"Household Debt and Income Distribution" by Robert Scott and Steven Pressman, 2013. PDF, 16 pages.
Couple paragraphs from the Scott & Pressman PDF:
In previous work (Pressman and Scott 2009a; 2009b), we argued that the official US definition of poverty was flawed because it ignored the interest paid on consumer debt to maintain that debt (but not reducing debt principal). These interest payments cannot be used to purchase the minimal goods and services that are necessary for survival during the year.
Our argument [in the 2013 paper] is relatively simple. Interest payments on past debt reduce the income that households have to spend and maintain a certain standard of living. An income shock (such as a bout of unemployment, the expenses of having a new baby, or a health problem) can lead families to resort to borrowing, which reduces household living standards in the future. Although future income may rise, the economic circumstances of the family will not improve if most of this extra income must pay interest in order to maintain past debt. This problem is ignored in standard measures of income equality, which take no account of the income lost in order to make interest payments on past consumption debt.
Even people in poverty are expected to pay their interest first, then live on the money they have left.
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