The “Dusenberry Effect” In The U.S. Economy

Just saw this chart on Zero Hedge yesterday, which takes me back to the days of graduate school and an unfinished Ph.D. dissertation.

One part of the “Dusenberry Effect” basically states that consumers do not give up their consumption patterns very easy even if their incomes decline.   They, in effect, “ratchet” down their living standard very slowly by first having a second wage earner enter the workforce as we saw in the 1970’s when women began to enter the workforce en masse and then by taking on debt to finance their previous standard of living.

…[a] significant part of Duesenberry’s relative income hypothesis is that it suggests that when income of individuals or households falls, their consumption expenditure does not fall much. This is often called a ratchet effect. This is because, according to Duesenberry, the people try to maintain their consumption at the highest level attained earlier. This is partly due to the demon­stration effect explained above. People do not want to show to their neighbours that they no longer afford to maintain their high standard of living.

Further, this is also partly due to the fact that they become accustomed to their previous higher level of consumption and it is quite hard and difficult to reduce their consumption expenditure when their income has fallen. They maintain their earlier con­sumption level by reducing their savings. Therefore, the fall in their income, as during the period of recession or depression, does not result in decrease in consumption expenditure very much as one would conclude from family budget studies.  – YourArticleLibrary

We suspect the cumulative policy decisions of bailing out debt holders and punishing savers over the past 30 years has changed attitudes on debt accumulaton.   We know several people that didn’t pay their mortgages for more than three years and were not foreclosed on.   That is just un-freaking-fair, folks!

The Rise of Tea Party

The duplicity of the policy makers and the banks gave rise too much anger thoughout the country from those who basically, “did the right thing”,  paying their bills and mortgages on time.    And was one reason for Rick Santelli’s rant in February 2009, which many atrribute to the birth of the Tea Party.

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Upshot?  No wonder the country is so divided.