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 7: Consumerism, Inequality and Globalization

Christopher Brown

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

Extract

The term ‘globalization’ is invoked in connection with a variety of phenomena. These include the expanding scale of international trade in merchandise and services, the removal of barriers to the transnational movement of resources and financial capital, as well as the relocation of production activity to so-called less developed countries (LDCs). The area of overlap between the elements subsumed under ‘globalization’ and the subject matter addressed in the preceding chapters is extensive. The analysis here is restricted to some salient points of intersection. We shall be concerned first of all with appraising the view that persistent US trade deficits are largely explained by ‘overconsumption’ or, equivalently, a shortage of saving by US households. Next, we shall take up the issue of the implications of globalization, and more specifically what is commonly called the global dis-integration of production, for inequality and household saving within the industrialized nations. We shall argue that the rising economic inequality, the debt surge and the decline of household saving are closely connected to the far-reaching push by US-based corporations to improve earnings by shifting production to LDCs. We have argued that the surprising muscularity of the US consumer is partly the result of financial innovations and practices that have effectively shifted the demand for household IOUs. Given that a substantial faction of new securities backed by credit card, installment, student loan, home equity, or other consumer receivables is placed in foreign-owned portfolios, is it accurate to claim (as some have) that US lifestyles...

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