The results of one study suggest that the main explanation for the decline in real interest rates over the past few decades is high and growing income inequality.
(Photo: imago images / Rolf Zöllner)
“Among the tendencies that harm economics, the most seductive and, in my opinion, most poisonous, is the focus on questions of distribution.” This statement comes from Robert Lucas, who was awarded the Nobel Prize for Economics in 1995 for his contributions to the theory of rational expectations.
Lucas is arguably the most influential macroeconomist of the late 20th century. His statement is symptomatic of the long ignoring of the macroeconomic significance of income and wealth inequality. The well-known economist Branko Milanovic reports from his time at the World Bank about resistance in dealing with distribution issues and a lack of research funds. The preoccupation with inequality was relegated to the edge of the discipline.
Fortunately, those times are over. A prominent example of how much the wind has now turned was this year’s central bankers’ meeting in Jackson Hole.
The study most discussed at this high-profile conference came from the macroeconomists Mian, Straub and Sufi, who work at elite American universities.
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Their results suggest that the main explanation for the decline in real interest rates over the past few decades is high and widening income inequality – rather than demographic factors such as the savings behavior of the “baby boomer” generation. If it is true, inequality is the main reason for the low interest rates the reduction of inequality is also of greater importance from a monetary policy perspective.
Philipp Heimberger is an economist at the Vienna Institute for International Economic Studies (wiiw).
For years, economists at the International Monetary Fund (IMF) have been increasingly critical of the effects of inequality. For example, an IMF study caused a stir, according to which lower income inequality is associated with higher economic growth. The conclusion was that redistribution was largely harmless in terms of its growth effects.
Globally, Germany is the only large country that has had permanent, excessive current account surpluses for many years – and this is largely due to high inequality, as IMF research shows. Rising corporate profits with a high concentration of wealth are responsible for 90 percent of the increase in the private savings rate and for a third of the increase in the current account surplus.
It is a good thing that inequality now has a regular place in the research of macroeconomists – out of concerns about growth, employment and because of imbalances and financial market developments. But politics must also take into account that inequality has other problem dimensions, for example because of reduced equality of opportunity and declining democratic participation of people at the lower end of the income and wealth distribution.
More: Economic recovery increases the gap between rich and poor.