Inequality, Consumer Credit and the Saving Puzzle

Inequality, Consumer Credit and the Saving Puzzle

New Directions in Modern Economics series

Christopher Brown

Providing much needed context for current events like the sub-prime mortgage crisis, this timely book presents a vision of an economy evolved to greater dependence on consumer credit and analyzes the trade-offs and risks associated with it. While synthesizing the Keynesian theory of consumption with the Institutional theory of habit selection (brought up to date with new knowledge from evolutionary biology and neuroscience), this book represents an in-depth treatment of the macroeconomic dimensions of consumer credit and implications of recent financial innovations from a non-traditional economic approach.

Chapter 1: Consumer Credit and Effective Demand

Christopher Brown

Subjects: economics and finance, institutional economics, post-keynesian economics


1. Consumer credit and effective demand Macroeconomics is the study of the forces that regulate the scale of output and employment (as well as the general price level) in systems featuring private production for market, vast capital goods industries and highly developed securities markets. The main topic of inquiry here is: how does the institution of consumer credit fit in the scheme of macroeconomic causality? Do expansions or contractions in the volume of consumer credit extensions constitute an important independent cause of aggregate-level fluctuations? Does the widespread use of consumer credit tend to increase the amplitude of business cycle expansions and contractions? Have the advanced industrialized economies (and in particular the USA) become more dependent on credit-financed consumption to achieve GDP growth? What is the role of financial innovation in making installment, credit card, home equity and student loans more widely accessible? Can broadened access to credit across income classes countervail the (potentially) depressing effect that rising income inequality exerts on aggregate expenditure? Does advertising, by stimulating the use of consumer credit, have an overlooked macroeconomic dimension? Are standard measures of aggregate household indebtedness adequate in terms of appraising the stress on household budgets from debt service? Is borrowing at the root of the wellpublicized collapse of household saving? To what extent does the liberal use of borrowing privileges by households contribute to massive US trade deficits? In light of the importance of credit, is it correct to think in terms of an ‘animal-spirited’ consumption function...

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