Alternative Perspectives on the Rise of Corporate Debt Dependency: The U.S. Postwar Experience

Abstract

One aspect of the contemporary crisis of the United States economy has been a sharp increase since the mid-1960s in the reliance on debt finance by corporations, households, and the federal government. This paper focuses on the borrowing behavior of nonfinancial corporations. It first presents measures of borrowing on the basis of data and accounting methods derived from the Federal Reserve Board's Flow of Funds Accounts. Three alternative approaches are then developed for explaining the corporations increasing reliance on debt: neoclassical cost-of-capital theory; the financial fragility framework of Hyman Minsky; and a Marxian falling-rate-of-profit perspective. For each approach, statistical evidence, including two-variable regression analysis, is presented to evaluate their relative explanatory power. The results of the investigation support the Marxian approach over the other two. In the conclusion, the relationship between these findings and the related contemporaneous phenomena of financial instability and inflation are briefly explored.