Working Paper: CEPR ID: DP14667
Authors: Alina Bartscher; Moritz Kuhn; Moritz Schularick; Ulrike Steins
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 Codes: E21; E44; D14; D31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased income inequality (D31) | increased household borrowing (G51) |
| low income growth (O49) | increased borrowing by middle-class families (G51) |
| debt-to-income ratios (F34) | increased household debt (G51) |
| home equity borrowing (G51) | increase in U.S. household debt (G51) |
| increased debt (H63) | financial fragility among middle-class households (G51) |
| income shock (E25) | increased financial fragility of middle-class households (G59) |
| housing wealth gains (G51) | consumption (E21) |