Rising inequality reduced income growth for the bottom 95 percent of the US personal income distribution beginning about 1980.
To maintain stable debt to income, this group’s consumption-income ratio needed to decline, which did not happen through 2006, and its debt- income ratio rose dramatically, unlike the ratio for the top 5 percent. In the Great Recession, the consumption-income ratio for the bottom 95 percent did finally decline, consistent with tighter borrowing constraints, while the top 5 percent ratio rose, consistent with consumption smoothing. We argue that higher inequality and the associated demand drag helps explain the slow recovery.
