Maturity, Stagnation and Consumer Debt: A Steindlian Approach

Abstract

This paper extends a Steindlian model of growth and income distribution to incorporate borrowing by consumers. It shows that borrowing by consumers can improve growth prospects in the short run by increasing consumer demand. However, in the longer run the effects of increasing consumer borrowing are ambiguous because, by increasing consumer debt, it redistributes income towards the rich who have a higher propensity to save, thereby possibly depressing aggregate demand and growth despite the borrowing-induced expansion. The problem may be exacerbated by financial considerations involving the increase of the interest rate due to greater borrowing, but these considerations are not necessary for it. The problem is more likely to occur when autonomous investment demand is weak, i.e. when borrowing-induced consumption increases are most required to counter tendencies towards stagnation.

Post-Keynesian macroeconomics since the mid 1990s: main developments

“…However the latter has recently been questioned based on the empirical observations in the US and other countries in the period before the Great Financial Crisis and the Great Recession, in which falling wage shares and rising inequality in personal or household income distribution, but rising instead of falling private consumption could be observed. 15 This has induced Kaleckians, like Dutt (2005bDutt ( , 2006b), Hein (2012a) and Nishi (2012a), following Palley (1994a), to include debt into workers' households consumption function and to examine the related short-run demand and longrun financial stability effects. Bhaduri/Laski/Riese (2006), and later Bhaduri (2011aBhaduri ( , 2011b and Bhaduri/Raghavendra/Guttal (2015), have discussed the impact of wealth and the related increase of credit and debt on consumption, aggregate demand and growth.…”

Neoliberal growth models, monetary union and the Euro crisis. A post-Keynesian perspective

“…An increase in debt will have expansionary effects as far as debtors have a higher propensity to spend than creditors. However, it will also have a negative effect, typically delayed, as higher debt levels imply higher interest payments from debtors to creditors, which dampens aggregate demand (Dutt 2006 Second, PKE theory of money is unique in that the dialectics between the state and the private sector in the origins of money, the endogenous and pro-cyclical nature money creation, and the importance of debt for understanding crises. This contrasts to mainstream economics and MPE, which view money, as regards its origin, as a produced commodity.…”

Brazil: an economy caught in a financial trap (1993-2003)

“…Most studies in this area focus on the relationship between the financial patrimonialization of households and increased consumption due to the 'wealth effect' created by financial profits, and the greater possibility for indebtedness that accompanies it (Aglietta, 1998 and2001;Dutt, 2006;and Bhaduri et al, 2006). Such studies are prone to distortions, either because they assume financial profits correspond to the entire population or because they ignore the negative consequences of massive indebtedness.…”