Modigliani Meets Minsky: Inequality, Debt, and Financial Fragility in America, 1950-2016

77 Pages Posted: 15 May 2020

See all articles by Alina K. Bartscher

Alina K. Bartscher

University of Bonn

Moritz Kuhn

University of Bonn

Moritz Schularick

University of Bonn - Department of Economics; Centre for Economic Policy Research (CEPR)

Ulrike Steins

University of Bonn

Multiple version iconThere are 3 versions of this paper

Date Written: April 28, 2020

Abstract

This paper studies the secular increase in U.S. household debt and its relation to growing income inequality and financial fragility. We exploit a new household-level dataset that covers the joint distributions of debt, income, and wealth in the United States over the past seven decades. The data show that increased borrowing by middle-class families with low income growth played a central role in rising indebtedness. Debt-to-income ratios have risen most dramatically for households between the 50th and 90th percentiles of the income distribution. While their income growth was low, middle-class families borrowed against the sizable housing wealth gains from rising home prices. Home equity borrowing accounts for about half of the increase in U.S. household debt between the 1970s and 2007. The resulting debt increase made balance sheets more sensitive to income and house price fluctuations and turned the American middle class into the epicenter of growing financial fragility.

Keywords: household debt, inequality, household portfolios, financial fragility

JEL Classification: E21, E44, D14, D31

Suggested Citation

Bartscher, Alina K. and Kuhn, Moritz and Schularick, Moritz and Steins, Ulrike, Modigliani Meets Minsky: Inequality, Debt, and Financial Fragility in America, 1950-2016 (April 28, 2020). Institute for New Economic Thinking Working Paper Series No. 124. Available at SSRN: https://ssrn.com/abstract=3601341

Alina K. Bartscher

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Moritz Kuhn

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Moritz Schularick (Contact Author)

University of Bonn - Department of Economics ( email )

Bonn
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ulrike Steins

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

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