Can We Count on Macro-Economists to Analyze the Impacts of Inequality?

Prior to the crash, only a very few macro-economists were studying consumer borrowing and fewer still were investigating inequality of income or of wealth as an important macro-economic factor. Work in macro-economics is done at academic institutions, the Fed, think tanks and government and private enterprises. Historically, very few PhD dissertations in macro-economics dealt with consumer finance or consumer spending or inequality issues. Prior to the crash there was a divide between the small minority (which included some high prestige folks such as Joseph Stiglitz) and the dominate majority. Both sides make extensive use of mathematical formulae but the majority looks more like physics and the minority may include a dose of sociology.  This is important stuff because government fiscal policy and even monetary policy and private business decisions are often based on the work of these folks. The majority tended to believe that humans act rationally while the minority helped develop the field of behavioral economics. 

National economic performance is based mostly on business investment, government spending and consumer spending with an additional factor rooted in the import-export balance. In the U.S. the role of consumer spending in that growth increased significantly in importance in the run-up to the crash. Some very few economists noted this development before the crash and began to recognize that consumer spending and borrowing, particularly on housing is a macro factor that could strengthen or topple the economy. 

Once the crash occurred, this issue drew increased scrutiny. Fast forward to the past year or three and the minority is growing a bit in numbers and even more in spotlight and the inequality folks have noted that the upsurge in consumer spending from 1990 - 2007 was based NOT on rising incomes for the bottom four quintiles; rather, in the early 1990's it was based mostly on credit card borrowing, and in the late 1990's and early 2000's it was based mostly on home equity withdrawals and increased home ownership and home prices. 

At the same time, attention turned to why this recovery is/was so much slower and shallower than recoveries following most recessions. One area of inquiry that is being put forward is that since wages are stagnant or falling and since increased borrowing (other than student loans and sub-prime auto loans) is not likely to reoccur soon, what is going to fill the gap in rebuilding U.S. domestic economic strength?  So Thomas Piketty, and Joseph Stiglitz and Steve Fazzari and Barry Cynamon here  and others stepped forward with various theories that inequality has negative impacts on the economic growth. Although these ideas are out of the mainstream and a non-trivial minority are adamantly opposed and there  is healthy dispute regarding the data and formulas on which this work is based, the median macro-economist accepts that aggregate demand has some effect on the economy and does not consider it crazy to consider that income distribution  has some effect on consumption and demand. 

That is where we stand at this point It will be enlightening to see whether there are more macro-economic PhD dissertation on these issues since the crash because that may be predictive of where the balance of macro-economics is headed. My point here is that those of us who care about these issues should be watching and hoping and advocating that at the least, macr0-economists spend a bit more time and attention on these issues in the future than they have in the past. 

Comments

[Anon]

Just a side note:

Applying the traditional-behavioralist dichotomy to macroeconomics is a little odd. This distinction is specific to finance, which is either a different discipline than economics or a subdiscipline of economics.

The macroeconomists who are the strongest advocates of a neo-classical approach (e.g. certain people at Chicago and the real business cycle school) fully embrace the study of incomplete markets, financial frictions, and game theoretic approaches to incentives that characterizes the work of economic theorists such as Stiglitz. See for example the discussion of Lucas here: http://newmonetarism.blogspot.com/2015/04/sticky-prices-financial-frictions-and.html , or the discussion of Prescott here: http://newmonetarism.blogspot.com/2015/04/bernanke-and-low-real-interest-rates.html

Calling Stiglitz a behaviorialist is a way of trivializing his theoretic work (as if it wasn't about people responding rationally to incentives), when in fact his work is extremely mainstream economics -- and even lawyers should be able to recognize this.

[LS]

As someone who studies consumer credit for a living, I find this topic very interesting. No knowing much about macro models, I am surprised to read that, as I understand it, income is the only determinant of consumption. That seems odd. There mush be some macro economists out there using a balance sheet-type theory of consumption where liability, credit constraints, etc play a role. Can someone more knowledgeable please say otherwise or post some links to these types of papers?

Thank you

[David Lander]

Although I am no expert on consumer economics I have long watched the field and felt strongly that we consumer advocates very much need stronger and deeper economics expertise in our corner. I have found some help through the Levi Institute i.e. http://www.levyinstitute.org/pubs/wp_669.pdf and locally at the St Louis Feds Center for Household Financial Stability and also Bob Hunt a true expert on credit cards at the Phil Fed. I do not think that income is the only determinant in consumption and would be glad to visit with you offline on that and other topics or to help you find others who know more about it than i do. Unfortunately, except at a couple of important progressive think tanks progressive macro and micro economists with expertise and interest in these topics have been few and far between and not so well connected with the consumer advocacy movement. Very few economic PhD programs provide training and writing tracks for development of such expertise and strengthening the training line is probably the long term key.