Behind the Great Recession, there was a credit crunch. Behind the credit crunch, there was a housing bust. And behind the housing bust, there was an explosion in debt in mid-2000s among low-income households.
So what was behind that?
One explanation begins with inequality. The idea is that the rich-poor gap leads to credit booms—as the poor try to close the gap with borrowed money— and this leads to defaults, financial busts, and recessions. This story would make the "keeping-up-with-the-Joneses principle" a key player in the great crash. It would also implicitly shift some of the blame to low-income people being, well, jealous and greedy for the lifestyle of their richer neighbors.
There are two problems with this story. First, there's no evidence that inequality actually leads to credit booms, in the first place. Second, a new paper finds that the parts of the country where poor families took on the most debt weren't the areas with the most inequality. They were the areas with the least inequality.
To examine whether big rich-poor gaps turn poor people into big borrowers, researchers looked at local levels of income inequality and debt-accumulation. They found that poor households didn't borrow more in high-inequality areas. Instead, poor households borrowed more in poorer areas (i.e.: areas with less overall inequality). In short, it's the opposite of what the keeping-up-with-the-Joneses effect would predict. Poor households borrowed more when they had poor neighbors, not rich neighbors.