May 8, 2012

Even when the northwest economy gets better, for those on low incomes – life may get worse. This is because of a hidden tide of debt inequality that is set to become the new income (and health) inequality.

This week I picked up a tweet from @Working America, highlighting IMF research in 2010 by Kumhof and Ranciere in Finance and Development. It said:

‘In 1983, the bottom 95% of the population (by income) had 62 cents of debt for every dollar they earned. But by 2007, the ratio had soared to $1.48 of debt for every $1 in earnings. For the top 5%, their debt-to-income level actually fell during the same period, from 76 cents of debt for every dollar earned in 1983, to just 64 cents in 2007. And experts say the picture hasn’t changed much since then.’

The graph below, based on IMF data shows what’s happened between 1983-2007:

While this is US data and only goes up to the financial crash, it does illustrate the issue that low incomes are really only half the income inequality story. Its shadow side is that those on low incomes have much larger debt to income ratios and this ‘debt inequality’ is growing as their capacity to repay is reducing.