Spending by Bottom-80% U.S. Households Is Persistently Greater than Income. What Funds the Deficit?

Roth, Steve (2021): Spending by Bottom-80% U.S. Households Is Persistently Greater than Income. What Funds the Deficit?

Abstract

This paper explores economic measures that are surprisingly hard to assemble: US household income quintiles’ annual spending relative to annual income. The total sector’s income-minus-spending surplus is heavily dominated by the top 20%. The bottom 80% runs persistent spending deficits, implying ongoing asset disaccumulation; the bottom 80%’s annual “propensity” to spend relative to income, or spending multiplier, is greater than one. This spending deficit is found to be largely explained or “funded” by two additional asset sources that are not included in income: borrowing from the financial/banks sector, and — to a far greater extent — capital gains on asset holdings.

• Item Type: MPRA Paper
• Language: English
• Keywords: propensity; marginal; income; disposable income; personal income; capital gains; household; balance sheet; spending; saving; holding gains; borrowing; liabilities; assets; quintile; multiplier
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Household Saving; Personal Finance; D - Microeconomics > D3 - Distribution > D31 - Personal Income, Wealth, and Their Distributions; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth

References

Fisher, Jonathan D., David S.Johnson, Timothy M. Smeeding, and Jeffrey P. Thompson. 2020. “Estimating the marginal propensity to consume using the distributions of income, consumption, and wealth.” Journal of Macroeconomics, Vol. 65.

Mian, Atif, Ludwig Straub, and Amir Sufi. 2021. “What explains the decline in r*? Rising income inequality versus demographic shifts,” presented at the Federal Reserve 2021 Jackson Hole conference. kansascityfed.org/documents/8337/JH_paper_Sufi_3.pdf

Roth, Steve. 2021. “Why the Flow of Funds Don’t Explain the Flow of Funds: Sectoral Balances, Balance Sheets, and the Accumulation Fallacy.” Working paper: mpra.ub.uni-muenchen.de/109976/8/MPRA_paper_109976.pdf

Smeeding, T.M. and J.P. Thompson. 2011. “Recent trends in the distribution of income: labor, wealth and more complete measures of well being.” Res. Labor Econ, May.