National income distribution and the crisis

This paper considers the notion that the US economy was able to continue growing in the period leading up to the financial crisis despite a major erosion of the wage share because of the expansion of credit. The negative impact on aggregate demand of a shift in the income distribution from wages to profits is supported by the estimation of a dynamic error correction consumption function for the United States, 1985–2011, using quarterly data. The results also corroborate the notion that the expansion of credit in the US, leading up to the financial crisis, served to stimulate consumption despite a major erosion of the wage share. The implication of this for the economy is formally considered using a basic demand-led real income growth model, to which we add equations modelling the growth of household debt for recipients of dividend and non-dividend income.