Inequality, Consumer Credit and the Saving Puzzle (original) (raw)

2011, Review of Social Economy

In this timely and engaging book, Christopher Brown makes a contribution to Post Keynesian and Institutional economics while also discussing the place of consumer credit in a macroeconomic context-in particular, its role in the business cycle and distribution. The book explains the pressing issues of a credit-financed surge in consumer spending and declining household savings rates, and whether this is sustainable. Relying on both Post Keynesian and Institutionalist thought, it is an example of a growing trend in heterodox economic analysis of combining elements from various traditions. While emphasizing the place of borrowing in expanding economic activity, and the role of liquidity preference, Brown notes the outdated view of lending institutions as financial intermediaries. Within this framework he discusses the importance of effective demand and the residual nature of savings. Furthermore, he presents an interpretation of the institutional process of habit formation, and uses it to analyze changing saving and spending tendencies in the US. Brown argues that cultural change is a prerequisite for the growth in US household debt, and that understanding this phenomenon requires studying habit formation and institutional change. After summarizing the main points of Post Keynesian theory in Chapter 1, Brown discusses the social embeddedness of consumption, the emergence and macroeconomic importance of consumerism, the habitual use of credit, and the recent rise of household debt. He argues that, starting in the 1980s, growing inequality changed what had been deemed culturally sufficient for consumption, and greater credit availability allowed the maintenance of acquired habitual consumption status. Chapter 2 gives numerous examples of this, and some may find parts suitable for assigning to students. One point that could have been discussed further is the lack of growth in wages in recent decades. Chapter 3 provides a historical discussion of financial, technical, and organizational innovations in the consumer industry, which adds another piece to the declining saving puzzle and the change in consumer culture. Along with securitization, which has only recently received the attention of economists and public commentators, Brown identifies credit scoring, the lengthening of consumer loan maturities, and the forward integration of activities of financial institutions as major changes contributing to increased household indebtedness. From the emergence of installment retail credit to the role of financial engineering and risk-based pricing in subprime lending, Brown traces the vast growth of business units that target low-income groups. Alas, he does not tie this point to Kalecki's work on the effect of the degree of monopoly on the wage share in national income, which was discussed in Chapter 1. In Chapter 4, Brown makes a distinction between saving from current income and unrealized capital gains. He argues that the decline of traditional pension plans, and the spread of 401(k) plans, has tied household wealth to stock and bond markets.