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Moritz Schularick

November 5th, 2019

"Modigliani Meets Minsky: Inequality, Debt and Financial Fragility in America, 1950-2016"


The rise of U.S. household debt from 30% of income in 1950 to more than 120% on the eve of the 2008 crisis is a prominent and much-debated trend. Using a new data set that covers seven decades of household-level information for the joint distributions of debt, income and assets, this paper studies the evolution and distribution of household debt in postwar America. We show that debt-to-income ratios increased most strongly for low income growth households in the middle of the income distribution. Rising indebtedness of households with low income growth is puzzling and potentially problematic. Divergent trends in middle-class income and wealth provide an explanation. House price increased faster than incomes of middle-class households and led to substantial wealth gains for homeowners. Middle-class households reacted to higher wealth by extracting home equity through increased debt. We show that equity extraction accounts for about 40% of the total increase in household debt since the 1970s, and was particularly pronounced among middle-class homeowners. The resulting increase in debt has made the financial position of the American middle class highly sensitive to income and house price fluctuations.