Inequality and Household Finance during the Consumer Age
AbstractOne might expect that rising US income inequality would reduce demand growth and create a drag on the economy because higher-income groups spend a smaller share of income. But during a quarter century of rising inequality, US growth and employment were reasonably strong, by historical standards, until the Great Recession. This paper analyzes this paradox by disaggregating household spending, income, saving, and debt between the bottom 95 percent and top 5 percent of the income distribution. We find that the top 5 percent did indeed spend a smaller share of income, but demand drag did not occur because the spending share of the bottom 95 percent rose, accompanied by a historic increase in borrowing. The unsustainable rise in household leverage concentrated in the bottom 95 percent ultimately spawned the Great Recession. The demand drag of rising inequality could be one explanation for the stagnant recovery in the recessionâ€™s aftermath.
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Bibliographic InfoPaper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_752.
Date of creation: Feb 2013
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Consumption; Saving; Inequality; Aggregate Demand;
Other versions of this item:
- Steven Fazzari & Barry Z. Cynamon, 2013. "Inequality and Household Finance during the Consumer Age," INET Research Notes 23, Institute for New Economic Thinking (INET).
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-02-16 (All new papers)
- NEP-HIS-2013-02-16 (Business, Economic & Financial History)
- NEP-LTV-2013-02-16 (Unemployment, Inequality & Poverty)
- NEP-PKE-2013-02-16 (Post Keynesian Economics)
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