wealth dist

Abstract Rising income inequality since the 1980s in the United States has generated a substantial increase in saving by the top of the income distribution, which we call the saving glut of the rich. The saving glut of the rich has been as large as the global saving glut, and it has not been associated with an increase in investment. Instead, the saving glut of the rich has been linked to the substantial dissaving and large accumulation of debt by the non-rich. Analysis using variation across states shows that the rise in top income shares can explain almost all of the accumulation of household debt held as a financial asset by the household sector. Since the Great Recession, the saving glut of the rich has been financing government deficits to a greater degree. 1 Introduction Rising income inequality since the 1980s in the United States has generated a large increase in saving by the top of the income distribution, which we call the saving glut of the rich. The additional savings have not been directed toward real investment. Instead, the saving glut of the rich has been linked to the substantial dissaving and large accumulation of household debt by the bottom 90%. The rise in savings due to the rise in income inequality is estimated using two separate techniques. The first relies on the National Income and Product Accounts (NIPA) together with an estimation of income and consumption across the income distribution. The second relies on household wealth reported in the Financial Accounts of the Federal Reserve and the evolution of wealth across the distribution over time. Both techniques find an annual increase in the savings of the top 1% of the distribution that is between 2.5 and 4 percentage points of national income when comparing the 1960s and 1970s with the post 2000 period. To put this magnitude into perspective, the average annual savings of the top 1% of the income distribution have been larger than average annual net domestic investment since 2000. The magnitude can also be compared to the global saving glut, which has been proposed as a reason behind the decline in real interest rates and rise in debt levels across advanced economies (e.g., Bernanke (2005)). Over the past 40 years, the saving glut of the rich in the United States has been on the same order of magnitude as the increase in the inflow of capital from overseas. National accounting dictates that the saving glut of the rich must have been absorbed by some other part of the economy. In a closed economy, one natural place to look would be net domestic investment or a rise in government borrowing. However, investment has declined since the 1980s, and government deficits were stable until the Great Recession. In an open economy framework, it is also possible for some of the savings to have found its way overseas. But, as is well known, the current account position of the United States has moved in the opposite direction. The United States as a whole has borrowed more from the rest of the world during this time period. This leaves only one remaining margin: the rest of the U.S. household sector must have reduced saving substantially. This is what the analysis finds. Saving by the bottom 90% of the income distribution has fallen significantly over this time frame. The rise in saving of the top 1% and the substantial dissaving by the bottom 90% are two sides of the same coin. The decline in saving by the bottom 90% was masked by housing valuation gains until 2007; such housing gains kept annual changes in net worth stable despite a decline in saving and a rise in borrowing. This is closely related to a central result in Kuhn et al. (2019), who use a different data set to show that the rise in wealth of the bottom 90% before 2008 was driven almost entirely by strong house price growth. In addition, the results here show that the rise in household debt that started in the 1980s understates the dissaving of the bottom 90%; the bottom 90% borrowed more, 1 but they also substantially reduced their build-up of financial assets. The second half of the study focuses on how much of the stock of household debt owed by the bottom 90% is held as a financial asset of the rich. Such an analysis directly ties the accumulated savings of the rich to the borrowing by the non-rich. In order to estimate how much household debt is held as a financial asset by the rich, the methodology proceeds in two steps. First, total household debt owed by the household sector is allocated to three potential providers of capital: the rest of the world, the government, and the U.S. household sector. This allocation is done using the extensive information on the linkages within the financial sector that are detailed in the Financial Accounts. The allocation process is best viewed as an exercise seeking to remove the veil of financial intermediation: the financial linkages between institutions are used to uncover who ultimately holds U.S. household debt as a financial asset. To the best of our knowledge, this unveiling process is novel to the literature, and can be potentially done for other asset classes and in other countries. The unveiling reveals how much household debt is held as a financial asset by the U.S. household sector in different asset classes. The second step then allocates this household debt across the income distribution based on ownership shares of each asset class. The final product from the methodology allows us to quantify exactly how much of household debt in the United States represents a financial asset held by the top of the income distribution. The results show that the rise in household debt owed as a liability was driven by the bottom 90% of the income distribution, whereas the rise in household debt held as a financial asset was driven by the top 10% of the income distribution. This suggests that a better measure of household debt claims across the income distribution is net household debt owed, which is defined as gross household debt owed minus household debt held as a financial asset. Net household debt positions clarify that rich Americans have increasingly financed the borrowing of non-rich Americans. The net household debt position of the top 1% fell by 15 percentage points of national income through 2007 which reflected their accumulation of household debt held as a financial asset. In contrast, the net household debt position of the bottom 90% increased by almost 40 percentage points. This implies that a substantial portion of the overall rise in household debt owed by the bottom 90% was financed by the top 1%. This study also presents a novel state-level data set that allows for a more powerful statistical test of the link between the rise in income inequality and the rise in household debt held as a financial asset of the rich. In particular, there was substantial variation across states in the rise in top income shares since the 1980s. The long-difference specification at the state-level relates the state-level rise in top income shares to the rise in household debt held as a financial asset by households in the state. Such a specification removes common aggregate patterns that occurred since the 1980s, and therefore brings us closer to the ideal thought experiment of examining economies with different 2 shifts in top income shares while holding all else equal. The state-level analysis confirms the close association of the rise in top income shares and the rise in household debt held as a financial asset by top income earners. The magnitude is substantial. Applying the coefficient estimate from the state analysis to the aggregate implies that the rise of top income shares explains almost the entire rise in household debt held as a financial asset by the household sector in the United States. Since the Great Recession, household debt has fallen while government debt has expanded considerably. The rise in government debt is likely to accelerate given the enormous government spending proposals being discussed as a response to the economic dislocations caused by the COVID-19 health crisis. The final section of this study shows that the saving glut of the rich has financed a substantial fraction of the rise in government debt since 2007, and we anticipate this trend will accelerate in the coming years. The baseline empirical analysis in this study uses the Distributional National Accounts (DINA) microfiles made available publicly by Piketty et al. (2018), which rely on the yearly public-use tax return files available at the National Bureau of Economic Research. However, the results are robust to the use of alternative data sets such as income shares from the Congressional Budget Office (CBO (2019)) and wealth shares from the Distributional Financial Accounts (described in Batty et al. (2019)). The results are also robust to issues related to the assumed interest rate on fixed income assets held by the rich (e.g., Bricker et al. (2018) and Smith et al. (2019b)). Implications A central implication of the findings presented here is that a single factor–a rise in top income shares–could potentially explain two common patterns witnessed in many advanced economies since the 1980s: a substantial decline in interest rates (e.g., Summers (2014)) and a large rise in household debt (e.g., Jorda et al. ` (2016)). A companion study (Mian et al. (2019)) incorporates non-homothetic preferences over saving into an otherwise standard deterministic twoagent macroeconomic model, and it finds that a rise in income inequality generates more saving by the wealthy, more borrowing by the non-wealthy, and a decline in interest rates. The patterns shown here are consistent with these predictions. Another implication is that aggregate measures of national saving should be treated with caution when evaluating the importance of a saving glut.1 Some have pointed to the decline in the aggregate personal saving rate as evidence against the idea that there has been a saving glut generated by the rise in income inequality. The analysis done here shows that such an argument is incorrect: a focus on the top 1% of the income distribution provides evidence in favor of the view that the rise in top income shares generated a substantial increase in saving. This saving, however, was associated with dissaving by the bottom 90%, thereby eliminating any response of the national saving rate. 1A similar point is made by Pettis (2017). 3 Finally, the findings suggest that borrowing by non-rich households from rich households has been an important factor sustaining aggregate consumption growth as income inequality has accelerated. The financial sector has been critical to this process by facilitating the rise in household borrowing. This offers a different perspective on the growth in the financial sector (e.g., Philippon (2015)). Rather than channeling the savings of the household sector into investment by the business sector, the growth in finance since the 1980s appears to be driven to a large degree by the channeling of savings by some households into borrowing by other households.

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