Income Distribution, Household Debt and Aggregate Demand: A Critical Appraisal

Transcription

1 Income Distribution, Household Debt and Aggregate Demand: A Critical Appraisal J. W. Mason January 7, 2017

2 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

3 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

4 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

5 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

6 Share of Household Debt by Purpose, Various Years Primary residence Purchase Improvement Other residential property Non-residential investments Vehicles Education Goods and services Source: Survey of Consumer Finances

7 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 , not all debt during whole period of rising inequality Not associated with any rise in consumption spending

8 Median Debt-Income Ratios by Income Percentile Source: Survey of Consumer Finances, author s analysis

9 Share of Total Household Debt by Income Decile bottom top Source: Survey of Consumer Finances, author s analysis

10 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

11 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.

12 Contributions to Debt Ratio Changes

13 Change in Debt-Income Ratio, % Points per Year Change Attributable to: in New Interest Growth Inflation Default Debt Ratio Borrowing 1946 to to to to to to to to Source: Mason and Jayadev 2015

14 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

15 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 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

16 Official & Adjusted Consumption as Share of GDP

17 Official and Adjusted Consumption, % of GDP Change Headline consumption Less 3rd party health spending Public Employer Owners equiv. rent Other non-expenditure Adjusted consumption Household res. investment Household expenditure

18 Has Consumption Inequality Tracked Income Inequality? Aguiar and Bis (2015): 80/20 income ratio rose 33% , consumption ratio by 30-42% Fisher, Johnson and Smeeding (2013): income and consumption inequality increase at approximately the same rate between 1985 and 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.

19 Consumption, Income for Top 5% and Bottom 95% Source: Cynamon and Fazzari 2015