It has long been assumed that many low- and middle-income Americans over-borrow so they can keep up with wealthier Americans—or “keeping up with the Joneses.” This condition is often blamed for the large rise in household debt that occurred during the 2000s, but a UT Austin economist’s research tells a different story.
The study examines household debt, income and economic inequality on a geographic basis through several large databases that cover home mortgages, auto loans, student loans and credit card debt.
According to the report, from 2001 to 2008, the debt of low-income borrowers in areas with less economic inequality rose about 15 percent compared to those in areas with higher inequality. Higher inequality areas include the South, California and the Pacific Northwest, while lower inequality was found in the Midwest.
The results support the notion that the growth in household borrowing during the mid-2000s was driven in large part by credit supply expansions targeted toward lower-income households, and not motivated by “keeping up.”
The report was authored by economists Olivier Coibion of The University of Texas at Austin, Marianna Kudlyak of the Federal Reserve Bank of Richmond and Yuriy Gorodnichenko and John Mondragon of the University of California at Berkeley. It was published in the National Bureau of Economic Research.