Household Debt Quintiles: Explaining Changes 1983–1989

The aggregate indebtedness of U.S. households grew substantially in the decade of the 1980s (Canner and Luckett 1991). Some of the aggregate increase can be explained by inflation, increased employment, and rising real incomes of high income households (Dunkelberg 1989; Kennickell and Shack-Marquez 1992). Yet, the dynamics of households' debt status are more complex than the aggregate data imply. Using quintile cross-tabulations of consumer debt in 1983 and 1989 from the Survey of Consumer Finances panel, Godwin (1997) found as many households decreased their debt as increased it (slightly less than 30 percent each). During the six-year period, the other approximately 40 percent of households stayed in the same consumer debt quintile. This analysis extends Canner, Kennickell, and Luckett's (1995) descriptive findings regarding the "considerable change over time" in households' debt burden (335). As yet unexplored is the question of which households moved up and down the debt distribution and why. Bryant (1990) posited a model of consumption and borrowing within which the intrahousehold dynamics of debt may be analyzed. Most available household level research on debt has used cross-sectional data (e.g., Avery and Elliehausen 1986; Canner and Luckett 1991) or trend analyses (e.g., Avery, Elliehausen, and Canner 1984; Avery, Elliehausen, Canner, and Gustafson 1984; Kennickell and Shack-Marquez 1982; Kennickell and Starr-McCluer 1994). While a few studies have examined change in consumers' debt (e.g., Bryant 1986; Dunkelberg and Stafford 1971), some major hypotheses of Bryant's model remain untested. The availability of the panel dataset of the Survey of Consumer Finances provides the opportunity to analyze intrahousehold change in debt over time. (1) Also, Bryant's model leaves unexplored the differences between the consumer credit market and the goods market. Examining issues of access to the credit market may help explain some of the variance in households' change in debt over time. While households' debt levels and portfolios changed over the decade, so did other things about households: their incomes, size, employment, and marital status also changed. Sorting out cause and effect among these changes and changes in the households' debt status is complex, but these issues deserve attention. Work by Greg Duncan and his colleagues (e.g., Duncan 1986) analyzed some of these changes with respect to household income dynamics and found them important. The purpose of this paper is to test hypotheses from Bryant's (1990) model of two-period economic decision making regarding the dynamics of household debt. Additional hypotheses are also examined about the effects of access to the credit marketplace and other economic change on households' change in debt status. THEORY Static views of consumer utility-maximization posit that consumers choose an optimal combination of goods based on the budget constraint, the household's current year income, and consumers' preferences between two goods in the current period. Bryant (1990) extends the one-period consumer utility-maximization model to an analysis of consumption and borrowing over time. Debt is dissaving or "the transfer of future resources to the present so as to increase current consumption" (Bryant 1990, 80). The intertemporal budget constraint includes the amount of borrowing possible from future income. The present value of the future stream of income constrains the household's consumption choices just as current year income and net assets do. Bryant's total resource reflects the current consumption consumers could enjoy in the current period if they spent their current income and wealth and the present value of their expected future income: [R.sub. 1] = [A.sub. 1] + [Y.sub. 1] + [Y.sub. 2]/(1 + r) (1) where R = total resources, A = net assets, Y = income, r = interest rate, and the subscripts denote time periods 1 (current) and 2 (future) (Bryant 1990, 82). …