Finance

 and  the  Dynamics  of  Demand:  

Minsky  for  the  21st  Century  
Steven  Fazzari  
Washington  University  in  St.  Louis  
Departments  of  Economics  and  Sociology  
Minsky  Seminar—June  2016  
Plan  for  Two  Lectures  

•  Part  1:    Minsky  theory  of  the  firm  =>  financial  instability  
•  Investment:    intrinsic  finance-­‐spending  nexus  
•  EvoluOon  of  financial  fragility  
•  Macroeconomic  financial  instability  
•  Part  2:  ConsumpOon,  inequality,  and  the  Great  Recession  
•  Proximate  source  of  recent  financial  crisis  is  household  sector  
•  Extend  Minsky  theory  of  finance-­‐spending  microfoundaOons  to  
consumers  
•  Apply  Minsky’s  financial  instability  macro  theory  to  explain  the  
macro  dynamics  that  caused  the  Great  Recession  
•  Link  these  dynamics  to  rising  inequality  
•  Develop  evidence  as  well  as  theory  
Behavior  and  Macro-­‐-­‐General  Thoughts  

•  MicrofoundaOons:  macro  results  linked  to  individual  

economic  units  
•  Two  interpretaOons    
•  Lucas  criOque:  narrow  modeling  strategies  and  “deep”  parameters  
•  ExploraOon  of  agent  behaviors  
•  Examples  abound  in  heterodoxy  
•  Keynes  and  uncertainty;  Kalecki  and  increasing  risk;  Eichner  and  
mega-­‐corps;  Davidson  and  liquidity  preference  …  
•  Key  disOncOons  
•  Isolated  agent  vs.  behaviors  emerging  from  social  interacOon  
•  Behavior  as  fundamental  vs.  imposed  by  technical  specificaOon  
Minsky  and  “Micro”  Behavior  
•  HPM  interpretaOon  of  Keynes:    
•  Investment  theory  of  output  
•  Financial  theory  of  investment  
•  Primary  locus  of  criOcal  behavior:  the  firm  
•  Firm  as  “acOve  agent,”  not  passive  repository  of  technology  
•  Investment  decisions  as  engine  of  macro  
•  Investment  must  be  financed    
•  Intrinsic  duality:    “real”  and  financial  
•  Note  emphasis  on  producOon;  contrast  with  mainstream  
exchange  economies  
•  Also,  behavior  of  “banks”  (concept  broadly  conceived  
as  providers  of  business  finance)  
•  Licle  emphasis  on  households  &  consumpOon  
Some  Investment  Basics    
•  The  “two-­‐price”  model:  demand  price  (PK)  and  supply  price  (PI)  
•  PK:  Quasi  rents  and  capitalizaOon  
•  Why  does  PK  decline  as  I  rises?    
•  Technology:  declining  marginal  producOvity  
•  Capacity  uOlizaOon:  investment  of  no  value  without  demand  
•  ExpectaOons  under  uncertainty;  issue  of  confidence  (Keynes,  GT,  
chapter  12;  Kalecki  “increasing  risk;”  Tracy  Moc)  
•  Supply  price  PI  :    costs  of  producOon  
•  Like  Tobin’s  Q  theory,  but  …  
•  ConcepOon  of  uncertainty  (Tymoigne  &  Wray)  
•  Market  equity  prices  may  not  fully  reflect  the  firm’s  percepOon  of  quasi  
rents  
 Investment Model Without Finance

Asset Negative slope: technology (mainstream)

Price & & uncertainty/confidence/utilization
Cost (Keynesian)

PK
“Supply price” of capital
PI

CF I*

Investment
Some  Observations  
•  Transform  verOcal  axis  to  rate  of  return  
•  Keynes:    marginal  efficiency  of  capital  equals  interest  rate  
•  Mainstream  model  in  this  framework  
•  PK  as  marginal  product  of  capital  (net  of  depreciaOon)  
•  Replace  uncertainty,  “animal  spirits,”  entrepreneurial  decisions  
with  technology:  from  acOve  to  passive  firms  
•  Real  interest  rate  as  a  “supply  price”  per  dollar  of  capital  invested  
(Jorgenson’s  “user  cost”  adjusts  for  taxes  and  depreciaOon)  
•  Finance  as  a  “sideshow:”  Modigliani  &  Miller,  Jorgenson  
•  Source  of  finance  irrelevant  (see  next  diagram)  
•  Link  to  Tobin’s  Q  theory  
 Source of Finance Does Not Matter for Investment

Asset
Price &
Cost

PK

PI

CF0 CF1 I*0= I*1

Investment
Minsky:  “Investment  is  a  Iinancial  
phenomenon”  (209  from  Stabilizing  …)    
•  “A  decision  to  invest  …  is  always  a  decision  about  a  liability  
structure”  (192);  finance  always  crucial  
•  Financial  effects  in  the  investment  diagram  
•  Internal  funds  
•  Borrowers’  risk  (subjecOve)  
–  Concern  control  of  assets;  future  access  to  funds  
–  AcOve  entrepreneurial  percepOon;  not  necessarily  in  market  prices  
–  Further  deviaOon  from  convenOonal  Q  theory  
–  Complementary  story:  Crocy  and  corporate  control  
•  Lenders’  risk  (in  contracts);  credit  crunches  and  freeze  ups  
•  Margins  of  safety  
•  Uncertainty  and  fundamentals  of  firm  /  lender  behavior  
 Minsky Investment Model: The Role of Finance

Asset
Price & Borrowers’  
Cost Risk  

PIM
Lenders’  
Risk  
PK*

PI

PKM

CF I Minsky I*

Investment
What  Drives  Investment?  
 
•  ExpectaOons  of  quasi-­‐rents  
•  Technology  and  market  opportuniOes  
•  Capacity  uOlizaOon:  state  of  the  output  market  
•  Confidence  (even  for  internally  financed  I)  
•  Digression  on  uncertainty,  Obama,  and  the  economy  

•  Evolving  condiOons  of  finance  

•  Changes  in  cash  flow  (link  to  Bhaduri-­‐Marglin,  Blecker,  …)  
•  Confidence  and  borrowers’  risk  (link  to  Kalecki,  Moc,  …)  
•  Confidence  and  lenders’  risk  
•  What  “margin  of  safety?”  
•  Investment  decision  is  a  finance  decision  
Finance  and  Saving  

•  Minsky:    finance  drives  investment  

•  Contrast  with  “scarce  saving”  perspecOve  
•  Constraint  is  not  aggregate  saving  
•  Investment  creates  saving  through  the  mulOplier    
•  Keynes  GT,  chapter  14  

•  Constraints  are  imposed  by  micro-­‐level  decisions  to  

finance  capital  expenditure  (borrowers  and  lenders)  
•  Micro  finance  decisions  draw  on  endogenous  money  
•  Investment  financed  at  micro  level  will  generate  macro  saving  
endogenously  

•  Fundamental  micro  /  macro  interacOon  

Review  of  the  Evidence  
•  Cash  flow  and  Investment  (micro,  see  diagram)  
•  Huge  literature  
•  IdenOficaOon  and  “heterogeneity”  
•  Recent  counter-­‐revoluOon;  but  finance  effects  widely  accepted  
•  Debt  and  interest  effects  (micro)  
•  Model  =>  higher  debt  leverage  raises  borrowers’  and  lenders’  risk  =>  
lower  investment  
•  Ambiguous  empirical  effects  of  leverage  (problem  of  correlaOon  with  
investment  “shock”)  
•  Ndikumana,  JPKE  
•  Credit  channel  (macro)  
 Minsky Investment Model: Increase in CF

Asset
Price &
Cost

PI0 PI1

PK*

PI

PK1
PK0

CF0 CF1 I0 I1 I*

Investment
Minsky  and  the  Mainstream  –  His  View  (**)    

•  “As  the  standard  interpretaOon  of  Keynes  was  assimilated  to  

tradiOonal  economics,  the  emphasis  upon  finance  and  debt  
structures  that  was  evident  in  the  1920s  and  1930s  was  lost.    
In  today’s  standard  economic  theory,  an  abstract  nonfinancial  
economy  is  analyzed”  (193)  
•  Modigliani-­‐Miller  &  Jorgenson  
•  Largely  true  for  much  of  Minsky’s  career  (1950s  –  1970s),  but  
changes  in  1980s  
Minsky  and  the  Mainstream  –  Update  (**)    

•  Newer  features  of  mainstream  models  

•  MicrofoundaOons  with  asymmetric  informaOon  
•  IntermediaOon  as  “technology;”  financial  innovaOon  raises  
producOvity  
•  Financial  “shocks”  propagate  and  possibly  iniOate  real  fluctuaOons  
•  A  possible  new  classical  story  for  the  financial  crisis  
•  Credit  channel  for  monetary  policy  (new  Keynesian  models)  

•  But  missing:  
•  “ImperfecOons”  vs.  Minsky:    finance  as  fundamental  to  capitalism  
•  Importance  of  uncertainty  
•  Macro  dynamics  of  finance:  systemaOc  tendency  to  fragility  (vs.  
equilibrium  driven  by  shocks)  
•  Bank  &  finance  behavior  that  magnifies  instability  (see  Dymski)  
•  Destabilizing  innovaOon  to  avoid  financial  regulaOon  
Micro  to  Macro:  Dynamics  of  Financial  
Instability  

•  Extend  staOc  model  from  diagram  with  explicit  

dynamics  for  key  variables  
•  Explore  the  dynamic  demand  generaOng  process  in  
the  context  of  an  “intrinsic  Keynesian  model”  
•  Demand  not  “automaOc”  over  any  horizon  

•  Complements  more  abstract  demand-­‐driven  growth  models  in  

tradiOons  of  Kalecki  and  Harrod  

•  Endogenous  transiOon  from  stable,  robust  financial  

structure  to  financial  fragility  
Validation:  Minsky  is  a  Keynesian  
•  Begin  with  “conservaOve”  financial  structure  
•  More  aggressive  finance  =>  more  spending  =>  more  
income  to  “validate”  aggressive  posiOons  
•  Keynesian  demand  effects  raise  output,  income,  and  
cash  flow  
•  Kaleckian  perspecOve:  investment  generates  profits  
•  Asset  prices  and  collateral  values  
•  Proximate  constraint  on  output  is  demand  =>  the  more  
acOvity  is  financed  the  greater  the  cash  flows  
•  Most  of  the  Ome;  supply  constraints  rare  
•  Contrast  with  mainstream  New  Keynesian  view  
•  Process  can  conOnue  for  years;  not  just  “short  run”  
•  Fundamental  direcOon  of  instability  is  upward  
Rising  Financial  Fragility  
•  ValidaOon  =>  more  aggressive  and  more  risky  financial  
pracOces  that  systemaOcally  increase  financial  fragility  
•  Share  of  external  finance:  debt  raOos  
•  Long-­‐term  to  short-­‐term  financing  
•  Hedge,  SpeculaOve,  Ponzi  
•  Need  to  roll  over  short-­‐term  financing  of  long-­‐lived  assets  
•  Shiu  from  financing  based  on  cash  flow  to  financing  
based  on  assets  prices  and  collateral  
•  InsOtuOonal  change  
•  InnovaOon  to  facilitate  credit  expansion  
•  Circumvent  regulaOon  
•  Reduced  borrowers’  and  lenders’  risk  (percepOons)  
•  Again,  fundamental  direcOon  of  instability  is  upward  
Role  of  Uncertainty  in  Dynamics  (**)  
•  Minsky  perhaps  less  emphasis  on  uncertainty  than  others.    
(Davidson,  Crocy,  discussion  in  T&W)  
•  But  it  plays  a  fundamental  role  
•  “Success  breeds  a  disregard  of  the  possibility  of  failure”  (237);  supports  
upward  direcOon  of  instability  
•  Because  of  uncertainty,  percepOons  of  risk  and  acceptable  financial  
structure  evolve;    
•  ConvenOon  becomes  more  risky;  drives  systemaOc  dynamic  toward  more  
fragile  finance  
•  Dymski:  Agents  “mistake  uncertainty  for  risk.”    Assume  risk  could  be  
managed  with  quanOtaOve  finance.    
•  Agents  do  no  understand  the  failure  of  staOonarity  /  ergodicity  
•  Importance  of  social  environment  for  percepOon  of  risks  and  validaOon;  not  
atomisOc  agents  
•  Again,  fundamentals  of  behavior  
Are  Agents  “Irrational?”  (**)  
•  Bernanke  comment  (1983,  AER):  If  fragility  is  systemaOc,  why  is  
it  not  anOcipated?  
•  ConcepOon  of  uncertainty  
•  Role  of  convenOon  and  generalized  “adapOve”  expectaOons  
•  Backward-­‐looking  “quant”  modeling  
•  Behavioral  psychology  and  social  herding;  how  do  agents  
behave  in  an  uncertain  world?  
•  1995  JFS:    “Units  live  in  a  world  with  intractable  uncertainty;  not  
only  is  their  foresight  imperfect,  but  sensate  agents  know  that  their  
foresight  is  imperfect.”  
•  Social  convenOons  validate  expectaOons  in  an  uncertain  world;  a  
sense  of  “safety  in  numbers”  
Stress  Test  Metaphor:  Validation  &  
Fragility  

•  Add  “stress”  (more  financial  fragility)  as  long  as  system  doesn’t  
“break”  (validaOon)  
•  Point  of  failure  as  “the  Minsky  Moment”  
•  Logic  of  system  =>  it  must  eventually  “break”  
•  Otherwise,  add  more  stress  (someone  will  make  money  if  the  system  
doesn’t  break)  
•  ValidaOon  =>  fragility  did  not  create  failure  =>  behaviors  that  raise  
fragility  …  unOl  breaking  point  
Financial  Recession  Instability  Leading  
to  the  Great  Recession  
•  Most  significant  financial  crisis  since  1930s  
•  Clear  that  household  debt  and  consumer  spending  played  a  
significant  role  
•  Fits  broad  outline  of  Minsky  process:    finance  as  a  source  of  
instability  
•  Details  less  clear:    must  shiu  focus  from  firms  to  households  
 
 A  Minsky  Crisis  Rooted  in  the  Household  
Sector  and  Consumption  

Steven  Fazzari  
Washington  University  in  St.  Louis  
Departments  of  Economics  and  Sociology  
Minsky  Seminar—June  2016  
Investment  or  Consumption?  
•  Minsky:    Instability  from  investment  finance  
•  Recognize  role  of  household  but  “fairly  well  known  and  relaOvely  
stable”  (35);  contrast  with  investment  
•  “Behavior  of  consumpOon  [is]  secondary”  (191)  
•  Why?    U.S.  consumpOon  in  Minsky’s  formaOve  years  
•  Strong  and  stable;  based  on  wage  growth  
•  Limited  household  finance  
•  Mortgages:    low,  fixed  interest  rates,    20%+  down  payments;  
stable  housing  prices  
•  Auto  loans:    relaOvely  short  terms;  collateral  
•  Locus  of  financial  instability  for  most  of  Minsky’s  historical  
experience  was  the  business  sector  
Shift  of  Microfoundations  
•  Premise:    basic  Minsky  theory  provides  a  powerful  framework  
for  understanding:    
•  “Consumer  Age”  increase  of  household  sector  financial  fragility  
•  Dynamics  of  Great  Recession  crisis  
•  Requires  shiu  of  emphasis  to  households  
•  Central  role  of  rising  income  inequality  (not  evident  in  Minsky  
theory  of  firm  and  investment)  
•  Challenges  to  growth  and  recovery  going  forward  
Plan  for  Lecture  
•  Review  a  few  facts  
•  Rising  household  fragility  leading  up  to  2008  
•  Great  Recession  collapse  and  stagnant  auermath;  more  dramaOc  
with  some  original  measures  of  the  household  sector  
•  ConsumpOon-­‐finance  nexus  is  central  to  macro  dynamics  
•  Extend  Minsky  to  consumpOon  and  households  
•  MicrofoundaOons  of  household  spending  and  finance  behavior  
•  Analogous  to  Minsky  theory  of  the  firm  
•  Emphasize  intrinsic  relaOon  between  spending  and  finance    
•  New  research  on  the  role  of  inequality  
•  ImplicaOons  for  the  auermath  of  the  Great  Recession:  secular  
stagnaOon  
Some  Notes  on  Measurement  
•  Key  quesOon:    demand  from  the  household  sector?  
•  New  Cynamon-­‐Fazzari  work  
•  Get  rid  of  implicit  owner-­‐occupied  components  for  housing  
•  Replace  with  residenOal  construcOon  
•  Medical  care:  who  pays?  
•  Consistent  framework  for  measuring  demand  
•  PracOcal  integraOon  of  consumpOon  and  residenOal  
construcOon  
The  Consumer  Age  
•  Good  macro  performance  in  1960s  with  stable  (or  falling)  
household  spending  share  
•  Strong  trend  of  U.S.  household  demand:    mid  1980s  to  2007  
•  Stable,  rising  consumer  spending  perhaps  the  most  important  
cause  of  the  so-­‐called  “Great  ModeraOon”  in  the  U.S.  
•  ValidaOon;  central  feature  of  several  decades  of  dynamic  demand  
generaOon  
•  But  associated  with  dramaOc  rise  in  debt  to  income:  fragility  
•  Collapse  of  the  Great  Recession  
•  Much  more  evident  in  cash  flow  (adjusted)  data  
•  ResidenOal  construcOon  rather  than  implicit  rent  
 Household Demand to Adjusted Disposable Income vs. NIPA PCE to
NIPA Disposable Income

102%

100%

98%

96% Positive Trend?

94%

92%

90%

88%

86%

84%

82%
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Adj. Household Demand / Adj. Disp. Income

NIPA PCE / NIPA Disp. Income
 Household  Debt  to  Income:  Two  Measures  
180%

160%

140%

120%

100%

80%

60%

40%

20%

0%
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Adjusted Debt to Income Ratio

Standard Debt to Income Ratio
 Measures  of  Household  Saving  Rate:  Further  Signs  of  Fragility  
15%

10%

5%

0%

-5%

-10%

-15%
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013
NIPA Saving Rate Adj. Gross Household Saving Rate Adj. Financial Saving Rate
The  Message  
•  Household  spending  dynamics  central  to  shiu  from  Great  
ModeraOon  to  Great  Recession  
•  Finance  played  central  role  
•  Strong  consumpOon  growth  as  important  engine  of  demand  =>  
validaOon;  much  of  it  externally  financed  
•  Rising  fragility  in  the  household  sector  
•  Debt  to  income;  saving  rate;  credit  terms  …  
•  Minsky  story,  applied  to  households  
Mainstream  Consumption  Theory  (**)  

•  HPM  (again):    “In  today’s  standard  economic  theory,  an  abstract  

nonfinancial  economy  is  analyzed”  (193)  
•  ConvenOonal  life-­‐cycle  model  /  consumpOon  smoothing  
•  Largely  dominates  for  much  of  Minsky’s  career  
•  Basic  demographic  story  fails  miserably  in  Consumer  Age  
•  Wealth  effects  
•  Possibly  relevant  for  high-­‐income  households  
•  Slower  income  growth  for  most  households:  PV  of  future  income  
falls  =>  weak  consumpOon  
•  Ambiguity  of  housing  wealth  effects  (contrast  with  collateral  effect)  
Mainstream  Links  between  
Finance  and  Consumption  
•  Has  finance  trickled  in?  
•  Analogy  to  “capital  market  imperfecOons”  &  investment  
•  Liquidity  constraints  
•  But  were  households  moving  toward  “opOmal  path”  in  consumer  
age??  
•  Minsky-­‐like  microfoundaOons  lead  to  becer  insights  
Dynamics  of  Household  
Borrowers’  Risk  
•  InsOtuOonal  change  
•  Tax  reform  &  home  equity  loans  =>  change  in  perspecOve  on  
borrowing  against  home  equity  
•  Falling  interest  rates  and  habit  of  refinancing  
•  Experience  and  changing  convenOon  –  Uncertainty    
•  Shiu  of  norms:  spending  and  finance  
•  Social  context  of  microfoundaOons  
 
Keynesian  Validation  
•  Finance  sOmulates  demand  
•  Strong  demand  drives  incomes  
•  Great  ModeraOon  and  “mild  recessions”  
•  ParOal  result  of  consumpOon-­‐debt  engine  
•  ConsumpOon  and  housing:    big  quanOtaOve  effects  
•  PCE  +  ResidenOal  ConstrucOon  (68%  to  74%  of  GDP  since  1990)  
•  Compare  with  business  investment  (11%  to  14%  of  GDP  since  1990)  
•  Asset  prices  (mostly  houses)  
•  Wealth  effects  on  spending  
•  Collateral  and  borrowing  
•  ExpectaOons  and  confidence  
•  Consistent  with  Minsky  validaOon  process  for  investment  
Minsky  Dynamic  of  Rising  
Financial  Fragility  
•  Success  =>  more  aggressive  lending  &  borrowing  
•  Shiu  toward  short-­‐term  financing  
•  Teaser  rates;  expectaOon  of  refinance  (speculaOve)  
•  Borrowing  to  pay  interest  (Ponzi)  
•  IrraOonal?    Refinancing  into  low-­‐rate  markets  worked  for  two  
decades,  validaOng  convenOon  in  uncertain  world  
•  Stress  test  metaphor  again  
•  When  test  item  doesn’t  break,  provides  validaOon  
•  But  addiOon  of  stress  leads  to  more  fragility  
Dynamics  of  Lenders’  Risk  
•  Financial  innovaOon  breeds  fragility  
•  New  world  of  credit-­‐scoring  technology  
•  Validated  by  Great  ModeraOon,  tech  bubble  strength,  etc.    
•  Assisted  by  perspecOve  of  modern  finance  
•  False  percepOon  of  risk  management  
•  Assumed  Ome-­‐invariant  probability  distribuOons  
•  Lenders’  risk  dynamic  
•  Again,  “Success  breeds  a  disregard  of  the  possibility  of  failure”  (237);  Curry  
quote;  next  page  
•  Hubris  &  bullish  “convenOon”  vs.  “moral  hazard”  of  bailouts  
•  Implicit  Fed  “bailouts”  of  previous  fragility  did  encourage  increasingly  risky  
behavior  
•  But  people  believed  in  a  “new  era”  
•  Great  ModeraOon:    sows  the  seeds  of  own  destrucOon  
In  Their  Own  Words  …  
•  Boykin  Curry,  managing  director  of  Eagle  Capital:  "For  20  years,  the  
DNA  of  nearly  every  financial  insOtuOon  had  morphed  dangerously.  
Each  Ome  someone  at  the  table  pressed  for  more  leverage  and  more  
risk,  the  next  few  years  proved  them  'right.'  These  people  were  
emboldened,  they  were  promoted  and  they  gained  control  of  ever  
more  capital.  Meanwhile,  anyone  in  power  who  hesitated,  who  argued  
for  cauOon,  was  proved  'wrong.'  The  cauOous  types  were  increasingly  
inOmidated,  passed  over  for  promoOon.  They  lost  their  hold  on  capital.  
This  happened  every  day  in  almost  every  financial  insOtuOon  over  and  
over,  unOl  we  ended  up  with  a  very  specific  kind  of  person  running  
things."    
•  Quoted  in    Farid  Sakaria  column  "There    is  a  Silver  Lining,"  Newsweek,  October  12,  2008,  emphasis  added  
Financial  System  Softens  Budget  Constraints  

•  Minsky  (1992):    When  we  go  to  the  theater  we  enter  into  a  
conspiracy  with  the  players  to  suspend  disbelief.  The  financial  
developments  of  the  1980s  can  be  viewed  as  theater:  promoters  and  
por|olio  managers  suspended  disbelief  with  respect  to  where  the  
cash  would  come  from  that  would  [validate]  the  projects  being  
financed.  Bankers,  the  designated  skepOc  in  the  financial  structure,  
placed  their  criOcal  faculOes  on  hold.    
•  Replay  in  the  “consumer  age”  
•  Strong  incenOves  for  people  to  maintain,  even  increase,  consumpOon  
in  face  of  unfavorable  financial  circumstances  
•  Financial  system  “suspended”  its  role  as  budget  constraint  enforcers  
•  Result  of  specific  historical  process,  but  part  of  systemaOc  pacern  
•  Stress  test  again  
•  PerspecOve  on  irresponsible  behavior  
Role  of  Inequality  
(Share  of  top  5%  -­‐-­‐World  Top  Incomes  Data  with  Capital  Gains)  

40%

35%

30%

25%

20%

15%

10%
1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010
Paradox:  Strong  Consumer  Spending  with  
Rising  Inequality  

•  Look  beyond  aggregates  …  

•  What  was  happening  to  spending  and  debt  across  income  classes?  

•  Survey  of  consumer  finance  for  debt  

•  Data  challenges  for  spending  and  saving  

•  Mark  Zandi  (plus  a  lot  of  work)  for  spending  rates  
 Who Was Borrowing? (SCF)
Household Debt / Disposable Income

200%

175%

150%

125%

100%

75%

50%

25%
1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Debt / Income, Bottom 95% Debt / Income, Top 5%

 Disaggregated Demand and Outlay Rates
(Credit Crunch vs. Consumption Smoothing)
100%

95%

90%

85%

80%

75%

70%
1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012
Consumption Rate 95% Consumption Rate 5%

Outlay Rate 95% Outlay Rate 5%

Collapse  of    
Demand  Generation  Process  

•  Loss  of  debt-­‐financed  spending  by  the  middle  class  

•  Deep  recession    

•  Stagnant  recovery  (“secular  stagnaOon)  

•  Rising  inequality  is  a  prime  suspect  

•  Some  analysis  …  
Rising  Inequality  in  a  Simple  Keynesian  
Growth  Model  
•  Demand-­‐led  growth  model,  augmented  with  two  
consumpOon  classes  
•  PropensiOes  to  consume  from  our  disaggregated  analysis  
•  Top  –  0.82;  Bocom  –  0.92  
•  Marginal  tax  rates    
•  Top  –  0.40;  Bocom  –  0.20  
•  Pre-­‐tax  income  share  for  top  5%:  from  23%  to  37%  
•  Result:  income  distribuOon  shiu  lowers  growth  path  by  9.5%  
•  Cynamon-­‐Fazzari,  European  Journal  of  Economics  and  
Economic  Policy,  2015  
 Weak  Consumption  and  the  Stagnant  Recovery  
(Adjusted  Household  Demand  ProIiles)  
125%

120%

115%

110%

1973-1980
105% 1979-1986
1990-1997

100% 2000-2007
2006-2013

95%

90%

85%
0 1 2 3 4 5 6 7
Years Since Pre-Recession Peak
 80
100
120
140
160
180
200
220
240
260
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000

Bottom 95%
2001
2002
2003
2004
2005
Top 5%
2006
Economic  Democracy?  

2007
2008
2009
2010
2011
2012
Challenges  Going  Forward  
•  Compromised  aggregate  demand  generaOng  process  
•  Deleveraging  level  effect  and  loss  of  growth  
•  At  least  10%  below  pre-­‐2007  trend;  gap  not  closing  
•  “Dumbing  down”  of  potenOal  output  esOmates  
•  Minsky  “cleansing”  stage  of  cycle  perhaps  less  effecOve  with  
households  
•  Compromised  financial  units  not  wiped  out  
•  Decentralized  units  
•  DistribuOonal  controversies  salient  with  “bailouts”  
•  ConsumpOon  large  relaOve  to  investment  
•  Rising  inequality  &  secular  demand  drag  
Right  Insights,  Once  Again  
•  Minsky’s  “passive”  concepOon  of  consumpOon  understandable,  
although  it’s  different  this  Ome  
•  But  framework  of  the  Financial  Instability  Hypothesis  provides  
central  insight  
•  Historical  specificity  of  each  cycle  /.  family  resemblance  across  
cycles  
•  Not  just  a  generic  model;  need  tools  of  history  
•  Minsky’s  own  method