Staff Reports
Modigliani Meets Minsky: Inequality, Debt, and Financial Fragility in America, 1950-2016
Number 924
May 2020

JEL classification: D14, D31, E21, E44

Authors: Alina K. Bartscher, Moritz Kuhn, Moritz Schularick, and Ulrike I. Steins

This paper studies the secular increase in U.S. household debt and its relation to growing income inequality and financial fragility. We exploit a new household-level data set that covers the joint distributions of debt, income, and wealth in the United States over the past seven decades. The data show that increased borrowing by middle-class families with low income growth played a central role in rising indebtedness. Debt-to-income ratios have risen most dramatically for households between the 50th and 90th percentiles of the income distribution. While their income growth was low, middle-class families borrowed against the sizable housing wealth gains from rising home prices. Home equity borrowing accounts for about half of the increase in U.S. housing debt between the 1980s and 2007. The resulting debt increase made balance sheets more sensitive to income and house price fluctuations and turned the American middle class into the epicenter of growing financial fragility.

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AUTHOR DISCLOSURE STATEMENT(S)
Alina K. Bartscher
I, Alina Kristin Bartscher, declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Moritz Kuhn
I, Moritz Kuhn, declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Moritz Schularick
I declare that I have no relevant or material financial interests that relate to the research described in this paper.

Ulrike I. Steins
I, Ulrike Isabel Steins, declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.