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How Financially Fragile can Households Become? Household Borrowing, the Welfare State, and Macroeconomic Resilience

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  • Mark Setterfield

    (Department of Economics, New School for Social Research)

  • Y.K. Kim

    (Department of Economics, University of Massachusetts, Boston)

Abstract

We extend the principles of the Financial Instability Hypothesis (FIH) to the household sector by re-framing the three financial postures associated with the FIH (hedge, speculative, and Ponzi) in the context of households, using a simple model of household borrowing and debt-financing behavior. We also connect our analysis to various strands of research in Comparative Political Economy on credit regimes, the welfare state, and Varieties of Capitalism. Our paper thereby discusses the importance of welfare systems and financial regimes as determinants of household borrowing behavior and hence the financial fragility of the household sector. In so doing it relates to recent US policy debates by demonstrating the macroeconomic consequences of raising taxes on top incomes in order to fund an increase in the social wage. Our results suggest that taxing top incomes to provide social services without accumulating public debt improves macroeconomic resilience and may also improve macroeconomic performance. We therefore uncover some of the values of welfarism that the neoliberal `experiment' inadvertently revealed by `rolling back the frontiers of the welfare state' and in so doing, leading capitalism headlong into the 2007-09 financial crisis.

Suggested Citation

  • Mark Setterfield & Y.K. Kim, 2022. "How Financially Fragile can Households Become? Household Borrowing, the Welfare State, and Macroeconomic Resilience," Working Papers 2210, New School for Social Research, Department of Economics.
    • Handle: RePEc:new:wpaper:2210
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    More about this item

    Keywords

    Financial fragility; financial instability hypothesis; household borrowing; household debt; welfare state; macroeconomic resilience;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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