Introduction Debt and Assets Debt and Income Debt Dynamics Consumption Income Distribution, Household Debt and Aggregate Demand: A Critical Appraisal J. W. Mason January 7, 2017
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption Are Rising Household Debt-Income Ratios Result of Higher Inequality? The argument: • Big increase in income inequality • All else equal, should reduce consumption demand • Lower income households seek to maintain rising consumption standard • Due to habit formation, emulation, status competition, etc. • Can do so by increased borrowing in credit markets • Higher borrowing by lower income households explains • Rising household debt (relative to income or GDP) • Slower growth of consumption inequality, vs income inequality • Rising consumption share of GDP • Inequality-fueled borrowing contributed to financial crisis
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption But Is It True? Problems with the distribution-debt story: • Households borrow mainly to finance assets, not current consumption • Debt ratios depend on interest, inflation, income growth, default, as well as new borrowing • Most debt near top of income distribution; very little at bottom • Distribution of consumption seems to track income distribution • Rise in aggregate consumption does not reflect increased consumption spending by households
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption Household Debt: What Do We Know? • Household debt mainly finances assets, not current consumption • Similar to business debt, state-local debt • Different from sovereign debt • Debt-income ratios change due to nominal income growth, interest on existing debt as well as new borrowing • Household debt rises with income • Highest debt-income ratios in top income quintile • Very little debt in bottom two quintiles
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption Consumption Loans and Asset Loans • Orthodox theory approaches household debt in terms of consumption loans (Samuleson 1959, etc.) • Incurred to shift time-profile of consumption relative to income • In periods with consumption > income, households increase debt (or reduce assets) • In periods with income > consumption, households pay down debt (or increase assets) • Because income rises then falls while desired consumption smooth, debt changes in regular pattern over lifecycle • Consumption-loan borrowing equivalent to negative saving • But most household borrowing finances asset ownership, not current consumption • No implications for saving • Trades off one future income stream against another, not present against future income • Education functionally an asset
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption Share of Household Debt by Purpose, Various Years 1989 1995 2001 2007 2013 Primary residence Purchase 71.3 78.0 77.2 79.8 79.6 Improvement 2.4 2.0 2.0 2.3 1.7 Other residential property 2.3 2.4 1.1 0.5 0.5 Non-residential investments 5.1 1.6 3.1 2.2 2.1 Vehicles 10.5 7.5 7.7 5.5 5.1 Education 3.1 3.1 3.5 4.0 7.1 Goods and services 5.2 5.4 5.5 5.8 4.0 Source: Survey of Consumer Finances
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption Debt and Income • Household debt is an upper-middle income phenomenon 2/3 in top three quintiles; less than 10% in bottom 3 • • All else equal, greater income inequality should lead to less household debt • Household debt did shift down the income distribution during the housing bubble • Limited to housing debt during 2001-2007, not all debt during whole period of rising inequality • Not associated with any rise in consumption spending
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption Median Debt-Income Ratios by Income Percentile Source: Survey of Consumer Finances, author’s analysis
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption Share of Total Household Debt by Income Decile 1983 1989 1995 2001 2007 2013 bottom 0.01 0.01 0.01 0.01 0.01 0.02 2 0.02 0.01 0.02 0.02 0.02 0.02 3 0.02 0.02 0.04 0.03 0.03 0.03 4 0.04 0.04 0.04 0.04 0.03 0.04 5 0.05 0.06 0.06 0.07 0.06 0.05 6 0.07 0.07 0.08 0.08 0.08 0.08 7 0.09 0.11 0.11 0.10 0.11 0.10 8 0.13 0.15 0.14 0.14 0.16 0.14 9 0.18 0.19 0.19 0.18 0.19 0.19 top 0.38 0.35 0.32 0.33 0.31 0.34 Source: Survey of Consumer Finances, author’s analysis
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption How Do Debt Ratios Change? • New borrowing for • Consumption • Investment (spending) • Non-demand expenditure (acquisition of financial assets, transfers) • Interest on existing debt • Inflation • “Real” income growth • Defaults Can’t describe historical changes in debt ratios without taking all these factors into account
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption The Law of Motion of Debt Ratios ∆ b t = b t +1 − b t = d t + ( i − g − π 1 + g + π ) b t + sfa t (1) ∆ b t ≈ d t + ( i t − g t − π t − c t ) b t − 1 (2) In Mason and Jayadev 2014, 2015, call second term on right “Fisher term”.
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption Contributions to Debt Ratio Changes
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption Change in Debt-Income Ratio, % Points per Year Change Attributable to: in New Interest Growth Inflation Default Debt Borrow- Ratio ing 1946 to 1963 2.9 2.6 2.9 -1.5 -0.8 -0.0 1964 to 1983 0.2 0.8 6.4 -2.6 -4.1 -0.2 1984 to 1993 3.2 -1.1 9.9 -2.0 -3.0 -0.5 1994 to 1999 1.7 -0.9 9.9 -4.4 -2.0 -0.8 2000 to 2007 5.8 5.7 9.5 -4.3 -3.3 -1.5 2008 to 2011 -4.1 -6.6 9.1 1.2 -2.2 -5.1 1946 to 1983 1.5 1.7 4.7 -2.1 -2.6 -0.1 1984 to 2007 2.8 0.1 9.7 -2.9 -2.8 -1.5 Source: Mason and Jayadev 2015
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption Consumption: Myths and Realities • Myth - household consumption spending has increased as a share of GDP • Myth (probably) - consumption inequality has increased less than income inequality
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption What’s behind the Apparent Rise in Consumption since 1980? • Headline measure of C/GDP stable around 0.6 in 1960s/70s, rises 8 points over 1980-2008. • Fuels narratives about increasing (debt-financed) household consumption spending • But official C measure includes items with no monetary expenditure by households • Public and employer health spending • Owner equivalent rent (net of costs) • Imputed financial services • Net spending by nonprofits • Rise in measured C all due to non-expenditure items • Consumption outlay by households declines 1950s-1970s, flat from 1980 • Downward trend larger when res. investment by households included with C • “C” w/o monetary outlay by households can’t raise debt
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption Official & Adjusted Consumption as Share of GDP
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption Official and Adjusted Consumption, % of GDP 1950 1979 2008 Change 79-08 Headline consumption 65.4 62.1 70.2 8.1 Less 3rd party health spending 0.3 4.2 9.6 5.4 Public 0.0 2.0 5.7 3.7 Employer 0.3 2.2 3.9 1.7 Owners equiv. rent 3.7 5.3 7.7 2.4 Other non-expenditure 2.1 2.5 3.5 0.9 Adjusted consumption 61.7 53.1 54.1 1.0 Household res. investment 6.2 4.5 3.0 -1.5 Household expenditure 67.9 57.6 57.1 -0.5
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption Has Consumption Inequality Tracked Income Inequality? • Aguiar and Bis (2015): 80/20 income ratio rose 33% 1980-2010, consumption ratio by 30-42% • Fisher, Johnson and Smeeding (2013): “income and consumption inequality increase at approximately the same rate between 1985 and 2006.” • Attanasio, Hurst and Pistaferri (2012): “Consumption inequality within the U.S. between 1980 and 2010 has increased by nearly the same amount as income inequality.”
Introduction Debt and Assets Debt and Income Debt Dynamics Consumption Consumption, Income for Top 5% and Bottom 95% Source: Cynamon and Fazzari 2015
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