Last week I promised a discussion of my new paper with Arjun Jayadev on “Fisher dynamics” and the evolution of household debt. That discussion is now here, not here, but at Rortybomb, where Mike Konczal has graciously invited me to post a summary of the paper.
The summary of the summary is that the increase in household debt-to-income ratios over the past 30 years can be fully explained, in an accounting sense, y changes in growth, inflation, and interest rate. Except during the housing bubble period of 2000-2006, household spending relative to income has actually been lower in the post 1980 period than in preceding decades. If interest rates, inflation and growth had remained at their 1950-1980 average level, then the exact same household decisions about spending out of income would have left them with lower debt in 2010 than in 1980. And just as it wasn’t more borrowing that got us higher debt, less borrowing almost certainly won’t get us to lower debt. If household leverage is a problem, then the solution will have to be some mix of large-scale writedowns, higher inflation, and lower interest rates via financial repression.
UPDATE: Now also at New Deal 2.0.
UPDATE 2: Responses by Kevin Drum, Karl Smith, Merijn Knibbe, Reihan Salam, and The New Arthurian. There’s some good discussion in comments at Mark Thoma’s place. And a very interesting long comment by Steve Randy Waldman in comments right here.