Sunday, December 18, 2011
Household Debt and The Decline In Aggregate Demand
This article provides data which describes the effects of household debt on the fall in aggregate demand that has led to high levels of unemployment for an extended period of time. They looked at housing bubble counties with high levels of debt and compared them with non-bubble counties with low levels of household debt. They also separated spending into two categories. One consisted of spending for local products and services. The other was comprised of spending on goods that were manufactured elsewhere and sold throughout the country. For example, in California the decline in automobile purchases caused a loss of jobs in local auto dealerships and it also contributed to the loss of jobs in counties that produced automobiles. They found that the decline in local spending on local products and services were 5% higher in bubble counties than in non-bubble counties. They conclude that housing bubble related debt is responsible for 65% of the decline in aggregate demand.