Debt-driven growth? Wealth, distribution and demand in OECD countries

The paper investigates the effects of changes in the distribution of income and in wealth on aggregate demand and its components. We extend the Bhaduri and Marglin (1990) model to include personal income inequality as well as asset prices and debt. This allows for an evaluation of the wage or profit-led nature of demand regimes, of the expenditure cascade argument (Frank et al. 2010) and several hypotheses regarding the effects of wealth and debt. Our estimates are based on a panel of 18 OECD countries covering the period 1980-2013. For the full panel the average demand regime is found to be wage led. We fail to find effects of personal inequality, but do find strong effects of debt and property prices which have been the major drivers of aggregate demand in the decade prior to the 2007 crisis

Expenditure Cascades, Low Interest Rates or Property Booms? Determinants of Household Debt in OECD countries

The past decades have witnessed a strong increase in household debt and high growth of private consumption expenditures in many countries. This paper empirically investigates four explanations: First, the expenditure cascades hypothesis argues that an increase in inequality induced lower income groups to copy the spending behaviour of richer peer groups and thereby drove them into debt (‘keeping up with the Joneses’). Second, the housing boom hypothesis argues that increasing property prices encourage household spending and household borrowing due to wealth effects, eased credit constraints and the prospect of future capital gains. Third, the low interest hypothesis argues that low interest rates encouraged households to take on more debt. Fourth, the financial deregulation hypothesis argues that deregulation of the financial sector boosted credit supply. The paper tests these hypotheses by estimating the determinants of household borrowing using a panel of 11 OECD countries (1980-2011). Results indicate that real estate prices and low interest rates were the most important drivers of household debt. In contrast the data does not support the expenditure cascades hypothesis as a general explanation of debt accumulation across OECD countries. Our results are consistent with the financial deregulation hypothesis, but its explanatory power for the 1995-2007 period is low

How to boost the European Green Deal’s scale and ambition

The European Green Deal (EGD) is the European Union’s flagship strategy to tackle climate change. This policy paper compares the ambition and scale of the EGD with the current relevant scientific literature. The goal is to assess whether the current proposals are capable of fulfilling the EU’s commitment to limit global warming to 1.5°C in line with the Paris Agreement. Before embarking on the details of that question it is crucial to emphasize three core messages which emerge from climate science: 1. Tackling climate change requires that greenhouse gas emissions (GHG) are cut to net zero. Importantly, this net zero goal allows for positive emissions as long as they are offset by negative emissions. However, the technological and ecological uncertainties involved in large scale deployment of negative emissions technologies, means the emissions goal should be thought of as being close to an absolute zero goal. 2. There is not much time left to take action globally and in Europe. The latest estimates of global, as well as European carbon budgets, suggest that at current emission rates global warming will increase by more than 1.5°C in less than ten years. In addition, self-reinforcing feedback loops which push earth onto an irreversible warming path (hothouse earth) might set in from global temperature increases as little as 2°C. 3. The price of inaction will be high and most likely underestimated by the general public. While Europe will not suffer the worst consequences of climate change, heat waves, floods and droughts will still cause severe human suffering and economic damage. In addition, by 2070 up to 3.5 billion people could live in regions unsuitable for human habitation. This has the potential to trigger an unprecedented global migration wave. The question which emerges against this background is whether the EGD is ambitious enough to avoid the worst consequences of climate change. First, and most important, is the overall emissions reduction targets. While the EGD proposes to cut emissions by 50% to 55% percent by 2030 compared to 1990 levels, recent research suggests that in order to stay well below 2°C, a reduction of 65% by 2030 would be required, as would reaching net zero by 2040 rather than 2050. The EGD currently assumes that reducing GHG emissions by 40% by 2030 requires additional annual investments of € 260 billion. This is likely an underestimation of the volume of required investments for several reasons. First, increasing the reduction target towards 55% or even 65% will require faster and broader action. Second, increasing energy efficiency renovation of buildings alone is likely to require annual investments of € 490 billion. Third, scaling up Research and Development (R&D) investment to 3% or 4% of GDP in the EU27 requires additional annual investments of between € 75 and € 200 billion. Many of the required carbon neutral processes, especially in manufacturing, do not exist yet, and will require an increased expenditure in R&D for a successful transition. Taken together, this suggests that annual investment requirements of up to € 855 billion in the EU27 would be required for a successful transition. Setting and delivering on more ambitious GHG emission reduction targets requires the use of all possible policy tools. The EGD is a promising start in this context as it relies on a broad set of instruments from regulations, carbon markets, taxes and public investment. Given the limited time available the EGD should go a step further and upgrade the Sustainable Europe Investment Plan into a comprehensive climate master plan which determines clear targets and timelines for renewable energy capacity, building renovations, transport infrastructure, R&D targets etc. This would not only provide the private sector with clear long-term signals but also allow for timely monitoring of the EU’s progress

Determinants of US Household Debt: New Evidence from the SCF

This paper investigates the factors driving US household borrowing up to 2007. Two popular explanations are tested: First, the expenditure cascades hypothesis based on the assumption of debt-financed expenditures driven by an increasingly polarised distribution of income (‘keeping up with the Joneses’) and second, the hypothesis of Minskyian households which identifies climbing real estate prices as the decisive factor in household debt accumulation (re-mortgaging in order to cash in on capital gains and rising loan-to-value ratios in property purchases). This paper develops a method for obtaining individual household borrowing figures despite the lack of a panel structure from the Survey of Consumer Finances (SCF); it is the first to use the high quality information the SCF provides to investigate the impact of shifts in the income distribution and asset prices on household borrowing. The findings indicate that it is the interaction between the concentration of income at the top of the distribution and rising real estate prices which explains a large fraction of the increase in household borrowing prior to 2008. Therefore, neither the expenditure cascades hypothesis nor the hypothesis of Minskyian households are, in isolation, sufficient in order to understand household debt accumulation and thus the paper calls for a synthesis: future research should analyse the role of the distribution of income and asset prices together rather than separately

Expenditure cascades, low interest Rates, credit deregulation or property booms? Determinants of household debt in OECD countries

The past decades have witnessed a strong increase in household debt and fast growth of private consumption expenditures in many countries. This paper empirically investigates four explanations: First, the expenditure cascades hypothesis argues that an increase in inequality induced lower income groups to copy the spending behaviour of richer peer groups and thereby drove them into debt (‘keeping up with the Joneses’). Second, the housing boom hypothesis argues that increasing property prices encourage household spending and household borrowing due to wealth effects, eased credit constraints, the prospects of future capital gains and changes in mental accounts. Third, the low interest hypothesis argues that low interest rates encouraged households to take on more debt. Fourth, the credit market deregulation hypothesis argues that deregulation boosted credit supply. The paper tests these hypotheses by estimating the determinants of household borrowing using a panel of 13 OECD countries (1980-2011). Results indicate that real estate prices were the most important drivers of household debt which we interpret as the result of speculative dynamics in real estate markets. In contrast we do not find a significant impact of shifts in the income distribution on household sector indebtedness. Our results are consistent with the credit deregulation and low interest rate hypotheses, but their explanatory power for the 1995-2007 period is low

The good life at the top: analysing The Sunday Times Rich List 1989-2023

Each spring, The Sunday Times Rich List (STRL) is published, inviting us as a country to reflect on the question of wealth inequality. When the STRL was first published in 1989, The Queen sat at the top of the list. Today, The King has been pushed down to 263rd place, as business owners, aristocrats, celebrities, and others have accumulated vast and unimaginable fortunes. In this short report, we present six key findings from a new research project analysing the STRL. The report utilises a novel dataset that has been constructed from archives of the rich list from 1989 to 2023. This dataset provides a unique opportunity to analyse the wealth of the very richest households, who tend to not be captured by other existing data sources

The good life at the top continued: analysing the Sunday Times Rich List 1989-2024

Each spring, The Sunday Times Rich List (STRL) is published, inviting us as a country to reflect on the question of wealth inequality. When the STRL was first published in 1989, The Queen sat at the top of the list. Today, The King has been pushed down to 258th place, as business owners, aristocrats, celebrities, and others have accumulated vast and unimaginable fortunes. In this short report, we present four key findings from a research project analysing the STRL. The report utilises a novel dataset that has been constructed from archives of the rich list from 1989 to 2024. This dataset provides a unique opportunity to analyse the wealth of the very richest households, who tend to not be captured by other existing data sources. This report updates the previous 2023 report