Inequality, the Great Recession, and Slow Recovery

Abstract

Rising inequality reduced income growth for the bottom 95 percent of the US personal income distribution beginning about 1980. To maintain stable debt to income, this group’s consumption-income ratio needed to decline, which did not happen through 2006, and its debt-income ratio rose dramatically, unlike the ratio for the top 5 percent. In the Great Recession, the consumption-income ratio for the bottom 95 percent did finally decline, consistent with tighter borrowing constraints, while the top 5 percent ratio rose, consistent with consumption smoothing. We argue that higher inequality and the associated demand drag helps explain the slow recovery.

Keywords: consumption, saving, inequality, aggregate demand

JEL Classification: D12, D31, E21