Richard H. Serlin: If Cowen's really concerned about habit formation?

Paul Krugman writes about Tyler Cowen?s new defense of decreased societal mobility; it?s a good thing in that habit formation would make it especially bad for the rich to become middle class, or less rich.

Habit formation is an important issue, especially for someone with a career in personal finance like myself, but:

1) If Cowen is so concerned with habit formation and its effect on utility, he should support highly progressive taxation, which really blunts the effects of a drop in income (by lowering your tax rate substantially to compensate), and keeps lifetime income a lot more steady, especially if it's used to better fund the safety net and public, non-positional goods. I've long said that progressive taxation is a great partial insurance against income variability, and takes a lot of the risk out of financial life ? and life is incredibly financially risky today after a generation of dominance from the right. Yes, there will be a one time adjustment for the current rich to greater progressivity, but from then on, income will be a lot more steady for everyone, every generation. Will Cowen now support highly progressive taxation? Yeah, right.

2) He should also support a strong social safety net, and government supported education and re-training, as that greatly decreases the risk of income variability over people?s lives. Don't hold your breath.

3) A solution to greater income mobility's risk of going downward doesn?t have to be locking in the classes. Good personal finance is an excellent solution. If your income is high now, you carefully consider how risky that income is. Are you a medical doctor with a high income, but one that's also relatively secure (but keep an eye on Watson and other developments) , or are you the owner of a business with a lot of risk? If it's the latter, then during good times your savings should be far higher, and your "Must-Haves" ? a term from Elizabeth Warren's personal finance book, "All Your Worth" (the best today) ? should be very low as a percentage of your income. Must-Haves are long term fixed expenses, the foundation of your lifestyle, like your home and cars. You should have your consumption be a relatively low percentage of your income in good times if that income is risky. Evaluating the riskiness of your income and setting your Must-Have and saving percentages accordingly is a very important part of good personal finance today.

4) As Cowen is now suddenly concerned with total societal utils, aren't there other factors in that besides habit formation? Hmmm?, maybe gigantically decreasing marginal utility of dollars making severe inequality disastrous for maximizing total societal utils. When the marginal utility of an extra dollar is vastly greater for a member of the middle class or poor, than a member of the 0.1%, that should make Cowen support much more progressive taxation, universal healthcare, a stronger safety net,....(and don?t tell me the rich will work a lot less hard Tyler; you know better). Yeah, when the Lions win the Super Bowl.

5) As Cowen is now enthused about habit formation, how about its sibling, positional externalities. Strong and ubiquitous positional externalites, combined with Cowen?s newfound concern for maximizing total societal utils, would mean support for steeply progressive taxation to fund much greater non-positional goods like universal healthcare, universal government funded preschool and bachelor?s degree, basic scientific and medical research, public health recreation, and safety,? Yeah right, when Paul Krugman shaves his beard.

Source: http://richardhserlin.blogspot.com/2012/07/if-cowens-really-concerned-about-habit.html

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