New Article in the Review of Keynesian Economics

My paper with Arjun Jayadev, “The Post-1980 Debt Disinflation: An Exercise in Historical Accounting,” has now been published in the Review of Keynesian Economics. (There is some other stuff that looks interesting in there as well, but unfortunately most of the content is paywalled, a choice I’ve complained to the editors about.) I’ve posted the full article on the articles page on this site.

Here’s the abstract:

The conventional division of household payment flows between consumption and saving is not suitable for investigating either the causes of changing household debt–income ratios, or the interaction of household debt with aggregate demand. To explain changes in household debt, it is necessary to use an accounting framework that isolates net credit-market flows to the household sector, and that takes account of changes in the debt–income ratio resulting from nominal income growth as well as from new borrowing. To understand the implications of changing household income and expenditure flows for aggregate demand, it is necessary to distinguish expenditures that contribute to demand from expenditures that do not. Applying a conceptually appropriate accounting framework to the historical data reveals that the rise in household leverage over the past 3 decades cannot be understood in terms of increased household borrowing. For both the decade of the 1980s and the full post-1980 period, rising household debt–income ratios are entirely explained by the rise in nominal interest rates relative to nominal income growth. The rise in household debt after 1980 is best thought of as a debt disinflation, analogous to the debt deflation of the 1930s.

You can read the rest here.

13 thoughts on “New Article in the Review of Keynesian Economics”

  1. “it is necessary to distinguish expenditures that contribute to demand from expenditures that do not”

    FYI: Expenditure in national accounts is expenditure on goods and services.

    1. Actually the interesting thing, which you would learn if you read the paper, is how much stuff that is NOT expenditure on goods and services gets mixed in there.

      1. My point is there’s no expenditure not on goods and services.

        Your intuition is fine. Rise in interest payments on say a home loan will reduce household consumption for example.


        “it is necessary to distinguish expenditures that contribute to demand from expenditures that do not”

        is meaningless as there’s no expenditure which does not contribute to demand (except when we are talking of open economies but that qualification isn’t relevant here).

  2. Sorry, that was too harsh. But I think you are getting hung up on a minor point of language. There are plenty of cash payments by households that are not directed toward currently produced goods and services but that still need to be financed and can contribute to increased debt. Whether you want to call these in “expenditure” doesn’t matter — I don’t think there is a strong convention on this. There are also payments by households that are counted as part of demand even though there is no actual good or service being produced. Mortgage interest payments are the biggest one of these. They are included in demand by being folded into the value of the notional housing services purchased by household, but this is inconsistent with the convention followed elsewhere in the accounts. So the true picture is a bit more complex than you are implying.

    1. Cool.

      My point was a minor point and I got into this before I wanted to make other points.

      No way I am implying anything simple. I did mention that payment on loans lead to a drop in consumption.

      But that in no way implies the main point of your paper in which interest rate plays the major role and not households’ behaviour of going into debt by themselves.

      Interest rates can be blamed in the few years before the crisis as the Fed raised rates but your argument is much more than that. Households could have behaved such that their debt/income came down much before the crisis. It didn’t increase mainly due to interest rates.

      So even if you consider the complications, it doesn’t follow that interest rate was the devil.

  3. Further comments:

    “The savings
    concept in national accounts, however, is not appropriate for either of those purposes.
    Savings in the national accounts include all spending that is not directed toward current
    consumption, with mortgage interest payments included in consumption.”

    In national accounts, saving is disposable income less consumption. The interest payment part is automatically adjusted when “disposable income” is calculated. So mortgage interest is not included in consumption.

    So as far as national accounts is concerned, things are fine.

    In fact one can construct models in which the rate of interest on loans is greater than the rate of growth but there’s no exploding dynamics. If the household sector is in deficit itself, then it becomes important. But one has to explain the household deficit itself.

    Back to your point about interest payments – it’s true high interest payment leads to a drain in demand because people consume less when faced with higher interest payments, it’s not as if all of it doesn’t matter to demand. Banks earn interest income and pay wages and dividends which in turn is received by households. But it’s true of course that interest payments hurt the economy. Can be shown via a stock-flow consistent model. But I don’t think there’s anything in the national accounts language which needs to be changed such as correctly counting consumption because it does correctly account for it.

    1. I’m afraid this isn’t a productive discussion. I posted the link so that interested people could read the paper, not to have a discussion about the contents of the abstract. If you want to read the paper, I’ll be happy to discuss it with you. And again, I assure you that you are wrong about consumption. The number in the national accounts does NOT mean what you think it does.

      1. Point being:

        1. your FISIM accounting is way off, if you distinguish final and intermediate consumption. Mortgage interest is intermediate consumption. So doesn’t matter when one is talking of GDP, final consumption etc instead of output. And in the FISIM language, the interest paid is a service, so there’s no expenditure which doesn’t contribute to demand.

        2. Even if you get those points right, those things are minor compared to the main dynamics which is also wrong here. What you call the primary balance is not some exogenously given number. Households can change it. So the main reason for rise in debt is not the rate of interest itself but the private sector deficit itself which the households could have changed.

        So in short, wrong accounting and wrong behavioural assumptions/dynamics.

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