The Welfare Functions of Credit and Debt in an Era of Rising Inequality

Abstract

Low-income families have increasingly relied on debt as income inequality has grown and state policy has become less redistributive since the 1970s. This study examines the shift toward debt by linking the macro-level patterns in inequality, social policy and family debt to the micro-level analysis of family finances. Using several data sources on family finances--the Survey of Income and Program Participation, the Survey of Consumer Finances, and the Panel Study of Income Dynamics, I analyze the tradeoff between social assistance and debt at the household level and the dynamics of family debt trajectories over time. Findings suggest that there is a general tradeoff between social assistance income and household debt. The reliance on debt in place of greater redistribution or social assistance is the result of a convergence of factors and explicit policy decisions that have promoted credit to improve the conditions of those who have been excluded from broader economic prosperity. The analysis of debt trajectories shows that debt has grown significantly faster for black families than white families. Social assistance, like welfare and the EITC, has become less effective in protecting low-income families from relying on debt. Taken together, this research suggests that growing debt places low-income families in increasingly precarious conditions in the long term, rather than the stability traditionally offered by the welfare state.