Blog Post #2: Household Deleveraging Among Income Levels

Dr. Colman and I decided to shift gears in our research, and rather than pursue the tertiary effects of the Affordable Care Act on household formation, we are instead pursuing research into the household de-leveraging process among income levels. De-leveraging is a reduction in debt-burdens, such as by paying off one’s debt. This is a good thing, however when households choose to deleverage rather than consume goods and services, economic growth slows.

Households also have different spending habits depending on their income level. The wealthier are said to have a lower marginal propensity to consume, and prefer to save more. Whereas lower income households will spend more of each dollar they earn, and save less.

The Great Recession was a balance sheet recession, and we saw deleveraging taking place among all income levels. But has that changed? Recent research from the Federal Reserve suggests that the deleveraging process might be officially over. Dr. Colman and I want to see if this is the case, or if perhaps deleveraging has only ended among higher income levels, which might be restraining consumption spending in the near-term.

We are using data from the Survey of Consumer Finances & the Panel Study of Income Dynamics. Preliminary testing suggests that the wealthier may have finished deleveraging, and this has accounted for the muted patterns in consumption spending we have seen lately. This means that lower and middle income households still need to deleverage, and once they do, we should consumption spending and economic growth to pick up further!

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