Household Profligacy vs. Rentier Neoliberalism as a cause of Household Indebtedness

Arjun Jayadev

American households have been profligate spenders over the last 30 years and have lived beyond their means for too long. Or so it is proclaimed repeatedly in the media and among policy makers. What else could explain the fact that household debt to income ratios have increased while the personal savings rate has fallen?

As it turns out, there are other ways in which debt-income ratios can increase other than actually borrowing more. Specifically, income can grow slower than the real interest burden. The latter in turn depends on both nominal interest rates and inflation. In the case of public debt, there is a long and distinguished literature trying to separate the relevant importance of these effects in periods of leveraging and deleveraging. Interestingly enough, although household debt exceeds public debt substantially (look here at Table L1), there has been virtually no research trying to assess the importance of each channel.

Josh Mason and I have attempted to address this in a new working paper.  The basic idea of our paper is to apply the standard equation used to analyze government debt trajectories to the debt of the household sector. We decompose changes in the sector’s debt-income ratio into a primary deficit (i.e. net new borrowing), nominal interest rates, real income growth and inflation. Using this approach, we find some interesting and underappreciated patterns.

In particular, there was no difference in the household sector net new borrowing in the three decades after 1980, when leverage ratios rose sharply, from the prior three decades, when they rose less. There was, however a large increase in household new borrowing in the period 1998-2005 (at the time of the housing bubble). In the 1980s however, households were actually running larger primary surpluses than at any time before or after. Virtually the entire rise in household debt in that period, and a significant fraction of the rise in the 2000s, can be attributed to higher effective real interest rates and not net new borrowing.

Where did this sea-change come from? Our working hypothesis is that a political economy shift in favor of financial capital (what may be termed the move towards financialization or rentier neoliberalism) occurred beginning around 1980. The beginning of the decade saw sharp rises in real interest rates with the Volcker shock and subsequent disinflation in the economy. In addition, deregulation of interest rates and a rising importance of the financial sector both economically and politically also contributed towards changing debtor-creditor relations. Although interest rates fell, inflation rates fell even more.

How important were these changes for household debt-income ratios? The figure below drawn from our paper is suggestive. It depicts the actual household debt-income ratio trend from 1945-2010, and a counterfactual trajectory if the growth rate of income, inflation rate and nominal interest rate was the average of the period from 1945-1980. The ‘profligacy of the American household’ looks fairly muted in the light of the alternative history.

Debt-income Ratios

We found several more interesting patterns in the paper, which we’re hoping you’ll take a look at. In particular, it is really useful to take a look at household debt trajectories in historical context. At the current juncture, we are updating and revising the piece, so any helpful input, thoughts and comments would be very much appreciated.

The Triple Crisis blog invites your comments. Please share your thoughts and opinions below.

2 Responses to “Household Profligacy vs. Rentier Neoliberalism as a cause of Household Indebtedness”

  1. milford bateman says:

    Hi Arjun, sounds like a very interesting project. You might also think about looking at developing countries and their exposure to increasing quantities of microfinance offered at high interest rates and which has resulted in large numbers of the poor falling into microdebt peonage for almost the same reasons you suggest in the developed countries (financialization of poverty). The poor have also been profligate spenders over the short term in so many countries, but not by using their houses as ATMs, but because it became so easy to access (expensive) microloans from the growing number of microfinance institutions. When the repayment becomes necessary, and also more difficult because the interest rates are very high (and generally much higher than you realise when taking out a microloan), or your tiny micro-business ailed (as most ‘poverty-push’ units do) you simply borrow another microloan to repay some or all of the older microloans. A Ponzi-style scenario develops and soon you are in serious microdebt, and then you lose your land, house, car, equipment, etc in order to repay the microdebt. With the loss of valuable household assets, irretrievable poverty is now your lot in life. Have a look at the situation in Andhra Pradesh state in India, for instance, where poor households accumulated up to 10 microloans each, or in Bosnia, which experienced sub-prime-style growth, massive profiteering by a small coterie of people, and then a major crash with, naturally, bail-outs by the international donors. Mexico, Bangladesh, Cambodia, Peru are also examples where the volume of microdebt offered to the poor has been rising very fast in recent years thanks to such Ponzi-style survival strategies, and a reckoning/bust cannot be too far off (or else their own government or the international donor community will step in to save the rentiers from their own greed by socialising the losses). Note also that standing behind many of these microfinance institutions today are massive western financial organisations, including the big banks (CitiGroup, Barclays, Deutsche Bank), pension funds, investment houses (Jardine Matheson), all of which are keen to take part in the financial bonanza that is commercialised microfinance today. Also funding the dramatic rise of microfinance are Microfinance Investment Vehicles (MIVs) which are established by some of the above institutions but also by groups of rich individuals keen to also get their share of the profits made in developing countries while also massaging their egos because they are publicly seen (wrongly) as ‘helping the poor’. Many MIVs are based in low tax/regulation Geneva and also in Luxembourg and in Holland, both countries which offer preferential tax regimes for MIVs on the (wrong) assumption that they are ‘double-bottom line’ – that MIVs help the poor while the rich also do well. I can provide many references if you wish. Good luck with your work.


  2. Arjun Jayadev says:

    Thanks Milford,

    Indeed, Josh and I toyed with comparing the problem with a poverty debt trap, but although the mechanism is very similar, the levels of income were quite different, so we decided against it. I would be grateful for any references that you send.