With great wealth comes great volatility

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Economist Jamie Galbraith has a cool little piece in the current issue of Mother Jones (link via Brad DeLong) about income inequality not between individuals but between counties.

Galbraith ends up using county income data to make pretty much the same point as I did in my column a few weeks ago: That the counties around Washington, D.C., have been doing better than anyplace else in the country since the beginning of the new millennium, thanks to federal deficit spending.

But his column got me looking into the county personal income data from the Bureau of Economic Analysis, and there’s some fascinating stuff to be found there. For instance, New York County (a.k.a. Manhattan), had the fastest annual income growth of any county in the state of New York between 1969 and 2004, at 9.2%. It also had the worst performance of any county in the state between 2001 and 2002, with income declining 4.1%.

Connecticut’s Fairfield County, home o’ the hedge funds, offers a similar contrast between strong long-run growth and a bad 2001-2002 (7.5% and -2.8%). In the California tech hotbed of Santa Clara County, long-run income growth was 8.4% but income fell a stunning 8.3% between 2000 and 2001, and 7.5% between 2001 and 2002. In Travis County, Texas, the home of Dell, long-run growth was 10.5%, yet income dropped 1.5% in 2001-2002.

These are not per capita numbers, but the overall personal income earned in each county. In counties whose populations aren’t shrinking, it’s pretty rare for personal income to turn down at all. These are among the more economically successful counties in the country, yet they saw outright drops in personal income–in some cases dramatic ones–during the relatively mild recession of the early 2000s.

The reason for this seems pretty clear: There are serious concentrations of people in the abovementioned counties who get paid mostly in stock options or annual bonuses or investment-performance fees. There may not be all that many of them, but their incomes are so huge that they have a dramatic impact on overall income data (and thus tax revenues as well). Their incomes jump around a lot from year to year. And government finances–not just locally but nationally–are increasingly dependent upon these volatile earners. Somehow I don’t think our elected officials totally get that yet.