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The secular decline in the natural interest rate r* cannot in any way be attributed to rising income inequality

The problem with the analysis by Atif Mian, Ludwig Straub, and Amir Sufi (2021)

I will show below that the aggregate savings rate of the U.S. did not rise, which means that even if household savings increased, there was no aggregate saving glut and hence no reason for r* to decrease. 

With savings rates for one group unchanged and the other 90% of the population consuming more, the rate of time preference of the average U.S. household must have increased — which is the exact opposite of what the authors conclude.

However, the biggest problem of all is that there is no such thing as a market for loanable funds. The irrelevance of this old Wicksellian story has been explained many times, starting with Keynes...

There exists no market for ‘savings’ and ‘investment’ which is cleared by an equilibrium interest rate

What explains the secular decline in r*?

With the top 10% richest households benefitting most from the resulting wealth gains, inequality spiraled up further, leading to another round of increased savings, lower r* and wealth gains. This, indeed, is the bottom line of the paper by Mian, Straub and Sufi

An alternative, far more plausible explanation

The key driver of rising income inequality is the stagnation of real wage growth for the bottom 80% or so of U.S. households

Fiscal policy was deprioritized in favor of monetary policy, conducted by independent central banks, single-mindedly focused on building credible reputations as inflation hawks, and counter-cyclical fiscal stabilization was made anathema by subjecting fiscal policy-making to rigid and deflationary rules, irrespective of the business cycle.

For a period of time after the global financial crisis of 2008, austerity zealots, dreaming of expansionary fiscal consolidations, intensified the fiscal repression, bringing about one of the slowest and most costly economic recoveries from a crisis in history.

The low interest rates, in turn, fuel asset-price bubbles, creating wealth gains for the rich, and over-indebtedness for the bottom 90% of households

Institute of New Economic Thinking SEP 13, 2021


The principal explanation for the decline in real interest rates has been high and rising inequality

Martin Wolf FT 21 September 2021



Grundbultsfrågan: Hur blir S = I ??? Savings and investment, being different activities carried on by different people

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