Arrears

Background

Arrears refer to the amount of money that is overdue after missing one or more required payments on a financial contract. This term is often used in the context of loans, mortgages, rent, child support payments, and other periodic payment obligations.

Historical Context

The concept of arrears has existed for centuries, ever since formalized financial and lending systems came into being. Historically, being in arrears could result in severe penalties, including the seizure of property, imprisonment, or other legal actions. Over time, laws and practices have evolved to provide more structured and humane ways to deal with overdue payments.

Definitions and Concepts

1. In Arrears: This phrase indicates a state of owing money after missing scheduled payments.
2. Overdue Amount: The actual sum that has not been paid by the required due date.
3. Financial Obligation: A legal requirement to make one or more payments over time as specified in a financial contract, such as loans, mortgages, or rental agreements.

Major Analytical Frameworks

Classical Economics

Classical economists focus less on the micromechanics of arrears, focusing more on production, savings, and investment in broader economic terms. Arrears could be seen as a distortion in the ideal function of the economy where debtors’ failure to pay affects the capital availability.

Neoclassical Economics

Neoclassical economics would consider arrears in the context of market equilibrium and individual utility maximization. Failure to make payments might reflect individual preference optimization under constraints but creates market inefficiencies which could be remediated with proper incentives and structures.

Keynesian Economics

Keynesian economics would approach arrears through the lens of aggregate demand. Unpaid debts contribute to reduced spending power and can weaken consumer confidence and decrease overall demand, potentially leading to broader economic slowdowns.

Marxian Economics

From a Marxian perspective, arrears could be interpreted as a symptom of systemic inequalities inherent in capitalist systems. The inability to meet financial obligations often points to underlying labor exploitation and income disparities.

Institutional Economics

Institutional economists would evaluate the role of social and legal structures in creating or alleviating arrears. They examine how laws, norms, and organizational practices shape individuals’ ability to meet financial commitments.

Behavioral Economics

Behavioral economists would study the psychological factors influencing why people fall into arrears. This could include theories on procrastination, lack of financial literacy, or over-optimism in financial planning.

Post-Keynesian Economics

Post-Keynesian economists focus on the financial instability that arrears can introduce into the economy. They emphasize the precariousness of credit and the precarious balance between liquidity and solvency in financial markets.

Austrian Economics

Austrian economists might analyze arrears as a consequence of improper interest rate manipulations by central banks, which create mismatches between debtors’ abilities to pay and their obligations, distorting natural economic signals.

Development Economics

Arrears present a significant issue in developing economies where insufficient financial infrastructure, income volatility, and lack of social safety nets compound the difficulties of meeting periodic payments.

Monetarism

Monetarists could view arrears as factors influencing the money supply and velocity of money through the economy. Persistent arrears may impact liquidity and aggregate money flow.

Comparative Analysis

Different economic schools offer varied lenses through which to analyze the root causes, implications, and solutions for arrears. While classical theorists might largely disregard the nuances, modern and heterodox schools are likely to integrate a multitude of social, psychological, and economic factors.

Case Studies

1. Mortgage Crisis: The 2007-2008 financial crisis saw massive arrears in mortgage payments, sparking a cascade of financial institutional failures.
2. Rent Arrears: Urban studies showing how economic downturns result in increased rent arrears and subsequent homelessness.
3. Child Support: Analysis of rife child support debts in various socio-demographic sectors highlights the impact of legal and economic structures on payment failures.

Suggested Books for Further Studies

1. The Economics of Money, Banking, and Financial Markets by Frederic S. Mishkin.
2. Modern Principles of Economics by Tyler Cowen and Alex Tabarrok.
3. Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger and Robert Z. Aliber.

Related Terms with Definitions

1. Default: Failure to fulfill the legal obligations of a loan.
2. Forbearance: A temporary postponement of loan payments granted by the lender or creditor.
3. Delinquency: The state of being overdue on payment but potentially remediable through catching up