Edward Conard

Top Ten New York Times Bestselling Author

  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, May 4, 2020

AI Summary. The authors estimate that the top 0.1%'s share of total household wealth rose to 14% from 7%, below earlier estimates of a rise to 22%. On their figures, a graduated wealth tax of 2% above $50m plus a 1% surtax above $1bn would raise $117bn rather than the $207bn implied by earlier estimates, assuming no behavioral response.

James Pethokoukis American Enterprise Institute
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New findings by @JamesPethokoukis suggest wealth inequality among top 0.1% is less severe than thought, with a proposed wealth tax generating $117B in 2016, not $207B.

Is wealth concentration at the top smaller than earlier estimates suggest?

Core argument: Zidar, Zwick, and Smith estimate the top 0.1%'s share of total household wealth rose to 14% in 2016 from 7% in 1978, below earlier estimates of a rise to 22%.

Recent findings by Zidar, Zwick, and Smith suggest that wealth inequality among the top 0.1% is less severe than previously estimated, with their share of total household wealth rising to 14% in 2016 from 7% in 1978, compared to earlier estimates of a rise to 22%. This has significant implications for wealth taxation, as a proposed graduated wealth tax—2% on wealth above $50m and a 1% surtax on wealth exceeding $1bn—would generate $117bn in 2016, not the $207bn projected by earlier estimates assuming no behavioral response. This suggests that the potential revenue from taxing the rich may be lower than anticipated, challenging assumptions about the effectiveness of such fiscal policies.

Takeaways by Macro Roundup® AI

  1. Zidar, Zwick, and Smith estimate the top 0.1%'s share of total household wealth rose to 14% in 2016 from 7% in 1978, below earlier estimates of a rise to 22%.
  2. Under the Zidar, Zwick, and Smith estimates, a graduated wealth tax of 2% above $50m plus a 1% surtax above $1bn would have raised $117bn in 2016, versus $207bn under earlier estimates assuming no behavioural response.
  3. The lower estimated wealth concentration at the top suggests revenue from taxing the wealthy would fall short of prior projections.

“…. They find the increase in wealth among the top 0.1 percent over the past 40 years is half as large as previous estimates, like those from Saez and Zucman, would indicate — a rise to 14 percent in 2016 from 7 percent in 1978….. One implication: It could be harder than previously thought to raise lots of dough by “taxing the rich”. For example: A graduated wealth tax — a 2 percent tax on wealth above $50 million and a 1 percent surtax on wealth exceeding $1 billion —would raise $117 billion in 2016 versus $207 billion using previous estimates and assuming no behavioral response…”

James Pethokoukis, “Maybe wealth inequality isn’t as dramatic as we think,” American Enterprise Institute, April 30, 2020, https://www.aei.org/economics/maybe-wealth-inequality-isnt-as-dramatic-as-we-think/

Maybe wealth inequality isn’t as dramatic as we think

How rich are the richest Americans? Perhaps not as rich as you think, at least if you’re the sort of person who obsesses about such things. If you are that sort of person, then you probably know the share of wealth held by the top 0.1 percent of families, according to economists Emmanuel Saez and Gabriel Zucman, is nearly as high as in the late 1920s, when “‘The Great Gatsby’ defined an era that rested on the inherited fortunes of the robber barons of the Gilded Age.”

Specifically, Saez and Zucman find the share of total household wealth owned by the top 0.1 percent surged to 22 percent in 2012 from 7 percent in the late 1970s. But there are alternate estimates, such as a new one from Princeton’s Owen Zidar, Chicago Booth’s Eric Zwick, and Treasury’s Matt Smith. They find the increase in wealth among the top 0.1 percent over the past 40 years is half as large as previous estimates, like those from Saez and Zucman, would indicate — a rise to 14 percent in 2016 from 7 percent in 1978.

aybe wealth inequality isn’t as dramatic as we think: Extended Excerpt Image 1


More from the paper “Top Wealth in America: New Estimates and Implications for Taxing the Rich”:

While this rise is half as large as prior estimates, wealth is very concentrated: the top 1% holds nearly as much wealth as the bottom 90%. However, the “P90-99” class holds more wealth than either group after accounting for heterogeneity. Private business and public equity wealth are the primary sources of wealth at the top, and pension and housing wealth account for almost all wealth of the bottom 90%.

One implication: It could be harder than previously thought to raise lots of dough by “taxing the rich”. For example: A graduated wealth tax — a 2 percent tax on wealth above $50 million and a 1 percent surtax on wealth exceeding $1 billion — would raise $117 billion in 2016 versus $207 billion using previous estimates and assuming no behavioral response.

Tuesday, May 5, 2020

AI Summary. A $1 increase in the minimum wage is associated with a 1.4% rise in low-wage job postings requiring a high school diploma, and with low-wage workers being older and more likely to hold a diploma. The authors interpret this as firms substituting toward higher-skilled workers, with no similar effect at higher education levels.

Lisa B. Kahn National Bureau of Economic Research
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A $1 increase in the minimum wage is associated with a 1.4% share of low-wage job postings that require a high school degree.

Do minimum wage increases push employers toward higher-skilled workers?

Core argument: A $1 increase in the minimum wage correlates with a 1.4% rise in low-wage job postings requiring a high school diploma, with diploma requirements in low-wage jobs rising by about 10% while requirements for higher education levels remain unaffected.

A $1 increase in the minimum wage correlates with a 1.4% rise in low-wage job postings requiring a high school diploma, indicating a shift towards higher-skilled labor. Analysis of 2011-2016 ACS data reveals that workers in low-wage roles are older and more likely to hold a high school diploma post-minimum wage hikes. Burning Glass vacancy data supports this, showing increased diploma requirements after wage increases. This labor-labor substitution suggests firms prefer higher-skilled workers when minimum wages surpass the value of lower-skilled output. The effect is pronounced in low-wage jobs, with diploma requirements rising by about 10%, while higher education levels remain unaffected. The study finds no significant impact on employment shares across other demographics, such as race or gender.

Takeaways by Macro Roundup® AI

  1. A $1 increase in the minimum wage correlates with a 1.4% rise in low-wage job postings requiring a high school diploma, with diploma requirements in low-wage jobs rising by about 10% while requirements for higher education levels remain unaffected.
  2. Analysis of 2011–2016 American Community Survey data shows workers in low-wage roles are older and more likely to hold a high school diploma after minimum wage increases, and Burning Glass vacancy data likewise show increased diploma requirements following wage increases.
  3. The study interprets the pattern as labor-labor substitution, in which firms prefer higher-skilled workers when minimum wages surpass the value of lower-skilled output, and finds no significant impact on employment shares by race or gender.

New paper speaks to the high cost of low skilled labor, finding a dollar increase in the minimum wage is associated with a 1.4% increase in the share of jobs that require a high school degree.

"... We explore whether minimum wage increases result in substitution from lower-skilled to slightly higher-skilled labor. Using 2011-2016 American Community Survey data (ACS), we show that workers employed in low-wage occupations are older and more likely to have a high school diploma following recent statutory minimum wage increases. To better understand the role of firms, we examine the Burning Glass vacancy data. We find increases in a high school diploma requirement following minimum wage hikes, consistent with our ACS evidence on stocks of employed workers. We see substantial adjustments to requirements both within and across firms…Most research focuses on the equilibrium employment effects of increases in wage floors, though there is recognition that other margins of adjustment may play a role. One important avenue by which firms may adjust in the face of minimum wage increases is through substitution towards higher-skilled labor. The underlying mechanism is straightforward: if the minimum wage exceeds the value of a worker’s output, a firm can eliminate their job or, potentially, find a replacement worker whose productivity meets or exceeds the floor. This phenomenon of “labor-labor substitution” can reduce the impact of minimum wage changes on equilibrium employment levels..... We find that effects are concentrated among individuals employed in low-wage occupations who are, on average, a quarter of a year older and 4 to 5 percent less like to be a young adult (age 16 to 21) or high school dropout, following statutory minimum wage increases that total around $1.70 over the full time period. We see no impacts on employment shares for other demographic groups, including groups defined by race, gender, and country of birth..... With the full set of controls included, a one-dollar increase in the minimum wage is associated with a statistically significant increase of 1.4 percentage points in the share of low-wage job postings that require a high school degree.....we show that the prevalence of requirements for a high school diploma increase following minimum wage hikes. The effect is concentrated among postings for low-wage occupations, where the diploma requirement increases by about 10 percent. Reassuringly, we find no effects for higher levels of education, like college degrees, that should be unaffected by minimum wage increases. We also find little impact on experience and other skill requirements....."

Jeffrey Clemens, Lisa B. Kahn, Jonathan Meer, "Dropouts Need Not Apply? The Minimum Wage and Skill Upgrading," National Bureau of Economic Research, May 2020, https://www.nber.org/papers/w27090

AI Summary. Research using American Community Survey data finds that minimum wage increases are associated with a shift in low-wage employment toward older, more educated workers, including more jobs requiring a high school diploma. The authors argue this substitution toward skilled workers reduces employment opportunities for less-educated, less-experienced workers.

Mark Perry American Enterprise Institute
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Research confirms that minimum wage laws have the greatest adverse effects on the most vulnerable workers, who lose their comparative advantage of offering lower wages.

Do minimum wage increases shift low-wage jobs toward more educated workers?

Core argument: American Community Survey data for 2011–2016 indicate that minimum wage increases shift employment in low-wage jobs toward older, more educated workers, with a rise in high school diploma requirements.

Research highlights the adverse effects of minimum wage laws on low-skilled workers, who lose their comparative advantage of offering lower wages. Data from the American Community Survey (2011-2016) shows that minimum wage hikes lead to a shift in employment towards older, more educated workers, with a notable increase in high school diploma requirements for low-wage jobs. This shift reduces employment opportunities for less-educated, less-experienced workers, exacerbating their vulnerability. Employers tend to substitute unskilled workers with skilled ones, as seen in job vacancy postings that increasingly demand higher qualifications. Consequently, minimum wage laws inadvertently increase unemployment and poverty among the least advantaged workers, as they are unable to compete effectively against more skilled counterparts. This underscores the need for policy considerations that address the unintended consequences of such wage regulations on marginalized groups.

Takeaways by Macro Roundup® AI

  1. American Community Survey data for 2011–2016 indicate that minimum wage increases shift employment in low-wage jobs toward older, more educated workers, with a rise in high school diploma requirements.
  2. Research argues that employers substitute skilled workers for unskilled ones after minimum wage increases, as reflected in job vacancy postings demanding higher qualifications, raising unemployment and poverty among the least advantaged workers.

Perry reports on new minimum wage research from Jeff Clemens, “…Bottom Line: It should be obvious but this new NBER research provides additional empirical evidence that the greatest adverse effects of the minimum wage law are concentrated on exactly those workers the minimum wage advocates say they are most trying help: lower-skilled, limited experience workers who are the least educated. In other words, the workers who suffer the most from minimum wage laws are the workers who are the least advantaged, least skilled, most marginalized, and most vulnerable, and who are most in need of gaining skills and work experience. And that makes minimum wage laws cruel, detrimental, and misguided, especially for the workers most at risk. To quote Don Boudreaux, “Taking away from workers an important bargaining chip, namely the ability to offer to work at a wage less than the minimum, is the cruelest thing you can do for a lot of these workers.”..”

Mark Perry, "Research confirms that the cruel minimum wage law has the greatest adverse effects on the most vulnerable workers," American Enterprise Institute, May 4, 2020, https://www.aei.org/carpe-diem/new-research-confirms-that-the-cruel-minimum-wage-law-has-the-greatest-adverse-effects-on-the-most-vulnerable-workers/

Research confirms that the cruel minimum wage law has the greatest adverse effects on the most vulnerable workers

Research confirms that the cruel minimum wage law has the greatest adverse effects on the most vulnerable workers: Extended Excerpt Image 1


It’s an economic reality that workers compete against other workers, not against employers, for jobs, and higher wages in the labor market. And it’s also true that lower-skilled, limited-experience, less-educated workers compete against higher-skilled, more experienced, more educated workers for jobs. As I explained in a 2016 CD post “What economic lessons can we learn about the $15 minimum wage law from an ‘$8 per pound minimum beef price law’?“:

Unskilled workers compete against other workers - especially skilled workers — for a limited number of available jobs at a given point in time. If the minimum wage is increased from $7.25 or $10 to $15 an hour, that will give skilled workers an advantage over unskilled workers, and will take away from unskilled workers the one advantage they currently have to compete against skilled workers - the ability to offer to work for a significantly lower wage than what skilled workers can command. And to the extent that we remove the wage advantage for unskilled workers, we reduce their ability to compete against skilled workers, and reduce employment opportunities for those unskilled workers.

Here’s an example: Suppose an employer can hire two unskilled workers at $7.25 an hour for a total cost of $14.50 an hour and provide them with on-the-job training, or hire one skilled worker for $20 an hour, provide no training, and get the same hourly output as two unskilled workers. Given that choice, the employer hires two unskilled workers and saves $5.50 an hour in labor costs. Now suppose that the minimum wage is raised to $15 an hour, which would require the employer to pay $30 an hour for two unskilled workers. In that case, the employer would switch to hiring one skilled worker at $20 an hour over two unskilled workers, and save $10 an hour in labor costs. Result of a minimum wage hike to $15 an hour? Demand for skilled workers goes up, demand for unskilled workers goes down, and employment opportunities for unskilled workers are reduced.

Here’s how Milton Friedman explained it:

The minimum wage law is most properly described as a law saying that employers must discriminate against people who have low skills. That’s what the law says. The law says that here’s a man who has a skill that would justify a wage of $5 or $6 per hour (adjusted for today), but you may not employ him, it’s illegal, because if you employ him you must pay him $9 per hour. So what’s the result? To employ him at $9 per hour is to engage in charity. There’s nothing wrong with charity. But most employers are not in the position to engage in that kind of charity. Thus, the consequences of minimum wage laws have been almost wholly bad to increased unemployment and increase poverty. What you are doing is to assure that workers whose skills are not sufficient to justify that kind of a wage will be unemployed.

A new NBER research paper “Dropouts Need Not Apply? The minimum wage and skill upgrading” by Jeffrey Clemens, Lisa B. Kahn, Jonathan Meer find empirical evidence of an adverse effect of minimum wage hikes on the least skilled, least educated workers as employers substitute away from those workers to hire higher-skilled, more educated workers with more experience. Below are the introduction from the paper and part of the conclusion:

Introduction:

We explore whether minimum wage increases result in substitution from lower-skilled to slightly higher-skilled labor. Using 2011-2016 American Community Survey data (ACS), we show that workers employed in low-wage occupations are older and more likely to have a high school diploma following recent statutory minimum wage increases. To better understand the role of firms, we examine the Burning Glass vacancy data. We find increases in a high school diploma requirement following minimum wage hikes, consistent with our ACS evidence on stocks of employed workers. We see substantial adjustments to requirements both within and across firms.

Conclusion:

We investigate whether changes in firms’ skill requirements are channels through which labor markets respond to minimum wage increases. We present evidence on two sets of outcomes: observable skill proxies and the skill requirements firms include in online job postings. Data from the American Community Survey show that recent minimum wage changes resulted in increases in the average age and education of the individuals employed in low-wage jobs. Data on job vacancy postings show that the prevalence of a high school diploma requirement increases at the same time. The shift in skill requirements begins within the first quarter of a minimum wage hike. Further, it results from both within-firm shifts in postings and across-firms shifts towards firms that sought more-skilled workers at baseline.

Given the poor labor market outcomes of individuals without high school diplomas, these findings have substantial policy relevance. This possibility was recognized well over a century ago by Smith (1907), who noted that the “enactment of a minimum wage involves the possibility of creating a class prevented by the State from obtaining employment.” Further, negative effects may be exacerbated for minority groups in the presence of labor market discrimination (Becker, 2010; Agan and Starr, 2017; Doleac and Hansen, 2016).

Bottom Line: It should be obvious but this new NBER research provides additional empirical evidence that the greatest adverse effects of the minimum wage law are concentrated on exactly those workers the minimum wage advocates say they are most trying help: lower-skilled, limited experience workers who are the least educated. In other words, the workers who suffer the most from minimum wage laws are the workers who are the least advantaged, least skilled, most marginalized, and most vulnerable, and who are most in need of gaining skills and work experience. And that makes minimum wage laws cruel, detrimental, and misguided, especially for the workers most at risk. To quote Don Boudreaux, “Taking away from workers an important bargaining chip, namely the ability to offer to work at a wage less than the minimum, is the cruelest thing you can do for a lot of these workers.”

AI Summary. Rising US inequality is associated with a savings glut among the top 1% alongside greater dissaving and indebtedness among the bottom 90%, while investment rates have declined despite falling real interest rates. The author argues escaping this debt trap requires shifting income distribution to support demand and investment, or reducing incentives favoring debt over equity financing.

Martin Wolf Financial Times
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Rising inequality in the US has led to a savings glut among the top 1% and dissaving among the bottom 90%, creating economic fragility. To escape this debt trap, shift income distribution to foster sustainable demand or consider equity financing for housing and businesses.

How can economies escape a debt trap driven by inequality?

Core argument: Rising US inequality has driven a large increase in saving by the top 1% of income earners while investment rates have declined despite falling real interest rates.

Rising inequality in the US has led to a significant increase in savings by the top 1% of income earners, while investment rates have declined, despite falling real interest rates. This savings glut has been matched by increased dissaving among the bottom 90%, resulting in a feedback loop of weakened demand and lower interest rates. The decline in net indebtedness of the rich since 1982 has been offset by rising indebtedness of the bottom 90%, creating economic fragility. To escape this debt trap, one solution is to shift income distribution to foster sustainable demand and stronger investment without escalating household debt. Alternatively, governments could continue borrowing, but this risks eventual default, impacting the well-off who are principal creditors. Addressing these issues requires diminishing incentives for debt financing over equity and considering equity financing for housing and businesses.

Takeaways by Macro Roundup® AI

  1. Rising US inequality has driven a large increase in saving by the top 1% of income earners while investment rates have declined despite falling real interest rates.
  2. The decline in net indebtedness of the rich since 1982 has been offset by rising indebtedness of the bottom 90%, whose dissaving matches the savings glut and creates economic fragility.
  3. Escaping the debt trap could involve shifting income distribution to support sustainable demand and stronger investment without more household debt, since continued government borrowing risks eventual default that would hit the well-off as principal creditors.

".....Two recent papers illuminate both the forces driving this rise in leverage and its consequences. One, directly related to the views of Eccles, who chaired the US Federal Reserve from 1934 to 1948, is on “The Saving Glut of the Rich and the Rise in Household Debt”. The other, on “Indebted Demand”, explains how debt overhangs weaken demand and lower interest rates, in a feedback loop. The authors of both include Princeton’s Atif Mian and Chicago’s Amir Sufi, well known for their fine past work on debt....The paper on the savings glut makes two points. First, rising inequality in the US has resulted in a large increase in the savings of the top 1 per cent of the income distribution, not matched by a rise in investment. Instead, the investment rate has been falling, despite declining real interest rates. The rising savings surplus of the rich has been matched by the rising dissaving, or consumption above income, of the bottom 90 per cent of the income distribution.... There are two apparent solutions. The first is for governments to keep on borrowing. But, in the very long term, this is likely to lead to some sort of default. The well-off, who are the principal creditors of government, are bound to bear much of the costs, in one way or the other. The alternative is to shift the distribution of income, in order to create more sustainable demand and so stronger investment, without soaring household debt….”

Martin Wolf, "How to escape the trap of excessive debt,"Financial Times, May 5, 2020, https://www.ft.com/content/2c5ddbd0-8e09-11ea-9e12-0d4655dbd44f

How to escape the trap of excessive debt

“It is utterly impossible... for the rich to save as much as they have been trying to save, and save anything that is worth saving.” Marriner Eccles, Congressional testimony 1933.

Debt creates fragility. The question is how to escape from the trap. To answer it, we need to analyse why today’s global economy has become so debt-dependent. That did not happen because of the idle whims of central bankers, as many suppose. It happened because of an excessive desire to save relative to investment opportunities. This has suppressed real interest rates and made demand far too reliant on debt.

Two recent papers illuminate both the forces driving this rise in leverage and its consequences. One, directly related to the views of Eccles, who chaired the US Federal Reserve from 1934 to 1948, is on “The Saving Glut of the Rich and the Rise in Household Debt”. The other, on “Indebted Demand”, explains how debt overhangs weaken demand and lower interest rates, in a feedback loop. The authors of both include Princeton’s Atif Mian and Chicago’s Amir Sufi, well known for their fine past work on debt.

As Eccles said so clearly, beyond a point, inequality weakens an economy by driving policymakers into a ruinous choice between high unemployment or ever-rising debt. The paper on the savings glut makes two points. First, rising inequality in the US has resulted in a large increase in the savings of the top 1 per cent of the income distribution, not matched by a rise in investment. Instead, the investment rate has been falling, despite declining real interest rates. The rising savings surplus of the rich has been matched by the rising dissaving, or consumption above income, of the bottom 90 per cent of the income distribution.

How to escape the trap of excessive debt: Extended Excerpt Image 1


The savings of the rich might have led to a current account surplus, as in late-19th-century UK. But the rich of the rest of the world have sought to accumulate US assets, and so generated a persistent US current account deficit. Except when the pre-financial crisis housing bubble drove up private ­investment, this has also remained too weak. The chief users of excess foreign and domestic savings have been less well-off households and the government.

There is a clear link between the saving of the rich and dissaving of the less rich, and the accumulation of credit and debt. Since 1982, the decline in net indebtedness of the rich has been matched by the rise in indebtedness of the bottom 90 per cent. This is why the argument that low interest rates hurt the less well off is absurd. The less well off are not large net creditors. The rich hold claims on the less rich, not only directly, via bank deposits, but via equity holdings in businesses that also hold such claims. This phenomenon of rising household debt and rising inequality is not unique to the US. It is widespread.

How to escape the trap of excessive debt: Extended Excerpt Image 2


Why does the rising debt matter? One answer, as David Levy argues in Bubble or Nothing, is that the economy becomes increasingly driven by finance and fragile, as borrowers become ever more overburdened. Another is the idea of “indebted demand” — a close relative of the idea of “balance-sheet recessions” propounded by the Japanese economist, Richard Koo. As debt soars, people are ever more unwilling to borrow still larger amounts. So interest rates have to fall, to balance supply with demand and avoid a deep slump. In these ways, we have ended up where we were even before Covid-19, with real interest rates at zero. This is one mechanism driving what Lawrence Summers has called “secular stagnation”.

How to escape the trap of excessive debt: Extended Excerpt Image 3


We must focus on the US first, because that is where global demand and supply tend to balance. But similar phenomena of rising inequality and soaring savings are to be seen in other big economies, notably China and Germany. The former used to export its excess savings to the US, but now absorbs it in wasteful investment at home. The latter has driven trading partners into rising debt in the eurozone and beyond.

How to escape the trap of excessive debt: Extended Excerpt Image 4


So, how are we to escape from the debt trap? One step is to diminish the incentive to finance businesses with debt, rather than equity. The obvious way to do so is to eliminate the preference of the former over the latter in almost all tax systems. It is also possible, as Profs Mian and Sufi argued in an earlier book, to shift from debt to equity financing of housing. In addition, we have a huge opportunity now to replace government lending to companies in the Covid-19 crisis with equity purchases. Indeed, at current ultra-low interest rates, governments could create instantaneous sovereign wealth funds very cheaply.

How to escape the trap of excessive debt: Extended Excerpt Image 5


Yet none of this would fix the ongoing dependence of macroeconomic stability on ever more debt. There are two apparent solutions. The first is for governments to keep on borrowing. But, in the very long term, this is likely to lead to some sort of default. The well-off, who are the principal creditors of government, are bound to bear much of the costs, in one way or the other. The alternative is to shift the distribution of income, in order to create more sustainable demand and so stronger investment, without soaring household debt.

In 1933, Eccles also told Congress, “It is for the interests of the well to do... that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit.” That happened, partly by accident and partly deliberately, after the second world war. Ever-rising household and government debt will not stabilise the world economy ­forever. Nor should asset-price bubbles remain so central to our economy. We will have to adopt more radical alternatives. A crisis is a superb a time to change course. Let us start right now.

Just an FYI, Martin Wolf wrote up Mian and Sufi’s Research:

Ed Comment:This is typically muddled wolf but add to savings glut for the useful graphs. I don't think it makes sense to restrict the use of debt when you have a savings glut as he proposes. If we are going to restrict the use of debt it ought to for using debt to fund consumption but I think even that would be mistaken. He wants to blame the rich but shows the trade deficit doubles the amount of savings and then says nothing about it. It never occurs to him that things likely exist for good reason so the successful risk-taking of the 0.1% who create inequality might be driven by their demand for payoffs large enough to allow them to save. Frankly, I have always been concerned that the expected value of risk taking is negative! And they may keep taking risk if they can hold risk averse savings that mitigate some of that risk. In that case, redistributing income that produce savings may have adverse consequence. I.e. There is no income to redistribute because it would gradually go away if you did. Wolf is either a propagandist or too stupid to recognize he ought to consider logic that might lead him to a different conclusion. Which do you think it is?