Abstract
This paper presents a simple post-Kaleckian model of distribution and growth that incorporates personal income inequality and interdependent social norms. The model shows in an easily accessible manner that macroeconomic effects of changes in personal and functional income distribution can potentially reinforce or dampen each other. The resulting variety of demand and growth regimes is due to different distributional effects on consumption demand. Therefore, the second part of the paper investigates the empirical relevance of the additional demand regimes by estimating aggregate consumption functions with variables for personal and functional income distribution for the United States and Germany. We find similar effects of functional income distribution for both countries. However, for the US, we find positive long-run effects of personal income inequality on consumption. The effect is strongest for the top 10% income share and the Gini index and less strong for the top 5% and 1% income shares. While this is evidence for relative consumption patterns, it also supports the view that the ?super rich? are a relatively distant class for most people - questioning the notion of expenditure cascades from the very top to the very bottom. In contrast, for Germany we fail to find compelling evidence for effects of personal income distribution.
Highlights
Summary: This paper presents a simple post-Kaleckian model of distribution and growth that incorporates personal income inequality and interdependent social norms
The estimated long-run personal inequality elasticity of US consumption is highest for the top 10% income share, followed by the Gini index, the 5% share and substantially lower for the 1% share. This result might indicate that expenditure cascades where triggered by redistribution from the very top (1% and 5%) but that the effects on consumption where much stronger when redistribution happened in favour of the top 10% and at the middle of the income distribution
A simple post-Kaleckian model of distribution and growth was presented that incorporates personal income inequality and interdependent social norms. This was achieved by making the propensity to save out of wage income endogenous with respect to personal income inequality
Summary
The model presented above gives an illustrative theoretical account on the potentially differing effects of changes in personal and functional income distribution associated with rising inequality and the potential for an alteration of the traditional demand and growth regimes in Kaleckian macroeconomic models. It remains an empirical question which specific effects prevailed in different countries. As has been illustrated by the model above, the estimation of aggregate consumption functions with variables for functional and personal income distribution as regressors is of key importance in this regard.
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