Applying the PIH to Politics

According to the logic of Milton Friedman's Permanent Income Hypothesis, a person's long-run average income is more important than annual income for determining his consumption and living standard. Stephen Rose suggests that the same logic applies to the question of what voters would naturally support the Democratic party:

A single-year snapshot of Census data can show almost 40 percent of the U.S. population making less than $40,000. On paper, that amounts to widespread economic distress. It suggests that something close to a majority of Americans may have a very direct personal stake in supporting social safety net programs for the poor -- the programs that the Democratic Party is most commonly identified with in public opinion surveys -- because they themselves might need government assistance at some point in their lives.

But because people's incomes fluctuate from year to year, the more accurate way to measure their economic wellbeing is to look at their average earnings over a longer period, for instance, 15 years. Analyzed that way, the data show that about 23 percent of adults in their prime working years have average family incomes of $40,000 or less. This is the segment of the population with the most direct interest in social safety net programs for people in economic distress.