> What I don't understand is how consumer debt can increase
> effective demand in the long term ...
My feeling is that people will buy things on credit (and thus for "too much" including non-deductible interest) that they wouldn't otherwise save for. So that *can* increase demand in the long run.
But as you point out:
> Over the long term then consumer debt engenders financial
> flows to those rentier classes with a presumably lower marginal
> propensity to consume and should thus have the effect of increasing
> savings, no?
I think that's at least part of the reason that the sharp increase in consumer debt hasn't correlated directly with a decrease in personal savings; but I think it's important to distinguish between housing debt and non-housing debt. Even rich people have been consuming up a storm ... probably moreso even than the non-rich.
> That is, the interest payments, which are counted as a personal
> outlay, of course undermine the ability of those households that
> most need to save to set income aside;
One question becomes: what do they "need" to save for? The traditional "save for" has been housing; but mortgages are easier to get, smaller (percentage-wise) downpayments are available, bigger leverage is possible. So why save? There's the question of retirement, of course, but I think people who have seen their 401k and IRA mutual funds quadruple in the past 5 years _believe_ they are covered in that area. They probably aren't, but that doesn't give them incentive to continue saving.
> but from this it does not follow that the use of credit
> has decreased the total amount of national savings. In particular,
> I don't follow this argument made by Medoff and Harless in
> The Indebted Society:
You're not alone; I don't follow it either.
> What is agitating me is the idea drummed into us that the working
> class in this country does not save enough.
I agree; what's so great about a high savings rate?
/jordan