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America’s household debt binge *was* about income inequality

Since 2006, a yawning gap has opened up between the average level of real household spending and the remarkably stable long-term trend:The standard explanation is that the trend’s stability was misleading.For one thing, aggregate consumption spending grew much faster than disposable incomes thanks to the steady decline in the average savings rate since the early 1980s. Not surprisingly, America’s household savings rate hit bottom just before consumption spending began falling away from its long-term trend.Even more important than this aggregate story, however, was the changing distribution of income. While the soaring fortunes of those at the top is well-known, the less-appreciated corrollary is that those in the bottom half experienced barely any growth in their real market incomes:Adding in the impact of taxes and cash transfers doesn’t change much, especially if you focus on the period before the crisis:(Data come from the Thomas Piketty / Emmanuel Saez / Gabriel Zucman Distributional National Accounts.)This matters because people who have a lot of money generally don’t spend that much if they get any more. Their material needs are already mostly satisfied, so any extra income is mostly appreciated for the status it accords and used to purchase assets.

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Since 2006, a yawning gap has opened up between the average level of real household spending...

Matthew C Klein
I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist. I have worked at the world’s largest hedge fund and read every FOMC transcript since May, 1987

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