Household Finance and the Welfare State: A Case Study of the United States, 1980-2010

45 Pages Posted: 5 Jun 2014

See all articles by Eddie Gerba

Eddie Gerba

Banco de España; London School of Economics & Political Science (LSE); CES Ifo Institute; European Central Bank

Waltraud Schelkle

London School of Economics & Political Science (LSE)

Date Written: April 30, 2014

Abstract

The sharp rise in household finance, both in debt and in assets, is one of the striking empirical facts about the US economy of the last two decades. But it is still not clear what caused it. Economists, both mainstream and heterodox, seek an explanation in financial market innovation and liberalization. But it is hard to find systematic evidence for this link. Our paper takes up another line of inquiry. Political economists have started to ask how the restructuring of the welfare state may have affected household finance. We use SVAR analysis to establish whether there is a link between the retrenchment of public social spending and the expansion of tax-incentivised private social spending, on the one hand, and household finance variables on the other. More specifically, we ask whether the transformation of the US welfare state over the last 30 years has affected household finances through the channel of debt, leverage, or asset formation. Our findings suggest that the asset channel is empirically the most likely candidate and we point to some welfare state reforms that can support the operation of this channel since the mid-1990s.

Keywords: Balance sheets, social spending, welfare reforms, financialisation, leverage cycles

JEL Classification: E21, E62, G21, H31, H55

Suggested Citation

Gerba, Eddie and Schelkle, Waltraud, Household Finance and the Welfare State: A Case Study of the United States, 1980-2010 (April 30, 2014). Available at SSRN: https://ssrn.com/abstract=2348253 or http://dx.doi.org/10.2139/ssrn.2348253

Eddie Gerba

Banco de España ( email )

Alcala 50
Madrid 28014
Spain
(+34)917088132 (Phone)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

CES Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Waltraud Schelkle (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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