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Atif Mian

24 Aug, 11 tweets, 3 min read

This op-ed argues that Fed should tighten monetary policy to fight rising wealth inequality

That is not quite right - we shouldn't mistake the symptom for the disease

I'll explain my thoughts a bit more ...

bloomberg.com/opinion/articl…

Yes, it is true that low interest rates disproportionately help the wealthy

The value of assets, especially long-lived assets like land and large corporations, rise as interest rate falls

In fact the value rises even faster as interest rate falls from already low levels

Since it is the very rich who own most of the assets, a fall in interest rate makes them richer -

and this effect *really* snowballs as interest rates get near zero

This is the world we have been living in for a while now

There is clear evidence that this "valuation effect" of lower interest rates has made the wealthy even wealthier

So there is no doubt that very low rates have contributed significantly to the rise in wealth inequality

But can we solve this problem by asking the Fed to tighten policy and raise rates?

Unfortunately, it is not that simple

We must first understand *why* the interest rate has fallen from its highs of over 10% in the 80's to near-zero levels today

Nobody thinks the Fed is powerful enough to have singularly led to such a decline

In fact, when one investigates the source of the fall in rates, the plot really thickens

It turns out that one of the primary reasons for the long-run decline in interest rate is the rise in inequality itself!

It is the rise in extreme income inequality (think of post-tax income going to the top 1%) that has fueled the fall in interest rates since the 80's

The full argument is the "indebted demand channel" in paper below. The basic logic is simple:

top 1% save a much higher share of their income. As more income goes to them, gross saving rises, but when real investment does not, interest rate must fall

scholar.harvard.edu/straub/publica…

Think about what this means

As the very rich get richer in terms of income, it creates a "saving glut"(see evidence below)

The saving glut forces the interest rate to fall, which makes the rich even wealthier!

scholar.harvard.edu/straub/publica…

Inequality begets Inequality!

It is a vicious cycle, and we are stuck in it. That's the challenge.

The near-zero rates is a *symptom* of the disease.

The disease is *structural inequality* of the worst kind

We need to cure the disease, and not try to put bandages through the Fed.

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More from @AtifRMian

Atif Mian

@AtifRMian

17 Sep

China's real estate sector is facing serious rumbles, with potentially significant consequences

I'll explain how this is connected to the 2007/08 crisis, and historical lessons we can draw for China going forward ...

cnb.cx/3nCJWqs

On the eve of the 07/08 crisis, China's growth model was increasingly reliant on surplus exports to the rest of the world

the level reached 10% of GDP! This is an *incredibly* large number for a major economy

But the crisis changed all of that: the world (esp U.S. households) was no longer as willing to borrow and buy Chinese surplus.

We can see this in the remarkable and relatively quick contraction of +7% of GDP in China's external account

Read 9 tweets

Atif Mian

@AtifRMian

2 Sep

Afghanistan is experiencing the mother of all "sudden stops"

i.e. economic collapse resulting from a sudden stop of foreign money that was financing a large trade deficit

Afghanistan was financing a trade deficit of ~ 25% of GDP

How large is 25%? It is about 3 times as large as the largest sudden stops in recent history such as east asia, southern europe, mexico etc.

And it gets even worse

~9B$ of their reserves have also been frozen, and there's no other credit line

So what happens when there's a sudden stop?

in the absence of foreign money, the only way left for the economy to balance its imports is to contract, i.e. GDP falls so demand falls, so imports fall

exchange rate devalues a lot too to cut imports

Read 5 tweets

Atif Mian

@AtifRMian

28 Aug

What is savings?

We all know what it is at a personal level: I get 100$ check and might save 20$ out of it

But what is savings in the aggregate? Say for the world as a whole?

That's where it gets tricky.

e.g. people talk about a "global saving glut". But can we measure it?

Not really - at least not in a direct sense

The reason is that when a person (say Adam) "saves", someone else (say Eve) uses that saving, i.e. "dissaves", by borrowing it and spending it for one purpose or another

So, aggregate total saving is always exactly zero!

Now you might say, that according to the world bank worldwide saving is about 25% of GDP historically.

What is that number about?

Well it is just an accounting convention!

Read 11 tweets

Atif Mian

@AtifRMian

23 Aug

Some broad takeaways for development from 20 years of Afghan economic experience

The Afghan economy stalled in 2012 after foreign aid started receding from a high of about 50% of GDP.

The big injection of foreign money did not translate into sustainable growth. Why?

Because foreign money artificially raised domestic spending power - artificial in the sense that it was not associated with increased domestic productivity

We can see this in Afghan trade statistics. Imports rise three-fold, while exports are stagnant.

There was a temporary spending boom, that vanished when foreign flows dried up.

The spending boom is actually harmful when it is artificial, because it hurts exports via real exchange rate appreciation and other misallocations

It's a story that is unfortunately not atypical

Read 6 tweets

Atif Mian

@AtifRMian

8 Aug

Is child care infrastructure?

The answer matters, because spending that is "infrastructure" should be seen as an "investment", i.e. spending that expands the overall size of the economy in the future -

and hence infrastructure spending should be prioritized

So is child care infrastructure?

We live in a knowledge based economy where required skills are constantly changing - prolonged periods away from one's profession naturally lowers their productive capacity

So making it easier for people, esp women, to stay connected to their profession helps us all - we will not lose valuable talent

The other side of child care is the child of course

Read 5 tweets

Atif Mian

@AtifRMian

6 Aug

What is the role is tax policy in development?

Often people think of tax policy largely as a revenue generating exercise - this is not quite right

A very important element of tax policy is its *design* that shapes incentives and the overall macro balance. Some examples ...

The consolidated tax code should be sufficiently progressive

By consolidated i mean including all taxes - e.g. local, provincial, federal etc.

Progressive means consolidated tax rate should rise sufficiently for wealthier households

e.g. Pakistan collects very low tax revenue as share of GDP, but another problem it has is that it relies excessively on indirect taxes -

various forms of consumption taxes that tend to be very regressive in nature.

Read 7 tweets

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