Inequality, Financialization, and the Growth of Household Debt in the U.S., 1989-2007

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Household indebtedness in the United States grew dramatically during the decades leading up to the financial crisis.

From 1989-2007 the mean household debt-to-income ratio increased by over 100%. Social scientists have devoted considerable attention to the macro- political economy of growing consumer credit markets, but there has been little empirical research on households’ proclivity to take on increasing debts. Two alternative explanations explain rising debt-to-income either as a compensatory response to income stagnation and the squeeze on the middle-class, or alternatively as a reflection of a more aggressive culture of financial risk-taking. The present paper utilizes household-level data in order to examine the empirical implications of each of these explanatory perspectives. Patterns of debt-to-income growth are less consistent with the income squeeze explanation than the financial culture explanation. Debt-to-income growth was concentrated disproportionately among college-educated, upper-middle income households – not the downwardly-mobile and/or lower-middle class households who were feeling the most acute effects of the wage squeeze. Income stagnation also played no significant role: Controlling for demographics, debt-to-income ratios for households with negative or stagnant real incomes over the preceding five years tend to be no greater than those for households with positive real income growth. More aggressive orientations toward financial risk were positively associated with debt levels. The results suggest that dominant macro-level explanations of household debt growth are based on inadequate micro-level assumptions.