An alternative to the wage stagnation – debt explosion story

Jesse Livermore puts up this chart in his twitter:

Trying to lead us to believe that the rise in the debt ratio (mostly reflected in the rise of mortgage debt) is a consequence of wage stagnation since the early 1970s.

A chapter of the “debt story” was told in this post. I include additional elements in this chapter.

The first point to notice is that the debt ratio only rises significantly after 1983; 10 years after wages stagnate according to his data. Coincidentally, at the time the “Great Moderation” begins!

The charts below give a different reading of the whole process.

Wages “stagnate” (relative to productivity) only after the “Volcker Transition” has brought inflation down.  Notice that the cost of buying a house (getting a mortgage) drops with interest rates tumbling down.

In the 1990s, despite additional interest rate decreases, the mortgage debt ratio stays flat, shooting up during the “Great Corruption” beginning in the early 00s.

So I´m not convinced of the “wage stagnation story” as harbinger for the rise in debt.

Update: Ryan Sanchez sent me this post on the “Debt question”. It´s very much worth reading.

HT: Saturos

8 thoughts on “An alternative to the wage stagnation – debt explosion story

  1. There was a great post Josh Mason about the debt dynamics during the great moderation and it also leads me to be skeptical of the wage stagnation explanation for the increase in household debt. The two main conclusions being:

    1)The 1980s, in particular, were a kind of slow-motion debt-deflation, or debt-disinflation; the entire growth in debt relative to earlier periods (17 percent of household income, compared with just 3 percent in the 1970s) is due to the slower growth in nominal income as a result of falling inflation. In other words, there is no reason to think that aggregate household borrowing behavior changed after 1980; indeed households rescued their borrowing in the face of higher interest rates just as one would expect rational agents to. The problem is that they didn’t, or couldn’t, reduce borrowing fast enough to make up for the fact that after the Volcker disinflation, leverage was no longer being eroded by rising prices.

    2) Neither the 1980s nor the 1990s saw an increase in new household borrowing — on the contrary, the household sector in the aggregate showed a primary surplus in these decades, in contrast with the primary deficits of the postwar decades. So both the conservative theory explaining increased household borrowing in terms of shorter time horizons and a general lack of self-control, and the liberal theory explaining it in terms of efforts by those further down the income ladder to maintain consumption standards in the face of a falling share of income, need some rethinking.

    Post is here http://rortybomb.wordpress.com/2012/02/23/guest-post-by-jw-mason-the-dynamics-of-household-debt/

    Cheers

  2. Globalization? I remember when USA leaders (in the 1960s) used to brag about how much workers made, often with comparison to the Soviet Union. “In America, workers have swimming pools.”

    Later, the the tune changed to “global competition forces us to cut expenses.”

    Even the leveraged buyout (Milken-Drexel pioneered) may have played a role. You see a blue-chip corporation with heavy payrolls? Buy it out, cut payrolls. Re-sell it and make gobs of money.

  3. So, revising Marcus’s “first point” in light of Ryan’s remarks on JW Mason’s “dynamics” —

    The first point to notice is that the debt ratio only rises significantly after 1983; 10 years after wages stagnate according to his data. Coincidentally, at the time the “Great Inflation” ends!

    By no coincidence at all, I might add.

  4. Pingback: An alternative to the wage stagnation – debt explosion story « Economics Info

  5. You could easily read the graphs through the wage stagnation lens.
    (1) Between 1983 and 1991 debt takes off. At the very same time wages fall (according to Livermore’s chart, which is the correct one).

    (2) Between 1991 and 2000 debt flattens somewhat. At the very same time wages rise.

    (3) Between 2000 and 2008 debt rises at the same time as wages rise. Presumably because a mad housing boom took off so both rose at the same time.

    In saying that, these graphs are a poor way of looking at the issue. But even so, the wage stagnation story can quite clearly be told through them. When supplemented, of course, by the crazy housing bubble story.

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