Political Aspects of Household Debt (original) (raw)
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Political aspects of household finance: debt, wage bargaining, and macroeconomic (in)stability
Journal of Post Keynesian Economics, 2018
The recent literature has shown that income inequality is one of the main causes of borrowing and debt accumulation by working households. This article explores the possibility that household indebtedness is an important cause of rising income inequality. If workers experience rising debt burdens, their cost of job loss may rise if they need labor-market income to continue borrowing and servicing existing debt. This, in turn, will reduce their bargaining power and increase income inequality, inducing workers to borrow more to maintain consumption standards, and so creating a vicious circle of rising inequality, job insecurity, and indebtedness. We believe that these dynamics may have contributed to observed simultaneous increases in income inequality and household debt prior to the recent financial crisis. To explore the two-way interaction between inequality and debt, we develop an employment rent framework that explicitly considers the impact of workers' indebtedness on their perceived cost of job loss. This is embedded in a neo-Kaleckian macro model in which inequality spurs debt accumulation that contributes to household consumption spending and hence demand formation. Our analysis suggests that (a) workers' borrowing behavior plays a crucial role in understanding the character of demand and growth regimes; (b) debt and workers' borrowing behavior play an important role in the labor market by influencing workers' bargaining power; and (c) through such channels, workers' borrowing behavior can be a decisive factor in the determination of macroeconomic (in)stability.
International Conference on Eurasian Economies 2021, 2021
In the neoliberal era, financialization of the economies is associated both with large-scale speculative movements in the financial sector and over-indebtedness. The fact that there were significant increases in household indebtedness in the United States before the 2008/09 global financial crisis made the growing indebtedness an outstanding issue that should be examined in terms of its supply and demand-side causes and its distributive consequences. Increasing inequality in income distribution has been an important consideration associated with the increase in household indebtedness. In a sense, the borrowing opportunities enable working households to maintain their consumption and living standards in the short term despite the stagnation in wages and thus increasing inequality, but it does not prevent them from undergoing an unsustainable debt burden. This debt burden creates a feedback effect by deepening the existing inequality. The purpose of this study is to reveal the macro a...
Rising Income Inequality, Increased Household Indebtedness, and Post-Keynesian Macrodynamics
Revista Economia Ensaios, 2014
A Kaleckian growth model is modified to incorporate working households who borrow to finance some part of their consumption spending. The impact of this behavior on the sustainability of the growth process is then studied by means of a numerical analysis that captures various dimensions of increased income inequality in the US. The results show that the precise manner in which debtor households service their debts has important effects on the economy's macrodynamics.
Household debt: The missing link between inequality and secular stagnation
Journal of Economic Behavior & Organization, 2019
How do inequality and growth evolve in the long run and why? We address this question by analyzing the interplay between household debt, growth and inequality within a monetary, stock-flow consistent framework. We first consider a Goodwin-Keen model where household consumption, rather than investment by firms, is the key behavioural driver for the dynamics of the economy. Whenever consumption exceeds current income, households can borrow from the banking sector. The resulting three dimensional dynamical system for wage share, employment rate, and household debt exhibits the characteristic asymptotic equilibria of the original Keen model, namely the analogue of Solow's balanced-growth path, where all state variables converge to an interior point, in addition to deflationary equilibria with explosive debt and collapsing employment. We then extend this setup by separating the household sector into workers and investors, obtaining a four-dimensional system with analogous types of asymptotic behaviour. Our main result is that long-run increasing inequality between these two classes of households occurs if and only if the system approaches one of the equilibria with unbounded debt ratios. More specifically, we find that one essential channel of increased inequality is the wealth transfer from workers to investors due to interest paid on debt from the former to the latter. Finally, when properly rewritten, the celebrated inequality r > g turns out to be a necessary condition for the asymptotic stability of long-run debt-deflation. Our findings shed new light on the relationships between fairness and efficiency, and have implications for public economic policy.
In this paper I develop a basic Post-Keynesian – Classical model of growth and income distribution in order to reveal the channels through which financial activities may affect income distribution. By doing so, I follow Marx’s analysis in Volume III of Capital (part IV) and assume that there are three classes: industrial capitalists, financial capitalists and workers. One channel by which financial variables affect income distribution is through the debt-financed consumption while the other is through the debt-financed investment1. This model is an extension of Dutt’s (2004 [2006]) Post Keynesian-Steindlian model of growth and income distribution, in order to incorporate the class of financial capitalists who own commercial banks and are the sole providers of credit money to the working class and to the industrial capitalist class that invests to fixed capital but do not consume. The functioning and stability of the macro system is both dependent on industrial capitalists and workers’ indebtedness, with the later being closer to play a destabilizing role.
Rising household debt: Its causes and macroeconomic implications--a long-period analysis
Cambridge Journal of Economics, 2008
The article analyses the rise in household indebtedness from the point of view of its causes and long-run macroeconomic implications. The analysis is focussed on the US case. Differently from life-cycle interpretations of the phenomenon, and from interpretations in terms of erratic deviations of current income flows from their longrun trend, the rising household debt is viewed as the outcome of persistent changes in income distribution and growing income inequalities. Through household debt, low wages appear to have been brought to coexist with relatively high levels of aggregate demand, thus providing the solution to the contradiction between the necessity of high and rising consumption levels, for the growth of the system's actual output, and a framework of antagonistic conditions of distribution which keeps within limits the real income of the vast majority of society. The question of the longrun sustainability of this substitution of loans for wages is finally discussed.
Macroeconomic implications of inequality and household debt: European evidence
Finance, Growth and Inequality, 2019
A growing recent literature has examined the macroeconomic implications of household debt. Recent analysis has linked household debt to rising inequality across developed economies leading to stagnant or declining real incomes for middle and lower income households. Wages stagnated with their decoupling from productivity growth and rising inequality; households maintained consumption with falling savings and rising indebtedness. This consumption behaviour can be understood in terms of emulation of consumption patterns through a relative income effect. A range of authors have argued household debt was central to the global financial crisis. More generally it has been argued that with rising inequality aggregate demand was only been sustained by this process of rising household indebtedness before the crisis and since then recovery has been held back by limited growth in household incomes and such recovery as has been achieved has generated by renewed rises in household debt.
CONSUMER AND CORPORATE DEBT IN A BASIC POST-KEYNESIAN MODEL OF GROWTH AND INCOME DISTRIBUTION
In this paper a basic Post-Keynesian model of growth and income distribution is developed incorporating consumer and corporate borrowing. Consumer borrowing is incorporated in the short-run and corporate borrowing is introduced in the long-run. Assuming a neoliberal regime, workers borrow to fill the consumption gap, and set targets for both living standard and interest payments. Capitalists borrow to finance investment. In the long-run model two cases are examined: the consumer debt-rate of accumulation relation and the consumer debt -corporate debt- rate of accumulation relation. In both cases the stable point corresponds to high growth and low workers’ debt-capital ratio and the saddle to low growth and high workers’ debt-capital ratio. Changes on parameters affect the volume of the stability of the system.
Household Debt and Unemployment
SSRN Electronic Journal, 2018
We use a labor-search model to explain why the worst employment slumps often follow expansions of household debt. We find that households protected by limited liability suffer from a household-debt-overhang problem that leads them to require high wages to work. Firms respond by posting high wages but few vacancies. This vacancy-posting effect implies that high household debt leads to high unemployment. Even though households borrow from banks via bilaterally optimal contracts, the equilibrium level of household debt is inefficiently high due to a household-debt externality. We analyze the role that a financial regulator can play in mitigating this externality.
Exploring the link between household debt and income inequality: an asymmetric approach
We investigate the relationship between household debt and income inequality in the US, allowing for asymmetry, using data over the period 1913-2008. We find evidence of an asymmetric cointegration between household debt and inequality for different regimes. Our results indicate household debt only responds to positive changes in income inequality, while there is no evidence of falling inequality significantly affecting household debt. The presence of this asymmetry provides further empirical insights into the emerging literature on household debt and inequality.