Borrowed Dreams. How Household Debt Drives the Knowledge Economy.

Sunday, June 26, 2016: 9:00 AM-10:30 AM
247 Dwinelle (Dwinelle Hall)
Andreas Wiedemann, MIT, Cambridge, MA
During the last couple of decades, many rich economies experienced a dramatic rise in household debt. Global financial cycles in capital flows helped to make credit to households more easily available and contributed to strong credit growth in many economies. Rising levels of household debt have important socio-economic consequences and have been identified as a crucial factor for understanding financial crises, especially the Great Recession.

This paper adds to the macro-level study of household debt a micro-level dimension and analyzes the socio-economic causes and electoral consequences of household indebtedness in Denmark. First, I argue that the flexible and dynamic environment of the knowledge economy is a key driver behind rising levels of household debt. The labor market that most middle-class families are facing now has changed from one of stable career paths with a male breadwinner and sufficient public benefits to one in which individuals move in and out of jobs much more frequently, with time off for child rearing or continued education, and with more women in the labor market. While low-income families see these changes as a threat, middle-class families view it as an opportunity. Access to credit offers the necessary fuel to smooth consumption in times between jobs, but also to finance investment in further education and in children. Credit allows families to make deliberate career choices in a more flexible work environment where public policies are inadequate or unavailable. I combine several detailed administrative register panel datasets covering the entire Danish population since 1990 to analyze households’ borrowing behavior in light of changes in the labor market and families’ career patterns over time.

Second, I study changes in electoral behavior and public opinion as middle-class households take on more and more debt. Are households becoming more conservative or liberal as they tap deeper into credit markets? How does this change their preferences for taxation and redistribution? To this end I combine administrative data with detailed geospatial information, voting records, and public opinion data to shed light on the electoral consequences of rising levels of household debt.

This paper suggests that household borrowing is not driven by rising levels of inequality or consumption motivations among the poor; rather it is a credit as a key ingredient of the knowledge economy that is mostly used my middle-class households. The findings have important policy implications beyond Denmark for the use of credit in light of changing skill requirements and career paths, but also for the debate about the adequacy and reach of public education and family policies in the knowledge economy.