Unequal Fortunes, Unstable Households: Has Rising Inequality Contributed to Economic Troubles for Households in the USA?

Abstract

The distribution of national income between capital and labor has become more unequal as has the distribution within labor. At the same time that inequality rose, consumer debt and household economic distress grew, too. The evidence on a positive link between rising inequality and innovation is not supported by the data. The data either suggest no connection or a potential negative link. In comparison, the link between growing inequality and aggregate demand is somewhat ambiguous. One way to clarify this ambiguity is the possibility that debt has increased and that it has increased more among low income households, particularly in the form of credit cards and non-bank credit. We find that credit card debt is especially sensitive to changes in inequality and that rising inequality may thus have contributed to rising personal bankruptcies.