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The U.S. household debt boom since 1980 is considered one of the main drivers of
the Great Recession of 2007–9. In lockstep with household debt, income inequality has
risen to new extremes. We evaluate the hypothesis that rising inequality was a causal
source of the debt boom. The mechanism builds on the observation that households
care about their social status. To keep up with the ever richer Joneses, the middle class
substitutes status-enhancing houses for status-neutral consumption. These houses are
mortgage-financed, creating a debt boom across the income distribution. Using a
stylized model we show analytically that aggregate debt increases as top incomes
rise. In a quantitative general equilibrium model we show that Keeping up with the
Joneses and rising income inequality generate sizable booms in mortgage debt and
house prices. By contrast, the Global Saving Glut hypothesis gives rise to a similar
debt boom, but has a much weaker effect on house prices.
