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Income Distribution, Household Debt, and Aggregate Demand: A Critical Assessment

J. W. Mason

Economics Working Paper Archive from Levy Economics Institute

Abstract: During the period leading up to the recession of 2007-08, there was a large increase in household debt relative to income, a large increase in measured consumption as a fraction of GDP, and a shift toward more unequal income distribution. It is sometimes claimed that these three developments were closely linked. In these stories, the rise in household debt is largely due to increased borrowing by lower-income households who sought to maintain rising consumption in the face of stagnant incomes; this increased consumption in turn played an important role in maintaining aggregate demand. In this paper, I ask if this story is consistent with the empirical evidence. In particular, I ask five questions: How much household borrowing finances consumption spending? How much has monetary consumption spending by households increased? How much of the rise in household debt-income ratios is attributable to increased borrowing? How is household debt distributed by income? And how has the distribution of consumption spending changed relative to the distribution of income? I conclude that the distribution-debt-demand story may have some validity if limited to the housing boom period of 2002-07, but does not fit the longer-term rise in household debt since 1980.

Keywords: Consumption; Debt Dynamics; Household Debt; Income Inequality; National Income and Product Accounts (search for similar items in EconPapers)
JEL-codes: D31 E21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-pke
Date: 2018-03
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