Federico Gastaldi
In the early days of the coronavirus pandemic, Hollywood mogul David Geffen enraged many social media users when he posted a photo of his yacht, Rising Sun, on calm waters. “Isolated in the Grenadines avoiding the virus,” Geffen wrote on Instagram. “I’m hoping everybody is staying safe.”
The photo of billionaire life aboard a 454 ft., $590 million yacht inspired plenty of outrage, and even a parody song by singer John Mayer titled “Drone Shot of My Yacht.” As an example of conspicuous consumption, the post highlighted stark global inequalities in wealth and opportunity, and didn’t land well with the millions of people stuck at home in lockdown or risking their health and lives performing essential work.
But when it comes to wealth inequality, a billionaire’s yacht is a sideshow, says Chicago Booth’s Amir Sufi. After all, a yacht is rooted in the real economy. A good chunk of the money originally spent on the yacht went to pay workers and buy equipment, and had a multiplier effect as it circulated in the broader economy. The real problem could be that much of the money owned by billionaires and other wealthy people never makes it that far. “People get angry about seeing the rich consuming a lot,” Sufi says, “but that’s better than what they’re actually doing.”
What’s happening, he says, is that disparities in income and wealth have fueled ever more saving by the top 1 percent. But while many economists think more saving leads to productive investment, Sufi, Princeton’s Atif Mian, and Harvard’s Ludwig Straub make a different argument. They find that these savings are largely unproductive, being remade by the financial system into household and government debt. And their research outlines a cycle whereby the savings of the top 1 percent fuel the debt and dissavings of the lower 90 percent, which in turn leads to more savings at the top.
From the 1980s through 2007, the top 1 percent financed a large portion of the overall rise in household debt for the lower 90 percent, according to the researchers. And as the rich have accumulated capital, the less wealthy have accumulated fewer assets, which means they experience less financial stability overall. Thus, the work argues, the savings glut of the rich, and its role in financing unproductive debt and dissavings of the nonrich, leads to instability not only for the less economically privileged but also for the broad economy.
Inequality, in terms of income and wealth, has been a hot topic for the past couple of decades, but it has been unclear what role saving plays in it, whether as cause or effect.
In March 2005, then Federal Reserve governor and future Fed chief Ben Bernanke gave a speech before the Virginia Association of Economists calling attention to a global savings glut. Bernanke argued that the US account deficit, which at the time was more than 6 percent of national income, wasn’t due to American profligacy but instead to the rest of the globe’s frugality.
Countries such as China, Korea, and Venezuela were increasingly saving money rather than using their savings to invest domestically. Those savings were then being put to work in industrialized countries such as the United States, through activity including massive purchases of government bonds. These foreign inflows helped inflate stock prices and depress long-term interest rates, said Bernanke—and this in turn encouraged borrowing, particularly for real estate, where prices were skyrocketing at the time. Foreign inflows were also strengthening the dollar, thus discouraging exports while boosting imports, and contributing to a US trade imbalance.
The analysis suggests that the top 1 percent of households in the US have just as much influence as emerging-market economies in fueling the debt of the bottom 90 percent.
While not all economic experts agree with Bernanke’s savings glut theory, some do argue that a savings glut contributed to the 2008–09 financial crisis. (In 2008, the radio show This American Life famously explained how what it called “the giant pool of money”—the $70 trillion in global fixed-income investments—was lent out as mortgages, many of them subprime, and helped cause the housing crisis.) While there’s no clear consensus in the academic literature on the factors that led to the crisis, Mian, Straub, and Sufi lean toward the global savings glut theory. Mian and Sufi argue in 2018 research that a rapid flow of foreign funds into the US triggered a credit-supply expansion that boosted household debt, which they say was a major factor in igniting the financial crisis.
And with Straub, they draw a line connecting the global situation to the savings glut of the rich. Using US current account data to compare the two, and a methodology that they use to calculate the savings of the rich, they find that from 1982 to 2016, the glut of the US rich was, on average, 60–75 percent of the size of the global glut. And at times in the 1990s and 2010s, the amount rich Americans put away even exceeded the global glut.
The top 1 percent by wealth in the US constitute a wide range, from millionaires to billionaires. (For more data about the ultrawealthy and highest earners, read “Never mind the 1 percent. Let’s talk about the 0.01 percent.”) It takes approximately $11 million to be at the bottom of the 1 percent by household net worth in the US (as of 2020), and about $538,000 per year to be at the bottom of the 1 percent by income. Credit Suisse’s 2020 wealth report finds that the US has about 20 million millionaires, 40 percent of the global total. Meanwhile, the Billionaire Census 2020 from Wealth-X, which provides information and insight on the world’s wealthiest individuals, finds the US has about 28 percent of the world’s billionaires, who hold a 36 percent share of global billionaire wealth. The world now has a record 2,755 billionaires, according to Forbes.
The analysis by Mian, Straub, and Sufi suggests that the top 1 percent of households in the US have just as much influence as emerging-market economies in fueling the debt of the bottom 90 percent. The researchers’ study focuses on the US, but they say similar patterns of wealth disparity and investment can be seen around the globe.
Between 1982 and 2007, US states with a higher increase in income inequality experienced a greater rise in saving by the top 1 percent, the researchers find. Florida, New York, and Nevada saw a larger income gap than Michigan, Arizona, and California. They also experienced a greater rise in saving by those at the top.
Ideally, all those savings would be channeled into productive investments such as research and development, or practical equipment, or new roads, or even new yachts—investments that would promote growth in the economy. However, from 2000 through 2016, the average annual savings of the top 1 percent exceeded average annual net domestic investment as a percentage of GDP, according to Mian, Straub, and Sufi. While the rich saved more, investment in productive assets declined.
The researchers argue that those savings were put to use financing both household and government debt. Comparing the 1960s and ’70s with the period between 2000 and 2016, they find that claims on household and government debt account for nearly two-thirds of the rise in asset accumulation of the top 1 percent in the US. In the 25 years leading up to the 2008–09 financial crisis, they calculate, the top 1 percent financed almost a third of the rise in household debt owed by the bottom 90 percent. And they find that in the years since the crisis, and since the housing bubble burst, the savings of the rich have gone more toward government debt—although many households in the lower 90 percent continue to spend more than they can save, with their debt indirectly financed by the 1 percent’s growing assets.
Not all household and government debt is unproductive, of course. More than one entrepreneur has financed a startup on a credit card or with a personal loan. However, much household debt goes toward instruments such as mortgages and home equity loans, which can be used speculatively, in which case they are less productive than, say, investments in manufacturing plants or technology. Thus, the researchers argue that mortgages, while enabling homeownership, can also help perpetuate a cycle of wealth inequality.
As US income inequality began a marked increase in the 1980s, the richest 1 percent of households increased their savings while the bottom 90 percent fell into debt. Research finds that lenders indirectly used the top 1 percent’s savings to finance this borrowing, essentially enabling the rich to benefit from the bottom 90 percent’s debt repayments.
The wealthy aren’t deliberately shying away from productive investments in order to finance household and government debt, the researchers say. And, certainly, many rich people contribute to productive investment and philanthropic causes. However, the rich are seeking returns on their excess savings because, as Sufi says, many of them “just cannot spend all the money they make.” The rich seek returns by investing; the US government, by providing tax breaks on debt interest, and by encouraging banks to lend via debt financing, promotes less-productive investment.
Using Fed data, Mian, Straub, and Sufi find that the five largest asset classes through which the rich hold claims to household debt are time deposits at financial institutions, bonds, pensions, equity, and mutual funds.
How are equities being used to finance household debt? The top 1 percent hold more than half the value of all stocks owned by all US households. Some of the money invested goes toward funding worthy corporate ventures, such as laboratories, technology, or workers’ wages, but some winds up in a corporate savings stockpile. Nonfinancial corporations have increased their holdings of money market funds and time deposits by 10 percentage points of national income since 1995, according to the research.
Public corporations increased their saving following global economic shifts such as declines in real interest rates and corporate tax rates, find the Analysis Group’s Peter Chen, University of Minnesota’s Loukas Karabarbounis, and Chicago Booth’s Brent Neiman in research from 2017. Since the early 2000s, the amount of corporate saving not invested in new capital has increasingly accumulated as cash, they write.
“Corporations can do a number of things with their net income besides simply paying dividends and investing,” Neiman says. “Just because corporate saving grows a lot, it does not necessarily mean that investment in productive assets grows together
with it.”
Further, research from Boston College’s Simcha Barkai finds that, from the mid-1980s to 2014, companies pocketed more profits while slashing other spending. Corporate spending on labor and capital, for instance, declined by 7 percentage points of gross value added (a measure of value generated by production), while corporate profits grew dramatically from about 0 percent to 13 percent of value added. In 2014 figures, says Barkai, that was equivalent to $600 billion less going to workers and $600 billion less to plants, property, and equipment—and $1.2 trillion more to profits.
A 2019 study by University of Maryland’s Michael W. Faulkender, University of Kentucky’s Kristine W. Hankins, and Northwestern’s Mitchell A. Petersen finds as well that nonfinancial companies in the US in 2017 were sitting on just under $4 trillion in cash, up from $2.7 trillion in 2010 and just $1.6 trillion in 2000.
“The bottom 90 percent are being convinced to borrow more and more, through lower interest rates, easier credit, and more advertising.”
—Amir Sufi
Say a corporation issues equity to the wealthy, but instead of spending the proceeds on research or equipment, puts that money into a time deposit at a bank, which in turn uses it to fund a mortgage for a less-affluent household. This is how the rich become lenders, Sufi says. Because they are the most likely to own shares in public companies that may have their excess cash in banks, their money can indirectly fund mortgages and other consumer debt products, including auto loans.
The debt loads that nonrich households carry may rise as a result. Many people today are, as in previous generations, saving money through their homes, and a mortgage payment can be considered “forced savings,” as a percentage of it goes toward the principal of the loan. But consumers are collectively accumulating the same amount of real estate overall, or slightly less, while also taking on more debt—in the form of larger mortgages as a fraction of their house value, or cash-out refinancing and home-equity loans.
Some politicians, economists, and pundits say that people are borrowing (and consuming) irresponsibly. But banks with all that cash on hand work to expand the credit market and realize returns on the savings glut of the rich. “The bottom 90 percent are being convinced to borrow more and more, through lower interest rates, easier credit, and more advertising,” Sufi says.
From the 1980s through 2007, the net amount of household debt that the top 1 percent held as a financial asset rose by 15 percentage points of national income, while at the same time the amount of household debt that the bottom 90 percent owed as a liability rose by 40 percentage points. The so-called accumulated dissavings of the bottom 90 percent from 1983 to 2015, relative to the average level from 1973 to 1982, was over twice the national income, the researchers say.
Households on this trajectory can get stuck in debt, and so can entire economies, argue Mian, Straub, and Sufi. As the savings of the rich go toward the borrowing of the nonrich, there may be a GDP boost in the short run, as it does encourage consumption. But the debt becomes a drag on future demand, the researchers say.
To understand why, consider households in the bottom 90 percent that are repaying debt. People in these indebted households, usually poor or middle class, may spend less on other goods and services as they make their loan payments. A family repaying a home equity loan, for example, may have less money to spend on new clothes, vacations, or cable television. On a macro level, the decline in spending by people weighed down by debt will trim companies’ revenues and profitability, which could in turn affect the employees at those companies.
“During times when aggregate spending is weak already, this means more workers might lose their jobs, or not get that next promotion,” Straub says.
He makes a distinction between this kind of debt and its productive cousin. “Building a new road might also be debt financed, but because it increases productive capacity going forward, it typically also creates jobs, offsetting the negative externality,” he says. “So we are not arguing that it’s bad if people buy houses—just that unproductive lending has an externality that needs to be corrected.”
The cycle of unproductive debt makes it hard for consumer demand to support full employment in the economy, and it ultimately forces central banks to lower interest rates, argue Mian, Straub, and Sufi. While lower rates may strengthen demand for a time, consistently low rates may be problematic, particularly in a crisis, as they leave the Fed little room to move the benchmark rate to boost demand.
Persistent low demand can foster a high-debt liquidity trap—or debt trap—in which economies are stuck in long periods of sluggish growth, according to the researchers. The US, Japan, and the eurozone provide examples of depressed economic growth after interest rates hit bottom (or even went negative).
Do the theories that Mian, Straub, and Sufi lay out in research explain recent events? Anyone paying attention to monetary policy in the past decade has seen central banks trying to lift economies creatively, unable to cut interest rates further. When the pandemic spread around the globe in 2020, the US Fed could cut the policy rate by only 1.5 percentage points before effectively hitting zero. While the Fed can and does make other monetary-policy moves, such as large asset purchases, in times of crisis, rate cuts are a key part of the strategy to boost consumer demand.
In a September 2020 speech, Fed governor Lael Brainard warned of a “downward spiral” of elevated unemployment, muted inflation, and slow economic growth amid a reduced opportunity to further cut rates. Former New York Fed president William C. Dudley concurred at a summit in October, noting that “if the Fed did more, what would be the effect on the economic trajectory? It would be very, very modest.”
“If you look at [billionaires] individually, their investments are incredibly concentrated. They’re invested in their companies. If you’re taxing Amazon, you’re taxing Jeff Bezos.”
— Eric Zwick
Several research projects are establishing that poorer households have been disproportionately affected by the COVID-19 recession, while wealthier households have spent less and been able to save. Both spending and saving initially rebounded faster for lower-income households during the pandemic in spring 2020, and some were even able to pay off debt. However, Sufi notes that the decline in household debt and the rise in savings in the middle and lower part of the income distribution can be attributed at least in part to massive government stimulus measures, and are likely temporary. Indeed, in August, the rise in saving by people who received unemployment checks began to reverse, according to research by University of Chicago Harris School’s Peter Ganong; JP Morgan Chase’s Fiona Greig, Max Liebeskind, and Daniel M. Sullivan; and Booth’s Pascal Noel and Joseph S. Vavra.
Meanwhile, people at the very top of the wealth distribution have grown richer through the pandemic, thanks in part to a poststimulus stock market surge. A March 2021 report by Americans for Tax Fairness and the Institute for Policy Studies finds that the collective wealth of America’s billionaires shot up by $1.3 trillion since the start of the pandemic, to a total of about $4.2 trillion. At the same time, more than one in four families with children are experiencing food insecurity, according to estimates from Northwestern’s Diane Schanzenbach. Mian, Straub, and Sufi see in the data a widening wealth gap and more saving by the rich, thus more money being turned into loans and lent out to consumers.
To the researchers, the savings glut is a result of rising inequality, yet they also suggest that policy actions could encourage the rich to put their money toward more productive uses. Their proposed solutions involve taxation—either a more progressive tax system or a wealth tax—through which the government can finance spending and investment, or redistribution programs that benefit lower-income households.
Such suggestions are controversial. Among the critics, Booth’s Steve Kaplan argues that proposals such as a wealth tax seek to emulate what has already been tried and proven ineffective in Western Europe. As of 1990, there were 12 countries in Europe taxing net wealth, but now that is down to Norway, Spain, and Switzerland. When France did away with its version in 2018, the prime minister said it had caused many millionaires to flee.
Kaplan also notes that income inequality had actually been decreasing in the US in recent years, as the fortunes of the lower 90 percent improved. He points to the Gini index, which measures income inequality on a scale from 0 to 1 percent. From 2017 to 2019, the US Gini index fell 0.005 percentage points, from 0.489 to 0.484 percent, while the share of income held by the top 20 percent fell by 0.4 percent. Meanwhile, median household income rose to a record $68,700 in 2019, driven by an increase in the number of workers, particularly women.
“If you go back to December 2019, the economy was strong and the inequality data were improving while the country was following tax policies the opposite of what they [Mian, Straub, and Sufi] are recommending,” Kaplan says, although he acknowledges that the trajectory has “likely been upended by the pandemic.”
Implementing some of the more progressive tax policies, however, is “only likely to make things worse,” he says.
Data from the Fed’s Survey of Consumer Finances also indicate that between 2016 and 2019 both wealth and income inequality fell modestly. However, Sufi and others focus on the longer trajectory. The rate of inequality may have slowed or even fallen prior to the pandemic for some groups, but inequality remains at historically high levels, and economists are debating what the “right” level of inequality should be and how to achieve it.
“Any decline in inequality from 2017 to 2019 was tiny compared with the rise in inequality since the 1980s, and the COVID-19 crisis will almost assuredly amplify inequality going forward,” says Sufi. “Policies tried in the US to stem the rise in inequality have not worked.”
Research by Booth’s Eric Zwick and Princeton’s Owen Zidar suggests that reforms such as rolling back special deductions for pass-through businesses, which they say collectively generate more taxable income for the top 1 percent than do big C corporations, could be a key part of a tax plan that raises up to $5 trillion over the first decade of implementation. Pass-through businesses typically include medical and law practices and other types of consultancies.
When it comes to the billionaire class, a better-designed corporate income tax may be more effective than a wealth tax, Zwick says. A corporate tax that does a better job of aligning the rates on foreign versus domestic income, as the current system gives large companies many incentives to move income offshore, could also be part of the solution, he says.
Billionaires are “not a huge share of wealth—perhaps 3–5 percent of household wealth in the US,” Zwick says. “And if you look at them individually, their investments are incredibly concentrated. They’re invested in their companies. If you’re taxing Amazon, you’re taxing Jeff Bezos.”
Mian says the most important thing regarding policy is to have the end goal be a healthy economic balance. “We need both investments and a competitive landscape that makes the economy work for everyone so the economic output is more inclusively distributed,” he says.
This may be especially the case as the wealthiest in the US continue to grow their financial portfolios during a health and financial crisis that has intensified the gap between the 1 percent and the bottom 90 percent. If Mian, Straub, and Sufi are correct, as the savings of the rich grow, so do their investments in unproductive debt. This leads to more household debt and less household savings, and a savings gap that grows ever larger.
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