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Liberal Yale economist Jacob Hacker has been getting a lot of play in the mainstream media with his new book The Great Risk Shift -- a kind of Bush-bashing self-help book. Dig the subtitle: "The Assault on American Jobs, Families, Health Care, and Retirement And How You Can Fight Back". Hacker's thesis, in a nutshell, is that even though the economy seems wonderful, it really isn't. That's because people don't feel "economic security." His seemingly scientific proof statement is a chart of what he calls "income instability." Here it is:

In the book he never really defines what this means or how it is calculated, but it gives an academic gloss to his otherwise sheerly anecdotal thesis. Actually, to my eye, it looks like -- whatever it is -- this "income instability" exploded during the Clinton years... but let's overlook that detail. More important is that I can't find any other data series that even remotely gives me this result. Take a look at these three that I calculated below from publicly available data from the Bureau of Economic Analysis, the Census Bureau, and the Bureau of Labor Statistics. All three are different measures of the volatility of income -- and none of them look the slightest like Hacker's. In fact, if anything, they lead one to the opposite conclusion -- that incomes have become less unstable through time.

One has to wonder just how Hacker tortured his data to get it to confess that incomes are more unstable today then they've been in the past. Wonder no more: here's how he did it, according to his own web site:

The transitory variance (or "instability") of family income is the difference between the total variance and permanent variance (or "inequality") of log family income (with "permanent variance" equal to the covariance of log income between the endpoints of a five-year interval -- a pair of years sufficiently far apart such that the transitory errors are uncorrelated) The model uses the log of income, so the measure of transitory variance is independent of the mean level of income. The intuition is simple: Transitory variance captures the fluctuation of income around its overall growth path. Income that stays flat or rises or falls smoothly has no transitory variance. Income that swings up and down wildly has high transitory variance.

Whew! Call me anti-intellectual, but I'm not buying it. Anyone who has to work that hard to come up with an interpretation of the data that simply appears nowhere else is, in a word, lying.

Update... A reader at the Federal Reserve Bank of St. Louis notes that Jacob Hacker is a politial scientist, not an economist. Amen.

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