- It’s inequality that dragged interest rates lower, not the other way around, NBER researchers said Friday.
- Wealthy Americans’ ballooning savings over the last two decades fueled interest rates’ decline, they find.
- Lower rates lift asset values and help the rich get richer, an expert says. Or in other words, “inequality begets inequality!”
Rock-bottom interest rates. They make it cheaper to borrow, less lucrative to save, and are meant to boost economic activity.
The Federal Reserve‘s benchmark interest rate has become its go-to tool for turning the dial up or down on spending as necessary. But the rate has been on a decades-long decline and currently sits near zero as the US emerges from
. That long slide to record lows risks new headaches for the economy.
The problem, as Insider has previously reported, is that low interest rates not only support the economy, they help the wealthy enjoy significant appreciation of their investments. As the Fed padded against the pandemic’s fallout, the country’s top earners padded their wallets.
The Fed has taken flak for the trend, with economists warning that near-zero rates worsen inequality. But what if that narrative is wrong, and the wealthy are behind rates’ steady decline instead of the Fed?
The conventional argument should be flipped on its head, according to a study published Friday by the National Bureau for Economic Research. Wealthy Americans’ booming income powered the decades-long decline in interest rates, economists Atif Mian, Ludwig Straub, and Amir Sufi wrote. That downtrend then lifted stocks and most recently powered the market’s rebound from 2020 lows.
“It is a vicious cycle, and we are stuck in it,” Mian wrote in a Tuesday tweet. In other words, it may not be the Fed’s fault, which means it will be much harder to solve.
The rich get richer because the rich save the most. The Fed can only watch.
The team of researchers focused on the natural rate of interest, or r* (r-star), which is meant to foster ideal hiring conditions while also keeping price growth under control.
The novel aspect of the research is the argument that this natural rate has steadily declined for nearly five decades due to ballooning savings piles around the world — after all, to keep massive savings from overstimulating the economy, the Fed had to keep rates at extraordinary lows.
That places the Fed in a precarious spot. Lifting interest rates to counter the decline would likely drag the economy into a recession by discouraging borrowing. But keeping rates at such low levels leaves the central bank with limited ability to further stimulate the economy in times of crisis.
That decline in r* worsened inequality by lifting stocks and other assets, but the wealth gap likely powered the downtrend in the first place, the researchers found. To start, rich Americans have counted for an increasingly large share of total earnings. The top 10% of earners took home roughly 45% of all US income by 2020, up from just 30% in the 1970s, according to the study.
The leap in earnings translated into larger cash piles. Roughly 40% of all private savings were held by the country’s top earners in 2019, up from 30% in 1995. That equates to trillions of dollars in cash.
The savings glut that’s dragging the natural rate lower, then, is largely held by the rich. And the rich have benefited from this situation they created.
“Since it is the very rich who own most of the assets, a fall in interest rates makes them richer,” Mian said. “Inequality begets inequality!”
What probably didn’t power the savings boom is the consensus view that it was the mass of baby boomers aging, the researchers said, as they found that savings rates don’t vary much across ages compared to across income levels. However, the researchers only noted that data supports income inequality being “an important factor” in the decline, not the sole driver. They also somewhat hinged the hypothesis on forecasts, saying its “relative strength … is perhaps best measured by looking into the future.”
It’s also unclear just how much the savings glut is powering the natural rate’s decline. The downtrend isn’t exclusive to the US, signaling factors other than income inequality are dragging on the rate.
Regardless, the researchers’ study underscores just how difficult reversing inequality can be, and how ingrained the wealth gap has become in the modern American economy.