Multiplier/Rational Expectations

This paper has addressed a classic topic: the optimal accumulation of capital and the welfare effects of government debt in neoclassical growth models. Over the past several decades, the thinking of many economists has been shaped by the Solow growth model and the Diamond overlapping-generations model, which assume certainty and competitive markets. In these models, the real interest rate reflects the marginal product of capital. As a result, the low real interest rates experienced in recent years have tempted some economists to conclude that capital accumulation now has only small social value at the margin and, therefore, that the crowding out of capital by government debt is of little concern. The innovation in this paper is to generalize these two canonical modelsto include firms with market power. In this environment, the real interest rate earned by savers is below the net marginal product of capital. For a plausible calibration of the extended Solow model, the wedge between them is about 4 percentage points. The calibration also suggests that the U.S. economy is dynamically efficient. When market power is introduced into the Diamond model, government Ponzi schemes can have different implications for welfare than they do under competition. Even if a perpetual rollover of government debt and accumulating interest is feasible, the crowding out of capital may still reduce steady-state welfare.Previous work has established a close connection between the feasibility of government Ponzi schemes and the possibility of rational speculative bubbles. This equivalence suggests that in an overlapping-generations model with market power, rational bubbles are possible whenever government Ponzi schemes are. But unlike under competition, these bubbles may reduce welfare because they could occur even in dynamically efficient economies. By diverting saving away from capital accumulation, bubbles may depress aggregate consumption. This topic could be addressed in future research. Much previous work on dynamic efficiency and Ponzi schemes has stressed the role of uncertainty about capital returns. Under uncertainty, the risk-free real interest rate is below the expected marginal product of capital, and attempted Ponzi schemes by the government are riskyThis paper abstracts from these issues by considering models with certainty. A more realistic analysis of the U.S. economy would include both uncertainty and market power. We also leave that topic for future work.

Laurence Ball and Greg Mankiw, "Market Power In Neoclassical Growth Models,"Working Paper, April 2022, http://www.restud.com/wp-content/uploads/2022/05/MS30597manuscript.pdf

Impact of firm market power"...If typical prices are marked up 20% over marginal cost, as some of the literature suggests, the real interest rate is about 4 percentage points below the social return on capital. Correcting for the effects of market power yields an estimate of the social return of more than 8%. Because this estimated social return on capital is much higher than the economy’s growth rate, it indicates that the U.S. economy is dynamically efficient...."
Relationship with "Government Ponzi Scheme""...The impact of a government Ponzi scheme on welfare depends on two effects. The first we call the aggregate effect. Because government debt crowds out capital, it depresses aggregate consumption if the net marginal product of capital exceeds the growth rate and increases aggregate consumption in the opposite case. (This is parallel to the classic Phelps, 1961, result.) The second we call the generational effect: the introduction of government debt improves the allocation of aggregate consumption between the young and the old. This effect is similar to the Pareto improvement that can result from pay-as-you-go social security when the growth rate exceeds the interest rate (Samuelson, 1958; Weil, 2008). In a competitive economy, the aggregate and generational effects of debt work in the same direction. In an economy with market power, when the economy’s growth rate is greater than the real interest rate but less than the net marginal product of capital, the two effects conflict. These findings show that, in the presence of market power, the real interest rate by itself is a poor guide for judging the welfare effect of increased government indebtedness..."

“…the time-series of investment and payouts to shareholders reported inFigure 10reveal an interesting pattern. increase in payouts to shareholders outweighs the increase in investment a.er the recent TCJA-17, but not a.er the Kennedy’s tax cuts..is can be observed both at the aggregate and at the c-corporations level. In fact, payouts does not appear to deviate much from the pre-reform trend, unlike investment which exhibits a clear acceleration. The increase in capital formation is gigantic: aggregate business investment is 50% higher in 1966 than in 1963, and c-corporations’ investment is 80% higher….”

Core finding, "... the results are reported in Figure 11. In response to the Kennedy’s tax cuts, the model predicts a large increase in GDP and investment, and a small effect on payouts to shareholders: the opposite of Trump’s Tax Cuts and Jobs Act. Similarly, the corporate tax multiplier for Kennedy’s tax cuts is around 2:5 for GDP, 1:85 for investment, and close to zero for payouts to shareholders. For the TCJA-17, the multiplier is around 0:6 for each variable. For every dollar of lost corporate tax revenues, the Kennedy’s corporate tax cuts stimulated GDP four times more than the TCJA-17. The intuition behind these results is the following. In the early 1960s, the corporate tax rate was high and tax depreciation policy was not accelerated as it was mimicking economic depreciation. As a result, the corporate tax wedge was well below one (around 0:72) before the reform. The Kennedy’s tax cuts increased the wedge significantly (to around 0:84), thus providing strong stimulus to the investment of c-corporations. Moreover, since around 75% of economic activity was taking place in the c-corporate sector, the aggregate effect was less diluted than in 2017….”

Evidence from the Trump vs Kennedy Tax Cuts

Mike Pettis Comment, "In this very interesting paper @Furno_Francesco compares the Kennedy corporate tax cuts in the early 1960s with the recent Trump corporate tax cuts, and finds that the former stimulated output roughly four times more than the latter. Put differently, the Kennedy tax cuts seem to have increased business investment while the Trump tax cuts were mostly passed on to shareholders which, as Atif Mian, Ludwig Straub and Amir Sufi have explained elsewhere, was likely in turn to lead to higher household debt. Furno explains that “A large part of this difference can be attributed to differences in pre-reform tax depreciation policy.” As I argued in my book and elsewhere, I think the reasons the Kennedy tax cuts flowed into investment and Trump tax cuts into savings had to do with the very different relationship between savings and investment at the time of the tax cuts. From a macro point of view corporate tax cuts increase business profits, which raise corporate savings. Whether these are used to fund investment or are passed on to shareholders depends on whether the main constraint on business investment is scarce savings or weak demand. In the former case, higher business profits can lead fairly automatically to higher business investment. If savings are abundant and the cost of capital low, however, the constraint is likely to be weak demand. In that case businesses will have little incentive to increase investment, and a cut in their taxes simply increases the after-tax profits they pass on to shareholders or use to acquire other companies. In the early 1960s, much of the world was still in the process of rebuilding itself after the ravages of two world wars. With high global investment needs and low global savings (the war caused income to plummet and, with it, savings), the main economic constraint was a scarcity of savings needed to fund investment. This was a time when the US was exporting so much of its domestic savings to the rest of the world that capital controls were imposed to restrict the outflow of dollars. Under these conditions it is not surprising that any policy that generated an increase in savings was likely - in classic supply-side fashion - to lead to an increase in business investment. In recent decades, however, conditions were dramatically different. The world has become awash in ex ante savings, and the US has become the dumping ground for nearly half of the world’s excess savings. What is more, US businesses are sitting on huge piles of cash and can only use them to buy back shares or purchase other companies. It is weak demand, in other words, and not scarce savings, that has limited business investment. In that case policies that increase in savings have little to no impact on business investment, and in fact could actually reduce business investment if the increase in business savings were balanced by a reduction in household income (and, with it, consumption). To me this is the key difference between the Kennedy and Trump tax cuts. The former provided more savings at a time when American businesses wanted to invest more, but were unable to do so in part because of the fierce global competition for US savings. The latter provided more savings at a time when the world was awash in excess savings and American businesses wouldn’t invest until they saw a rise in demand. As an aside, I am re-reading Charles Arthur Conant’s 1900 book, and it is amazing how similar the problem of excess savings the global economy faced in the 1880s-90s. At one point he proposes establishing a state pension system to help generate the demand needed to absorb excess global savings. This is because “experience has shown that when saved capital accumulates rapidly, the groping after new uses for it causes waste and disaster”.

Core of paper“…In the model, corporate tax changes affect the economy primarily through the investment decision of c-corporations, which is affected not only by the tax rate but also by tax depreciation policy. Specifically, the possibility to deduct investment from the tax base (partially) counteracts the distortion introduced by the tax rate: the faster investment is deducted from the tax base, the smaller the distortion to the rate of return on investment. As a result, when tax depreciation policy is very accelerated - like it was in 2017 - the rate of return on investment is almost unaffected by corporate tax policy, and a reduction in the corporate tax rate is not particularly expansionary……However, irrespective of how much stimulus is provided to investment, a corporate tax cut always entails a transfer of resources from the government to c-corporations. When pre-reform tax depreciation policy is very accelerated, the tax-savings from a rate cut are not used for investment and are distributed to the shareholders. When pre-reform tax depreciation policy is not very accelerated, instead, the extra cash is used for investment. Moreover, since a change to the corporate tax rate affects only c-corporations, the aggregate effect is diluted by the presence of pass-through businesses. After a rate reduction, pass-through entities are not only excluded from the tax cut, but they are also put at a competitive disadvantage. ‘is happens because they compete with c-corporations in the production of (imperfectly) substitutable goods, which further amplifies the shift of economic activity from pass-through businesses to c-corporations and reduces the aggregate effect even more….”

Good blog post from FRBNY that makes the case that the excess savings accumulated over the past year are unlikely to generate a demand surge as the pandemic recedes, "... these savings are not that excessive, when considered against the backdrop of the unprecedented government interventions adopted over the past year in support of households and that they are unlikely to generate a surge in demand post-pandemic...."

Their argument in terms of accounting identity the excess savings derive from excess (pandemic related) government spending, “…Excess savings are the accounting counterpart of “extra” government debt. According to the principles of national income accounting, the flow of private saving (by households and businesses) must be channeled to one of three uses. It can finance investment, be lent abroad, or lent to the government. In 2020, the U.S. government spent roughly $2 trillion to fight the COVID-19 recession, most of it financed with debt. The $1.6 trillion in “excess savings” is the accounting counterpart of this increase in government borrowing.As is often the case with accounting identities, this observation has limited economic implications. It does not reveal why households accumulated the “excess savings,” nor whether they will spend them once the economy fully re-opens. Nonetheless, it helps us to consider them under a different light—not as “extra” resources ready to be spent, but as the flip side of the extraordinary fiscal effort to fight the COVID-19 pandemic….”
In practical terms they believe this plays out as follows, “…. Excess savings are mostly held by…savers. One reason why many economists do not associate the exceptional increase in government debt over the past year with an imminent explosion in aggregate demand—even though they might worry about it for a host of other reasons—is the idea that government debt is money that citizens owe to themselves. As such, it would not represent “net wealth” that is ready to be spent. In economics jargon, this idea is known as Ricardian Equivalence. According to this proposition, public transfers financed with government debt do not affect consumption because households save them to pay for the increase in taxes that will eventually be necessary to repay that debt. If Ricardian Equivalence held, the marginal propensity to consume out of debt-financed transfers would be zero, and the resulting savings would never be spent. Ricardian Equivalence is the kind of theoretical benchmark that economists love, but it clearly does not hold in practice. In fact, many U.S. families did spend a significant share of the checks and other income support that they received during the pandemic. According to available estimates, this share is around one-third on average. The rest was used to pay down debt (also about one-third) or otherwise saved. It is hard to know exactly who holds these savings, but it seems reasonable to assume that they are individuals and families with a bit of a buffer in their budgets—and whose consumption decisions are therefore less sensitive to their immediate economic circumstances. This is presumably what allowed them to save part of the support they received. According to economic theory, these savers are more likely to be Ricardian, and hence to continue holding on to these savings. Of course, their economic circumstances might change in the future and they might find themselves in need to spend those accumulated resources, but the end of the pandemic in itself is unlikely to turn them from savers to immediate spenders. If anything, fewer households should face financial hardship as aggregate conditions improve. Excess savings are unlikely to unleash pent-up demand for services. One caveat to the previous reasoning is that some of the “excess savings” might be due to a dearth of spending opportunities in the sectors of the economy most affected by the virus, such as travel and entertainment. If this is true, some of that lost spending could materialize once those sectors fully re-open…”

They estimate ~ 1/3 of the savings will be spent, an estimate in line with the 2008 “Economic Stimulus Act” (the Bush checks)“…How large is this “pent-up” demand for services likely to be? On the one hand, there is little doubt that many consumers will enjoy a few extra restaurant meals and perhaps splurge on a nicer vacation after such a long period without them. On the other hand, there is a limit to how many extra restaurant meals and vacations people will be able to enjoy. To have a sense of how much of this pent-up demand might be activated by the “excess savings” accumulated during the pandemic, recall that available estimates of the propensity to consume out of the CARES Act transfers is about one-third. This means that the average household spent about 33 cents out of each dollar received in direct payments. As it turns out, this estimate is in line with those based on previous transfers of this kind, such as the Economic Stimulus Payments of 2008. Therefore, the pandemic does not seem to have substantially limited households’ ability to spend the support that they received….”

Though this might be of interest, new NBER from Valerie Ramey looks at the macro effects of government infrastructure investment and finds that it has limited short run effects versus other forms of government consumption due to time lag and crowding out, this is true even when some infrastructure investment has significant positive long runs effects,

On the short term stimulative effect“…First, even when government investment has significant long-run effects, the short run stimulus multipliers are less than those from government consumption in most situations. The two key reasons are (i) the effects of time-to-build delays and (ii) the propensity of government investment to crowd out private spending more than government consumption does.These results are supported by quantitative models, empirical panel studies across OECD countries, time series analysis in the U.S., and cross-state studies. The effects of time-to-spend and time-to-build delays, which appear to be inherent in infrastructure projects, work against the standard New Keynesian mechanisms and lower short-run multipliers. Second, the long-run multipliers on government investment depend critically on both the production function elasticity of output to public capital and on where the economy begins relative to the socially optimal level of public capital. Higher production function elasticity raises multipliers and starting far below the socially optimal level of public capital also raises multipliers….”

Valerie Ramey, “The Macroeconomic Consequences Of Infrastructure Investment,” National Bureau Of Economic Research, July 2020, https://www.nber.org/papers/w27625

Her figure 8 suggest current levels of public capital in terms of GDP are comparable to previous periods of higher investment, “…shows government capital as a percent of GDP from 1929 to 2018. The data are current-cost net stock data on government capital and nominal GDP from the BEA. The figure shows long-run trends for all government capital, nondefense government capital, and transportation capital relative to GDP. All show significant swings over time. The total government capital ratio hit peaks in the 1940s and the mid-1970s. Both the nondefense and transportation government capital ratios hit peaks in the 1930s, the mid-1970s, and in the early 2010s. The ratios have fallen only slight since the early 2010s. Thus, current levels of public capital are comparable to those of some of the past high points….”

Taking a longer view, “…Second, my review and small extension of the empirical literature on the long-run estimates suggests that theaggregate production function elasticity of output to public capital is probably between 0.065 and 0.12,…However, this elasticity is very stylized and does not take into account possible differences in the marginal products of different types of government capital. Some studies find higher estimates for core infrastructure, while others do not. Third, there is both theoretical support and some empirical support for the short-run multiplier on government investment being higher when interest rates are constrained by the zero lower bound (ZLB). The theoretical mechanisms that lead to this effect, however, also imply that at the zero lower financing government spending with distortionary income taxation rather than deficits leads to higher multipliers, a result contrary to most economists’ priors. Fourth, cross-section and panel evidence on U.S. states or counties that focuses on bridge, highway, and road infrastructure spending suggests that the spending leads to either no change or a decline in employment in the first several years, even during ZLB periods. There is no obvious explanation for these puzzling results, though the disruptive effects of construction on existing infrastructure might play a role. In sum, the macroeconomic approach to government investment provides strong support for the long-run benefits of infrastructure spending. However, the same approach raises questions about the suitability of investment in infrastructure and other public capital as a short-run stimulus….”

"....Using new narrative measures of exogenous variation in marginal tax rates associated with postwar tax reforms in the US,this study estimates short run tax elasticities of reported income of around 1.2 based on time series from 1946 to 2012. Elasticities are larger in the top 1% of the income distribution but are also positive and statistically significant for other income groups. Previous time series studies of tax returns data have found little evidence for income responses to taxes outside the top of the income distribution. The different results in this study arise because of additional efforts to account for dynamics, expectations and especially the endogeneity of tax policy decisions. Marginal rate cuts lead to increases in real GDP and declines in unemployment. This study also presents evidence that the responses are to marginal tax rates rather than average tax rates.Counterfactual tax cuts targeting the top 1% alone have short-run positive effects on economic activity and incomes outside of the top 1%, but increase inequality in pre-tax incomes.... Moving outside of the top 1% or 5%, the elasticities drop off sharply and are generally insignificant. Based on the results in Table 2, the evidence for a sizeable response outside the top 1% or in the aggregate appears weak or nonexistent.The relatively large short run elasticities for the top 1% also do not contradict more modest long run responses.....Cuts for taxpayers outside of the top 1% also lead to increases in incomes and economic activity, but with a longer delay…..”

Karel Mertens and Jose Montiel Olea, "Marginal Tax Rates And Income: New Time Series Evidence," National Bureau Of Economic Research, June 2013 Revised September 2017, https://academic.oup.com/qje/article-abstract/133/4/1803/4880451

Reviewed the first of the two of the paper's David Rivera sent, looks at relationship btw marginal tax rates and elasticities by incomes (this is pre-TCJA) paper finds that top 1% incomes show strongest short run response to tax rates, but also finds statistically significant drop off @ cutoff of top 5% income; they do find that lower income earners also see an increase in income but with a time lag:“…The regression results indicate thatincomes in the top 1% of the income distribution display the strongest short run response to tax rates, which is consistent with the notion that high income tax payers display more avoidance behavior. However, contrary to prior time series studies of tax return data, wealso find statistically significant elasticities for lower income groups and narrower wage income measures. Moreover, marginal rate cuts lead to increases in real GDP and declines in the unemployment rate that are broadly consistent with existing macro results. Simple calculations suggest aggregate hours elasticities of 0.37 on the intensive margin and 0.41 on the extensive margin…”

Working paper looks at the relationship btw the drop in demand caused by a supply shock, which in many cases might be larger than the decline in supply. This shock is amplified by lack of a substitution channel btw sectors -“the fact that some goods are no longer available makes it less attractive to spend overall. An interpretation is that the shutdown increases the shadow price of the goods in the affected sectors, making total current consumption more expensive and thus discouraging it”They are calling this a“Keynesian supply shock”

TheEconomistnoted it in passing, saying that the implication is consumption will be more valuable in future given the lack of available goods and services today, they suggests that the deflationary shock could eventually turn inflationary.

“….We present a theory of Keynesian supply shocks: supply shocks that trigger changes in aggregate demand larger than the shocks themselves. We argue that the economic shocks associated to the COVID-19 epidemic—shutdowns, layoffs, and firm exits—may have this feature. In one-sector economies supply shocks are never Keynesian. We show that this is a general result that extend to economies with incomplete markets and liquidity constrained consumers. In economies with multiple sectors Keynesian supply shocks are possible, under some conditions. A 50% shock that hits all sectors is not the same as a 100% shock that hits half the economy. Incomplete markets make the conditions for Keynesian supply shocks more likely to be met. Firm exit and job destruction can amplify the initial effect, aggravating the recession…. In this case, we identify a firm exit multiplier. As some initial set of businesses is shut down (e.g. restaurants), e.g. due to health concerns, Keynesian forces reduce demand for other businesses (e.g. car dealers) as well. This, however, might mean that some of the other businesses become unable or unwilling to remain open. When they close, however, laying off their workers, a new, endogenous, Keynesian supply shock is born, that amplifies the existing exogenous one, creating a multiplier effect that may be sufficiently strong to shut down most of the economy…. We discuss the effects of various policies. Standard fiscal stimulus can be less effective than usual because the fact that some sectors are shut down mutes the Keynesian multiplier feedback. Monetary policy, as long as it is unimpeded by the zero lower bound, can have magnified effects, by preventing firm exits. Turning to optimal policy, closing down contact-intensive sectors and providing full insurance payments to affected workers can achieve the first-best allocation, despite the lower per-dollar potency of fiscal policy…demand may indeed overreact to the supply shock and lead to a demand-deficient recession.We have tried to lay out the conditions for this to be the case. Low substitutability across sectors and incomplete markets, with liquidity constrained consumers,all contribute towards the possibility of Keynesian supply shocks…..”

Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub and Iván Werning, "Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?," Working Paper, April 2, 2020, https://cpb-us-e1.wpmucdn.com/sites.northwestern.edu/dist/6/1682/files/2020/04/covid19_supply_demand.pdf

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"...Thus, if this capital is all deployed by the Fed, and at rates that will surely crowd out private capital, all capital allocation in the U.S. in 2020 will be done by the Federal Reserve System, not by the capital market. This is the largest step toward a centrally planned economy the U.S. has ever taken. And it socializes only losses. Profits, when they come, remain private....."

Amit Seru and Luigi Zingales, "Save Capitalism From the Cares Act,"Wall Street Journal, March 30, 2020, https://www.wsj.com/articles/save-capitalism-from-the-cares-act-11585608917

Save Capitalism From the Cares Act

A surreal bipartisanship prevails in Washington. Everyone wants to spend, spend, spend. Senate Majority Leader Mitch McConnell, who aggressively fought President Obama’s 2009 stimulus package, was delighted the other day to announce a fiscal stimulus more than twice as large. Democrats are pushing for more.

Are we all Keynesians now? Or have we all embraced the so-called Modern Monetary Theory, which suggests that when an economy is below its full potential, we can print money to finance any deficit without provoking inflation? No. The answer is much simpler. We are all experiencing the effects of combining a real crisis with powerful lobbying.

With 20% of Americans locked in their homes, nearly all air travel canceled, and the global supply chain disrupted, you don’t need to be a Keynesian to think the government should intervene. But that doesn’t mean the Cares Act—an acronym for Coronavirus Aid, Relief, and Economic Security—is wise. The last thing we need at this moment is a Keynesian stimulus. Since the lockdowns constrain supply, stimulating demand would lead only to a rise in prices.

Besides helping the medical effort, government intervention should offer financial help to people who can’t work, and it should preserve the production capacity of the U.S. economy. The greatest resource most companies have is their teams of employees. If they dismantle those teams because of the pause in the economy, production capacity will be lower at the end of the pandemic.

Only $377 billion of the $2 trillion package is directly targeted to this goal. These are loans to small firms (fewer than 500 employees), which are forgivable if the funds are spent on payroll, rent, mortgage interest and utilities. By using 2017 census data (the most recent available), we calculated the total expenditures in payroll, interest expenses and rents of U.S. small firms amounts to $258 billion a month. Unless the Trump administration introduces criteria for selective targeting, the money allocated in Cares will run out in a month and a half. Designing the conditions for such targeting isn’t easy, since every requirement will slow the money’s deployment and speed is of essence. Thus, we fear that the administration will soon come back to Congress with a new request for money.

The need to help individuals and small firms has provided cover to the largest corporate subsidy program in U.S. history. Under intense pressure from lobbyists, the Cares Act allocates $510 billion to support loans for large businesses. A small chunk of this money ($56 billion) will be used directly by the Treasury to grant loans to airlines and other “strategic” firms (read: Boeing). The Treasury will then confer the rest ($454 billion) to the Federal Reserve to absorb losses the Fed might incur in lending to firms in the private sector.

The expectation is that the central bank will leverage this money 10 to 1, enabling it to lend up to $4.54 trillion to companies. That sum is more than all U.S. commercial and industrial loans outstanding at the end of 2019 ($2.35 trillion) plus all the new corporate bonds issued during 2019 ($1.41 trillion). Thus, if this capital is all deployed by the Fed, and at rates that will surely crowd out private capital, all capital allocation in the U.S. in 2020 will be done by the Federal Reserve System, not by the capital market. This is the largest step toward a centrally planned economy the U.S. has ever taken. And it socializes only losses. Profits, when they come, remain private.

There needs to be far more transparency, governance and accountability around the Fed’s deployment of trillions of dollars in the real economy. Policy makers also should make the $510 billion program for large companies similar to that for small firms, but with tougher conditions. Again using 2017 census data, we calculated the total expenditures in payroll, interest expenses and rents of all U.S. large companies to be $392 billion a month.

Yet not all large companies are idle. Amazon is doing great, and so are Google and Facebook. Overall, large businesses are likely to be hit less hard than the U.S. economy overall. Goldman Sachs forecasts a 24% drop in this coming quarter. Even if the large companies were hit in proportion to the overall downturn, the cost of replacing their wages, rents and interest would be only $94 billion a month. So the $510 billon would last almost half a year.

The urgency of the moment facilitated a giveaway to vested interests. Now that the Cares Act is law, policy makers need to find ways to impose restrictions on how the money is deployed. It isn’t only a question of fiscal prudence; the nature of American capitalism is at stake.

New Rognlie looks at income distribution's impact on aggregate demand as of today. As of now they find that the marginal propensity to consume btw rich and poor is quite small: “…average MPC of the top 10% of income earners and that of the bottom 90% of earners is less than 0.1….”

Adrien Auclert and Matthew Rognlie, "Inequality and Aggregate Demand," Stanford University and Northwestern University, January 2020, http://mattrognlie.com/inequad.pdf

“…For temporary increases in inequality, in line with common intuition, we find that the key is the relationship between MPCs and income. But although the rich have lower MPCs than the poor, the gap is not large enough for realistic changes in the income distribution to have much effect on aggregate consumption. For instance, in both the data and our calibrated model,the gap between the average MPC of the top 10% of income earners and that of the bottom 90% of earners is less than 0.1. Hence, every additional 1% of overall income shifting from the bottom 90% to the top 10% (a larger-than-usual year on year change; see Piketty and Saez 2003) lowers aggregate consumption by no more than 0.1% of total income….We explore the transmission mechanism of income inequality to output. In the short run, higher inequality reduces output because marginal propensities to consume are negatively correlated with incomes, but this effect is quantitatively small in both the data and our model. In the long run, the output effects of income inequality are small if inequality is caused by rising dispersion in individual fixed effects, but can be large if it is the manifestation of higher individual income risk….We found that transitory income redistribution can lead to declines in both consumption and output, but that this effect is likely small. By contrast, we found that the long-run effect of income inequality, if it involves an increase in idiosyncratic income risk, can potentially be quite large….”

However they find that this could change going forward, “…we generally findoutput effects that are negative but small, with one notable exception: if inequality is caused by an increase in individual income risk, and monetary policy does not or cannot lower interest rates enough to offset it, then a large, long-lasting slump can ensue…”.