Long-term risks of debt-dependent demand

Princeton University economist Atif Mian says record wealth inequality has become a major macroeconomic problem. Born and raised in Pakistan, Mian came to the United States to study math and engineering at MIT, where he discovered economics and eventually earned his PhD. After the 2008 financial crisis, he rose to prominence with his groundbreaking research on the relationship between debt, the financial sector, wealth concentration, and the macroeconomy, which culminated in his influential book “House of Debt,” with colleague Amir Sufi. Mian says “distribution matters,” and that today’s record levels of economic inequality represent not just a moral issue, but a serious threat to the functioning and stability of the macroeconomy. Mian says the massive inequality at the top of the wealth pyramid—think of the top 1% of Americans, who now control as much wealth as the bottom 90% combined, for example—has created a system that is dangerously out of balance. His research has found that the savings rate among the bottom 50% is effectively zero, while the top 1% are able to bank 40% of their income. 

All that money being removed from the economy, he says, “has to go somewhere.” So where is it going? Not where it’s needed, Mian says. Instead of channeling it into productive uses, like investments in businesses and factories, the financial sector is pushing it out as unproductive consumer debt at a rate that isn’t sustainable, he says. And in fact, U.S. consumer debt rose to a record $18.6 trillion dollars in the third quarter of last year. It’s a system that is dangerously out of balance, he says. To rebalance it will require looking at regulations, incentives, inherited wealth, and particularly taxation, especially on unproductive assets. Atif Mian joins Economics for Inclusive Prosperity Podcast host Ralph Ranalli to talk about how we got here economically, what it means if we do nothing, and ways we might be able to get to a better, more sustainable place. 

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Reading materials mentioned in this episode:

Academic Papers:

"The Goldilocks Fiscal Theory of Government Debt," Atif Mian, Ludwig Straub, Amir Sufi (Washington Center for Equitable Growth - June 2022)

"The Saving Glut of the Rich," Atif Mian, Ludwig Straub, Amir Sufi (National Bureau of Economic Research - April 2022)

"Indebted Demand," Atif Mian, Ludwig Straub, Amir Sufi (Bank for International Settlements, October 2021) 

Books:

"House of Debt," Atif Mian, Amir Sufi (University of Chicago Press, 2014)

Key Terms in this episode

Digital Land Asset - Also known as digital real estate, such as a website or another type of online asset.

Full market - A theoretical market with negligible transaction costs (and therefore also perfect information) and one where every asset in every possible state of the world has a price. In a full market, the complete set of possible bets on future states of the world can be constructed with existing assets without friction. Also known as a complete market.

Time Series Data - Time series data consists of observations of economic variables (like GDP, inflation, or stock prices) collected at regular time intervals to identify trends, patterns, and relationships.

VARs - Vector Autoregression (VAR) models how interconnected economic variables influence each other over time, explaining dynamic relationships and aiding policy analysis.

Atif Mian is the John H. Laporte, Jr. Class of 1967 Professor of Economics, Public Policy and Finance at Princeton University. He started my academic career in 2001 after completing his bachelor’s degree in Mathematics with Computer Science and Ph.D. in Economics from MIT. Prior to joining Princeton in 2012, He taught at the University of California, Berkeley and the University of Chicago Booth School of business. Mian’s research focuses on finance and macroeconomics, with a focus on understanding the human connections that help form the economy. “I see the goal of economics as helping society connect with itself in ways such that the sum is bigger than its parts,” he says. His current work focuses on the deeper implications of rising inequality for the macroeconomy—including growth, financial markets, monetary policy and fiscal policy. Mian co-founded the Center for Economic Research in Pakistan (CERP) in 2007, a non-profit research institute dedicated to economic research, teaching and innovation. He is also the director of the Julis-Rabinowitz Center for Public Policy and Finance at the Princeton School of Public and International Affairs. Mian co-authored the influential 2013 book, “House of Debt,” with Amir Sufi.

Economics for Inclusive Prosperity (EfIP) is a network of academic economists from Harvard, Princeton, Columbia, and other leading universities who are committed to an inclusive economy and society. EfIP members are working to transform their field around a new vision of prosperity—a vision that includes traditional economic metrics, but also expanded measures of wellbeing including access to health, to democratic participation, and to a livable planet. They’re also highlighting the important changes in economics that are already underway.

Host Ralph Ranalli is a podcaster, entrepreneur, and former journalist, who has also hosted “HKS PolicyCast,” the award-winning flagship podcast of the Harvard Kennedy School. He holds a BA in political science from UCLA and a master’s in journalism from Columbia University.

The Economics for Inclusive Prosperity Podcast is recorded at the Malcolm Wiener Center for Social Policy at the Kennedy School of Government at Harvard University. The show is co-produced by Ralph Ranalli and Tony Ditta.