Inequality, Economic Policy, and Household Credit in the USA: The Roots of Unsustainable Finance

This chapter looks at US household sector micro data since 1989, to explore the relation between income inequality and financial fragility from a macro perspective. In contrast with a portfolio (and wealth inequality) approach to household financial instability, which focuses on the investments of the upper-middle class, the author argues that the transformation in the financial conditions of the bottom 50% of the equivalent income distribution has been crucial for macroeconomic stability. In the past three decades, households in that group saw their debt-to-income ratio dramatically increase on average, together with financial strain and debt service payments. Being particularly exposed to the compression of real available incomes, their unprecedented access to credit contributed to producing a smooth flow of revenues to the corporate and rentier sectors, with systemic consequences. In the chapter, those are analyzed using insights from Kalecki and Luxemburg, to highlight how alternate and specular movements in household net borrowing and public net spending subsidized the US economy but also produced decades of low growth and stagnant productivity, punctuated by financial excesses. The chapter stresses the historical and policy-driven nature of the phenomenon and concludes that a policy attempting to reduce fragility must tackle the structure of aggregate demand and the sources of income inequality.