The US is nearly nine months into a pandemic that has resulted in 215,000 deaths and 11 million fewer Americans employed (159 million in February vs. 148 million in September). There is no clear end in sight. At the same time, stock markets, bond markets, and house prices are at or near record highs. What is going on?
Two recent papers by Atif Mian, Ludwig Straub, and Amir Sufi might have part of the answer: The Saving Glut of the Rich and Indebted Demand. Basically, some people have a lot of money, and what better thing to buy than a $1.8 million average-price home in Miami Beach or more stocks. The papers are interesting because they link wealth distribution, low interest rates, and future economic growth.
Since the 1980s, debt levels have increased and interest rates have decreased. Mian, Straub, and Sufi explain this by showing that the bottom 90% of the income distribution has taken on more and more debt while the top 10% - and especially the top 1% - has taken on more and more claims on that debt. This matters because the top 1% saves more than half its income, while the bottom four quintiles save between 1% and 17%. As a result, higher inequality tends to lead to lower demand for goods and services in the economy, which results in lower prospective returns on investment, lower interest rates, and lower growth.
In their indebted demand model, Mian, Straub, and Sufi explain how these divergent saving rates result in lower growth and interest rates when inequality increases:
"Empirical evidence suggests that an important channel of accomodative monetary policy operates through an increase in debt accumulation. This channel is also active in our model, boosting demand in the short run. However, this boost reverses as monetary stimulus fades and debt needs to be serviced, beginning to drag on demand. Due to the presence of indebted demand, this drag can cause a persistent shift in natural interest rates after temporary monetary policy interventions. It is for this reason that monetary policy has limited ammunition in the model: successive monetary policy interventions build up debt levels, thereby lowering natural rates. This forces policy rates to keep falling with them to avoid a recession, thus approaching the effective lower bound.
"When savers command sufficient resources in our economy, for instance due to high income inequality and large debt levels, the natural rate in our economy can be persistently below its effective lower bound. At that point, our economy is in a debt-driven liquidity trap, or debt trap, which is a well-defined stable steady state of our economy."
A couple more notes on Mian, Straub, and Sufi's Savings glut paper.. a saving glut occurs when there is too much savings relative to investment. The idea is associated with Keynes, but Bernanke brought the theory back to prominence in 2005, when he gave a speech showing why he believed there was a global saving glut. In Bernanke's telling, foreign countries' high desired savings and low prospective returns on investment led them to try to run current account surpluses and thus lend abroad. This explained the persistent US current account deficit as well as low interest rates. MSS show that there is a second, equally important saving glut that has developed within the US since the 1980s -- the saving glut of the top 1%. They find that this saving glut has been almost as large as the global saving glut, with implications for national savings, the size of the financial sector, and the long-run interest rate.
"The saving glut of the rich is an important factor behind the increase in the size of the financial sector as the rise in top 1% savings largely shows up as financial assets. However, unlike the traditional view that the financial sector channels savings into investment, we find that additional savings absorbed by the financial sector are directed towards financing household and government spending through debt."
Savings equals investment is a fundamental macroeconomic identity. If foreigners are saving (i.e., running a current account surplus with the US) and the top 1% of income earners are saving, then someone has to be dis-saving. Since the 1980s, the dis-savers have been lower-income households and the government. MSS find that two-thirds of the financial assets accumulated by the top 1% in the past 40 years have gone into claims on household and government debt.
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