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Cambridge Journal of Economics Advance Access originally published online on August 5, 2008
Cambridge Journal of Economics 2009 33(1):113-137; doi:10.1093/cje/ben030
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© The Author 2008. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

Rising household debt: Its causes and macroeconomic implications—a long-period analysis

Aldo Barba and Massimo Pivetti*

* Università di Napoli and Università di Roma ‘La Sapienza’, Italy, respectively

Address for correspondence: Massimo Pivetti, Università di Roma ‘La Sapienza’, Istituto di Economia e Finanza, Dipartimento di Scienze Giuridiche, Piazzale Aldo Moro 5, 00185 Rome, Italy; email: massimo.pivetti{at}uniroma1.it Aldo Barba, Università di Napoli ‘Federico II’, Dipartimento di Economia, via Cintia 45, 80126 Naples, Italy; email albarba{at}unina.it

The article analyses the rise in household indebtedness from the point of view of its causes and long-run macroeconomic implications. The analysis is focussed on the US case. Differently from life-cycle interpretations of the phenomenon, and from interpretations in terms of erratic deviations of current income flows from their long-run trend, the rising household debt is viewed as the outcome of persistent changes in income distribution and growing income inequalities. Through household debt, low wages appear to have been brought to coexist with relatively high levels of aggregate demand, thus providing the solution to the contradiction between the necessity of high and rising consumption levels, for the growth of the system's actual output, and a framework of antagonistic conditions of distribution which keeps within limits the real income of the vast majority of society. The question of the long-run sustainability of this substitution of loans for wages is finally discussed.

Key Words: Household debt • Wages • Aggregate consumption • Saving rate • Income distribution

JEL classifications: D11, D14, E21, E25

Manuscript received July 16, 2007; final version received May 6, 2008.


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