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Does income distribution matter for effective demand? Evidence from the United States


  • Christopher Brown


This article examines the influence of income distribution in the determination of effective demand in the US. A simple model is developed to simulate the effects of changing income inequality on the aggregate propensity to consume. The simulation results illustrate that income inequality has a substantial negative impact on consumption when household spending is assumed to be income-constrained. Econometric evidence is presented that rising private sector wage inequality had a dampening effect on the time path of consumption in the United States between 1978 and 2000. The methodology entails time series estimation of consumption specifications with a measure of income inequality (the Theil index) included among the explanatory variables. The argument is made that, ceteris paribus, rising income inequality creates a need for greater reliance on debt to sustain a given level of household spending.

Suggested Citation

  • Christopher Brown, 2004. "Does income distribution matter for effective demand? Evidence from the United States," Review of Political Economy, Taylor & Francis Journals, vol. 16(3), pages 291-307.
  • Handle: RePEc:taf:revpoe:v:16:y:2004:i:3:p:291-307 DOI: 10.1080/0953825042000225607

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    References listed on IDEAS

    1. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-115, March.
    2. Peter Gottschalk & Timothy M. Smeeding, 1997. "Cross-National Comparisons of Earnings and Income Inequality," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 633-687, June.
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    Cited by:

    1. Detzer, Daniel, 2016. "Financialisation, debt and inequality: Scenarios based on a stock flow consistent model," IPE Working Papers 64/2016, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    2. Daniel Detzer, 2017. "Financialisation, Debt and Inequality: Export-led Mercantilist and Debt-led Private Demand Boom Economies in a Stock-flow consistent Model," Working Papers 2016-03, Universita' di Cassino, Dipartimento di Economia e Giurisprudenza.
    3. Gonzalo Paz Pardo & José Manuel Sánchez Santos, 2014. "Household Debt and Consumption Inequality: The Spanish Case," Economies, MDPI, Open Access Journal, vol. 2(3), pages 1-24, July.
    4. Salvatore Morelli & Anthony Atkinson, 2015. "Inequality and crises revisited," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 32(1), pages 31-51, April.
    5. Barry Z. Cynamon & Steven M. Fazzari, 2013. "Inequality and Household Finance during the Consumer Age," Economics Working Paper Archive wp_752, Levy Economics Institute.
    6. Engelbert Stockhammer & Rafael Wildauer, 2016. "Debt-driven growth? Wealth, distribution and demand in OECD countries," Cambridge Journal of Economics, Oxford University Press, vol. 40(6), pages 1609-1634.
    7. Crespo Cuaresma, Jesus & Kubala, Jozef & Petrikova, Kristina, 2016. "Does income inequality affect aggregate consumption? Revisiting the evidence," Department of Economics Working Paper Series 4787, WU Vienna University of Economics and Business.
    8. repec:zbw:esthes:157991 is not listed on IDEAS
    9. Steven Pressman, 2014. "Keynes, family allowances, and Keynesian economic policy," Review of Keynesian Economics, Edward Elgar Publishing, vol. 2(4), pages 508-526, October.
    10. Steven Pressman, 2009. "Keynes, Family Allowances and Post Keynesian Anti-Poverty Policy," LIS Working papers 525, LIS Cross-National Data Center in Luxembourg.
    11. Hein, Eckhard, 2016. "Post-Keynesian macroeconomics since the mid-1990s: Main developments," IPE Working Papers 75/2016, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    12. Ángeles Sánchez-Domínguez & Maria J. Ruiz Martos, 2016. "Europe 2020 Strategy Under the Scope of Life Satisfaction," ThE Papers 16/01, Department of Economic Theory and Economic History of the University of Granada..
    13. Barry Z. Cynamon & Steven M. Fazzari, 2016. "Inequality, the Great Recession and slow recovery," Cambridge Journal of Economics, Oxford University Press, vol. 40(2), pages 373-399.
    14. repec:bla:revinw:v:63:y:2017:i:1:p:53-69 is not listed on IDEAS
    15. Steven Pressman, 2014. "Keynes, Family allowances and Keynesian economic policy," LIS Working papers 616, LIS Cross-National Data Center in Luxembourg.
    16. Steven Pressman, 2006. "The Decline of the Middle Class: An International Perspective," LIS Working papers 280, LIS Cross-National Data Center in Luxembourg.
    17. Steven Pressman, 2013. "Justice and History: the big problem of Wilt Chamberlain," Economic Issues Journal Articles, Economic Issues, vol. 18(1), pages 1-16, March.
    18. Barry Z. Cynamon & Steven M. Fazzari, 2017. "Household Income, Demand, and Saving: Deriving Macro Data With Micro Data Concepts," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 63(1), pages 53-69, March.
    19. Heather Boushey & Christian E. Weller, 2006. "Inequality and Household Economic Hardship in the United States of America," Working Papers 18, United Nations, Department of Economics and Social Affairs.

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