Consumer Debt is 130% of Income : Avoiding Budget Constraint Orthodoxy

Consumer theory maximizes utility subject to a budget constraint, ignoring that the ratio of consumer debt to disposable income has varied between 30% and 130%. Granger-causality tests also confirm Consumption-precedence over income. We discuss features of newer US data allowing families greater control on the timing and level of income. Our 'target-seeking' Wiener-Hopf-Whittle optimization yields a two-equation system where both consumption and income are endogenous, similar to quantities and prices in a demand system. We resolve five old 'puzzles' from the consumer theory literature and provide estimates of shadow prices of the income level and adjustment costs