New Directions in Modern Economics series
Chapter 1: Consumer Credit and Effective Demand
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...