Rising Inequality, Demand, and Growth in the US Economy

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We use consumption and balance sheet data disaggregated between the top 5% and the bottom 95% of US households by income to show that the bottom 95% went deeply into debt to mitigate the impact of their stagnant incomes on their consumption. We use micro data to calibrate an intrinsic Keynesian growth model and show that over a range of plausible parameter values, the rise in US household income inequality increased enough between the early 1980s and 2000s to cause the entire magnitude of the Great Recession and can explain the slow and prolonged recovery.