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Working and Living in the Shadow of Economic Fragility$
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Marion Crain and Michael Sherraden

Print publication date: 2014

Print ISBN-13: 9780199988488

Published to Oxford Scholarship Online: December 2014

DOI: 10.1093/acprof:oso/9780199988488.001.0001

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Too Much Spending or Too Little Income?

Too Much Spending or Too Little Income?

The Macroeconomics of Household Spending and Debt in the Consumer Age

(p.36) 2 Too Much Spending or Too Little Income?
Working and Living in the Shadow of Economic Fragility

Barry Z. Cynamon

Steven M. Fazzari

Oxford University Press

Economic theory suggests that rising income inequality reduces economic growth because high-income groups spend a smaller share of their income than do lower-income groups. Despite rising inequality, however, the US economy performed rather well during the 30 years before the Great Recession. This chapter analyzes this paradox by disaggregating household spending, income, saving, and debt for the bottom 95 percent and top 5 percent of the income distribution. We find that the high-income group spends a smaller share of income but that demand drag did not occur because the bottom 95 percent’s spending share rose along with a historic increase in borrowing. The unsustainable rise in household leverage, concentrated in the bottom 95 percent, ultimately spawned the Great Recession. The demand drag of rising inequality reasserts itself in the stagnant recovery from the Great Recession, and we explore structural changes to revive future demand growth.

Keywords:   consumer Age, consumption, debt, demand creation, financial instability, Great Recession, growth, inequality, saving, spending

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