Inequality and investment
In this paper Mian et al. conduct an empirical analysis to measure the contribution to aggregate savings from different parts of the distribution of U.S. households. They develop a novel methodology that “unveils” the financial sector and shows who ultimately holds claims on financial assets such as household and government debt.
The rise in savings by the top 1% has not been accompanied by a rise in net domestic investment. Instead the additional savings have been absorbed in a less conventional manner through dissavings by the government and the rest of the U.S. household sector. In particular, savings by the bottom 90% have fallen significantly since the early 1980s and the government has run larger deficits, especially after the Great Recession.
The Saving Glut of the Rich
Authors: Atif Mian, Ludwig Straub, Amir Sufi
From: Princeton University, Harvard University, Chicago University
Inequality and aggregate demand
Mian and al. propose a theory of indebted demand, capturing the idea that large debt burdens by households and governments lower aggregate demand, and thus natural interest rates. At the core of the theory is the observation that borrowers and savers differ in their marginal propensities to save out of permanent income. They find that recent trends in income inequality and financial liberalization lead to indebted household demand, pushing down rates of return. Moreover, expansionary policies—such as accommodative monetary policy and deficit spending—generate a debt-financed short-run boom at the expense of indebted demand in the future. In this “debt trap”, debt-financed stimulus deepens the recession in the future, whereas redistributive policies and policies addressing the structural sources of inequality mitigate it.
Indebted Demand
Authors: Atif Mian, Ludwig Straub, Amir Sufi
From: Princeton University, Harvard University, Chicago University
Inequality and r*
In this latest paper, Mian et al. argue that the decrease in r* is better explained by the increase in income inequality than demographic trends. They use data from the Survey of Consumer Finances Plus (SCF+) and a shift-share empirical design to estimate how changes in aging and income inequality affect saving in the U.S. economy.
The higher saving rate of the top 10% together with the large shift in income to the top 10% combined to generate a significant increase in savings entering the financial system from high income households. Overall, we estimate that between 3 and 3.5 percentage points more of national income were saved by the top 10% from 1995 to 2019 compared to the period prior to the 1980s. This represents 30 to 40% of total private saving in the U.S. economy from 1995 to 2019. The rise in saving by high income households is likely a powerful force putting downward pressure on r∗.
What explains the decline in r∗? Rising income inequality versus demographic shifts
Authors: Atif Mian, Ludwig Straub, Amir Sufi
From: Princeton University, Harvard University, Chicago University
