Household debt, economic conditions, and income inequality: A state level analysis

- Many economists have suggested that increases in debt are the counterpart of the redistribution of income in the U.S.
- We build a state level panel data set that includes information on household debt, income inequality, unemployment, and GDP.
- Our results show that the basic prediction of debt leading to increases in income inequality is soundly rejected for the period 2003 to 2012.

This paper uses OLS regressions to understand the relationship between household debt, income inequality, and economic growth in the United States. For robustness we use two different measures of income inequality. The results show that, for the period 2003-2012, there is statistical evidence that increases in household debt are associated with lower levels of economic growth and higher rates of unemployment. In addition, we uncover evidence that high growth rates in household debt are associated with negative growth in income inequality, likely because debt caused economic growth to slow, diminishing the returns of top earners.