, the impact of macroeconomic events on household incomes forms a U-shaped curve -- it is greatest at the bottom and the top of the income distribution and smallest in the middle.

The strengthening link between high incomes and macroeconomic activity provides some insight into a stunning set of statistics: In 2010, according to research by Emmanuel Saez, an economist at the University of California, Berkeley, households in the top 1 percent of income distribution accounted for an astonishing 93 percent of aggregate income gains. During the slump from 2007 to 2009, according to the same data set, that group also accounted for a very large share of aggregate income losses -- almost half of the total decline.

The tighter connection of the affluent to the macroeconomy isn't limited to income. The Bloomberg same-store retail-sales indexes show a disproportionate decline for high-end stores in 2009, and then particularly rapid growth since 2010.

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