The following interview with Princeton economist Atif Mian was conducted by Heather Boushey of Washington Center for Equitable Growth on June 21, 2018. The original source for this interview is available on line here: https://equitablegrowth.org/in-conversation-with-atif-mian/
Ralph Hiesey: I have reproduced the complete text of this interview in order to add my personal comments to the original. It was a delight to me to have discovered this interview that fits so closely with my views, and from someone whose thinking seems so stubbornly to follow real economic data. The text below includes all of the original interview, plus (in green) my comments, which were not part of the original interview.
The debt issues Mr. Mian discusses here are closely related to the economic questions I am interested in. Most views expressed by Mian fit extremely well with what I have also expressed in my extensive essay on the QuestionEconomics.com website: “A new macroeconomics to explain wealth inequality.”
The major reason for posting this is to add additional insight about one of the main questions Mian is asking: What determines the source and amount of credit creation in the economy? My essay ““Explaining the Fundamental Monetary constraint” directly addresses this issue in a manner I have not seen before. It defines and describes the monetary constraint, and shows how the source of credit emerges as a consequence of this constraint. As a bonus, it also shows how the demand for use of such credit is also simultaneously created. Both supply and demand for credit could be said to be consequences of the way money has been traditionally structured.
The commentary I have added of my views on this interview is displayed as green text interspersed throughout the interview. As will be evident, I share a very substantial part of Mian’s views about debt as expressed here—but the most important reason is to try to better answer his question about the source of credit.
Although my original motivation to study economics was to understand the cause of the 1930’s depression a very fruitful result from that has been an exploration of how credit and debt influences an economy, both positively and negatively.
Washington Center for Equitable Growth: “Equitable Growth in Conversation” is a recurring series where we talk with economists and other academics to help us better understand whether and how economic inequality affects economic growth and stability.
In this installment, Equitable Growth Executive Director and Chief Economist Heather Boushey talks with Atif Mian, the John H. Laporte, Jr. Class of 1967 Professor of Economics, Public Policy and Finance at Princeton University and a 2015 Equitable Growth grantee. He is the director of the Julis-Rabinowitz Center for Public Policy and Finance at the Woodrow Wilson School of Public and International Affairs at Princeton. Mian’s work studies the connections between finance and the macroeconomy. His 2014 book, House of Debt, with Amir Sufi, finance professor at the University of Chicago’s Booth School of Business and a Equitable Growth Research Advisory Board member, builds upon powerful new data to describe how debt precipitated the Great Recession. The book explains why debt continues to threaten the global economy and what needs to be done to fix the financial system.
In a lively and wide-ranging conversation, Boushey and Mian discuss:
- The role of household indebtedness in the most recent U.S. economic recession
- The role of credit creation in economic boom-and-bust cycles
- Microeconomic perspectives on macroeconomic questions
- Economic inequality and the explosion of credit in China
- New research questions about whether low interest rates are leading to slowing economies, rising market concentration, and renewed political extremism.
[Editor’s note: This conversation took place on June 21, 2018.]
Ralph Hiesey: My comments, shown in green text, were not in the original interview. They were added by me on July 30, 2001 for posting to my website.
Heather Boushey: Thank you so much, Atif, for talking with me today. It’s a real pleasure to be able to talk to you about your work.
Hiesey: It is also with great pleasure that I have discovered this interview in on the Washington Equitable growth website expressing views unusually close to mine without any previous communication. That encourages me to think that our common views could have validity.
Atif Mian: Thank you for having me, it’s a pleasure to be here.
Boushey: I wanted to start with your work with your often co-author Amir Sufi. I went back and counted, and it seems to me that you have done about 15 papers together on top of a book, which seems like a lot of co-authorship. And I thought I would start by asking actually, how you guys met and how you got started working together.
Mian: Well, we met at Chicago Booth. Both Amir and I were faculty, junior faculty, there at the time. And this was in 2006, and it was the height of the mortgage boom, and that perked our curiosity, and we were discussing what was going on and why it was happening.
Our initial take was to focus on the expansion in mortgage credit toward households and approach that question from a bit of a behavioral angle to figure out why are households borrowing, what are their expectations, are they borrowing because they expect high income going forward—and so, are they borrowing to kind of smooth their consumption as traditional economic theory suggests—or is there something else going on that these people might be behaving more myopic and borrowing more than they can chew in the long term?
Hiesey: Those views were well explained in the book “House of Debt” by Amir Sufi and Atif Mian published in 2015.
That’s how we got started, and we actually started working on this question before the mortgage crisis. So, the very first project we got started on, we eventually got data from [the credit reporting company] Equifax Inc., and we were probably one of the first to get credit bureau data at the individual level for research purposes. But, obviously, then the recession [of 2007–2009] happened, and it became obvious to us very quickly that this was not just an interesting question from an individual household perspective, but actually had very important macroeconomic consequences, too. And so, we quickly switched gears to focus more on the macro consequences of this behavior at the household level. And we ended up just working together since then.
Hiesey: One thing that pleases me so much about this approach is that you and Sufi are attracted to, and understand the necessity of looking closely at actual economic data.
THE ROLE OF HOUSEHOLD INDEBTEDNESS IN THE MOST RECENT U.S. ECONOMIC RECESSION
Boushey: Can you walk us through that research, about how debt and increased leverage made the most recent economic downturn so potent? And what in your view was the leading cause?
Mian: There’s a lot one can possibly say there, but let me try to summarize it by saying that traditionally the way economists by and large have thought about credit, and especially credit to households, is in a way that makes it a sideshow rather than something interesting by itself as a causal factor in determining macro dynamics such as aggregate demand or Gross Domestic Product. And what we discovered early on was that movements in household credit were, by themselves, potentially responsible for moving the aggregate variables such as consumption and employment. And the immediate question that raises is, why would that be the case? So, one has to then depart from the traditional framework in a sense to really make room for household credit to have an impact and a direct impact on the macroeconomic aggregates.
Now, that opens up a whole series of questions, which we have tried to address in our research. The first one is why people borrow in the first place, which goes back to the motivation of the first project that I described to you. Again, the traditional story is that people borrow because they expect higher income in the future, and they want to support consumption, so borrowing when you’re younger and expect greater income tomorrow is rational, makes sense, and we should all do that. At least that’s the standard story.
Hiesey: I completely agree with criticism that present macroeconomics regards debt as a sideshow. A single agent model makes debt among agents invisible, and seem inconsequential to GDP. We are also in agreement that loaning and borrowing must be integral to macroeconomics. The obvious and simple argument for that is that people borrow money to facilitate and increase their ability to spend. Of course that will affect GDP. On the other hand, widespread paying back loans with interest also obviously will influence GDP in likely opposite direction.
I have proposed another way to understand macroeconomics based on a surprisingly simple analysis that explains how a very basic overlooked attribute of money explains both supply of, and demand for credit—and how both tend to be produced in equal quantity. A monetary explanation that I call “the fundamental monetary constraint” is the foundation for that understanding. The objective of this commentary to share this to receive critical comments from you, specifically about my essay “The fundamental monetary constraint.”. I believe it is very much consistent with, and strengthens Keynes’ view about macroeconomics.
.Mian (continued): But we also know that people can borrow for other reasons. There is behavioral work that suggests households could be myopic at times, and they just borrow today because they feel that consumption today is a lot more attractive than it should be from a longer-run perspective. So, there could be behavioral reasons for people to over-borrow. And there could be other, more subtle reasons, for people to over-borrow.
So, for example, if people don’t take into account the macro consequences of their borrowing, then they could borrow collectively at the same time, which might be rational from an individual perspective but that collective borrowing leads to future problems such as a foreclosure problem that has spillovers for everyone in the economy. When people borrow individually, they may not take into account those spillovers. And so, again, from a macro perspective, people might over-borrow.
For all of these reasons, a possible result conceptually is that if and when credit expands, it is possible for households to over-borrow, to overstretch from a macro kind of social perspective. And that over-borrowing, that overstretching during the boom phase of the credit cycle, can then come back to hurt on the downside and lead to a deeper recession than it would otherwise have been.
This is one of the points we tried to make in our book, for example, based on our research that that’s essentially what happened in the United States, that the borrowing by the household sector was, in fact, a contributing factor to both the strength and the depth, as well as the persistence, of the recession that followed in 2008.
Hiesey: It would be surprising to me if any borrower would consider the macroeconomic implications of their borrowing. At risk of sounding a bit simplistic, I would say the reason that people borrow is that they need the money–to buy something for which they do not have the present wealth or income to pay for. The opportunity for borrowing will be enhanced if the sellers of credit have a high supply of money to loan, and advertise their product effectively, especially when those grantors of credit are not too fussy about default risk. That’s where “credit market deregulation” comes in, which Mian comments about just below. What causes borrowing is adequate credit supply and demand with strong push to encourage demand because of high supply. Financial deregulation can of course grease the wheels. I do find it amusing to read economists who claim that borrowers consider the implications of their lifetime income to make such rational decisions about how much to borrow.
THE ROLE OF CREDIT CREATION IN ECONOMIC BOOM-AND-BUST CYCLES
Boushey: You [Mian] also have done a recent paper with Emil Werner [an assistant professor of finance at the Massachusetts Institute of Technology’s Sloan School of Business] on banking deregulation. Are you taking this research and these questions around credit and starting to look at the effects of policy changes in the short and medium term, and even the long-term effects on the increased supply of credit? Is that a sort of natural flow from one idea to the other?
Mian: That’s right. What we have found is that credit movements have a causal impact on macro aggregates, and that link works through the household sector. So, the next obvious question is, where are those movements in credit coming from in the first place? And to understand that question, we have tried to explore what we refer to as natural experiments in the past, and one of them is the wave of deregulation and liberalization of the banking sector and the financial sector over the past several decades.
The work of me and my colleagues with Emil Werner for the 1980s is along those lines, as the banking sector deregulated during the 1980s. And the usefulness of the 1980s banking deregulation experiment is that work by Philip Strahan [the John L. Collins, S. J., Chair in Finance at Carroll School of Management at Boston College] and co-authors has shown quite effectively that individual states staggered their deregulation experiment for political reasons and other reasons that did not necessarily have anything to do with where the state-specific business cycle was when they deregulated the banking sector. So, we took advantage of that sort of natural experiment, and we built on that work by looking at the more medium- to long-run impact of this credit expansion.
Hiesey: Understanding what powers the source of credit is the very important question for which I believe I have contributed an important explanation. I am guessing (without having examined actual data!) that the motivation for deregulation described above was a secondary effect, resulting from an awareness that there was increasingly high supply of available money to loan—also with many potential customers for such money, for which it became obvious that there was a lot of money to be made in the loanable funds market if it were expanded by relaxing credit requirements for potential borrowers.
Mian (continued): Now, there’s been a lot of very nice work that looked at the immediate short-term consequences of this banking deregulation. A quick summary of that work is that it led to a short-term boom. And viewed from the traditional framework, this was okay because it just shows that those areas were credit constrained, and that relaxed credit through banking deregulation led to an economic expansion. And what we argue is that all of that is absolutely true—credit did lead to a short-term credit expansion—but, equally importantly, we show that it ultimately led to a stronger recession in 1990 and 1991 as well. So, in other words, it suggests that while credit can have short-term positive impacts, there is a tradeoff to think about, which is that it can lead to an ultimately stronger downturn. That essentially means that credit can generate an amplification of the cycle, both on the upside, as well as on the downside.
Hiesey: I could not be in more agreement with this—at first, expansion of credit by loaning naturally increases economic demand—but the secondary effect “tradeoff” can result eventually in more debt than the economy can afford. Your “tradeoff”” reference appears to correspond with the longer, secular stagnation period that I discuss in my macroeconomic analysis. This happens when debt becomes so high that it cannot be expanded; increasing wealth inequality provides lots of supply of cash to loan from holders of high wealth, however with lack of demand because not enough customers left with good enough credit rating to borrow—signaled by dropping interest rates and reduced credit demand compared to supply, and as a result reduced aggregate demand. This follows closely with what Mian expresses next:
Mian (continued): If you think of this question again from a conceptual perspective, it suggests that some of those earlier ideas that [economic historian] Charles Kindleberger and [monetary theorist] Hyman Minsky, among others, had been talking about perhaps in a more descriptive sense are very much relevant for us to consider when we are thinking about the role that the financial sector plays in the macro economy. And this, in turn, obviously has implications for policy, for prudent macroeconomic policy, as well as for the collateral damage effects, if you like, of deregulation and liberalization.
One of the longer-run questions goes even a step deeper than just talking about deregulation or liberalization. And that is, credit in the macro economy is not just a story about business cycles, but also about what I sometimes refer to as a super cycle, or a secular trend in the background, which perhaps is even more important than the ups and downs of credit in a 3- to 4- year horizon. And that longer-term trend, or the super cycle, is that since 1980, we have seen a large increase in credit to GDP across the board. This is not just a U.S. story. It’s not just a European story. It’s also really a global story. Credit has expanded at an incredible pace and is currently at a level never seen before, historically speaking.
Along with this massive expansion in the quantity of credit, there has been a related decline in the price of credit. And here, I’m basically referring to the decline in long-term interest rates since the 1980s. This is the super cycle I was referring to, and if you just put these two facts together—an expansion in quantity of credit and a reduction in the price of credit—then basic Economics 101 would suggest that if quantity is expanding and price is declining, then in the background there is something like a supply expansion, right? The supply side of credit has been expanding, it seems, based on these basic facts.
And, again, the question is why. Forces such as deregulation and liberalization are good at explaining the short-term movements that I just described during the 1980s in the United States, but those forces are not very useful in explaining these very persistent, longer-term massive increases in the quantity of credit. Deregulation and liberalization might themselves be a consequence of a deeper fundamental force behind the financial sector. And that’s something that my collaborators and I have more recently been trying to figure out. Why has credit over this longer term expanded?
Hiesey: What originally got me so excited about commenting on this interview is that I believe my explanation in the essay “Fundamental Monetary Constraint.” answers this question, which I will briefly describe and reference at the end of this interview..
Mian (continued):This is where we feel there is a connection between what has been happening in the financial sector and some of the more fundamental shifts in the global economy. In particular, I’m thinking about economic inequality, the rise of concentration of market power, as well as some of the institutional dimensions such as the rise in China and the extremely high saving rates in China for various reasons, one of them having to do with the kind of centralized nature of economic power within China. We are now exploring if these movements in inequality are themselves responsible for this massive expansion in the financial sector.
We have a new paper that suggests that there is empirical evidence to support this argument. And that argument basically is the rise in inequality, which is by and large a top 1 percent phenomena, with the top 1 percent globally expanding their share of the pie. The other thing we know about the top 1 percent is that it tends to have very high saving rates. So, the marginal propensity to save for the top 1 percent is persistently extremely high relative to the average propensity of the population.
Hiesey: Although the last paragraph is very close to my analysis of why interest rates are low, I have chosen a slightly different way to describe this. Rather than analyzing as “marginal propensity to save” by the top 1% wealth cohort, I believe it is more useful and accurate to speak of lower monetary velocity of money held by the top 1 percent wealth holders (rather than top 1% income distribution). The reason is that “MPC” refers to just one point in time when someone receives money income, whereas monetary velocity refers to a property that is an attribute of held money that goes on for as long (or short) in time as the person possesses that money. Low velocity means holding a high amount of cash as static wealth rather than transactional cash. The top wealth holders are holding high amounts of non transactional cash that likely has the same effect as how contractionary Fed monetary policy works by reducing cash. Motivations for holding relatively high amounts of such cash are very low interest rates (low opportunity cost) and concern about holding too much other more risky assets.
Mian (continued):And so, if you put these facts together, the natural implication is that the rise in inequality will increase gross savings in the global economy. Now, the thing about gross savings is that when people save, they essentially channel that money through the financial sector. And so, they leave it to the financial sector to decide where those savings go. And what has been happening globally is that this increased flow of savings coming into the financial sector has naturally led to the creation of credit because that’s what the financial sector does.
Hiesey: Exactly! We are on the same track here.
Now, in order to absorb these ever-increasing amounts of credit, something else needs to give. You need to convince people to borrow more one way or the other, and one of the ways or mechanisms through which this has been happening is through this continual reduction in the long-term rate of interest. The global economy can afford to borrow more and more if interest rates keep going down.
Hiesey: I would describe it this way: Supply goes up, and also demand goes down as potential borrowers become more highly indebted—therefore, the price of borrowing goes down.
Just imagine an interest rate of zero. At an interest rate of zero, you can have an infinite amount of debt if you want it. Because you can just keep rolling over the debt that you have at no cost since the interest rates are zero. This same logic basically applies before you hit zero as well. This is one explanation of what has been happening globally.
Now, this has very deep and important implications for how we should interpret what has been happening in the financial sector, and also in terms of some of the policy implications about what needs to be done in the long term to really address this problem of over-levered economy. And that’s something my colleagues and I are thinking about more carefully going forward.
Boushey: Well, if it is true that a big part of the rise in credit is connected to the rise of inequality globally, as you so compellingly lay out, then it does pose real questions for policymakers. What I take from that is that we need to do more thinking about the role of inequality in not just the micro outcomes that I think we’ve thought about for a long time, but also the macroeconomic outcomes, which have not really been on the table as much. It’s been hard to find research and scholarship that puts that front and center, and then what you would do about it would generate some new questions.
CONNECTING THE MICROECONOMIC PERSPECTIVE TO MACROECONOMIC QUESTIONS
Boushey: One of the exciting things about your work as I’ve followed it over the years is that you are bringing this microeconomic perspective to macroeconomic questions. This seems to me to be an important contribution to the field. Tell me a little bit about where you see this work fitting into the larger questions in financial macroeconomics and what some of these big questions are.
Mian: Let me say something positive first and then something negative about macroeconomics as a field. The biggest attraction for me when thinking about macroeconomics is that this is the field that has the most important and exciting questions. Why do economies grow? Why do they collapse at times? Why do people remain unemployed? These are fundamentally important questions that everyone on the street is interested in. And this is what makes macroeconomics most exciting in my view. That’s my positive spin on macroeconomics.
Hiesey: My questions also since high school when I wondered why the 30’s depression happened. Perhaps that explains why our views are so closely in agreement!
The negative is, in a sense, also driven by the positive, and is that since macroeconomics is a study of the aggregate economy, the aggregate dynamics, it essentially suffers from this one observation problem, which is that you only get to see the whole economy once. How much can you deduce from observing that one realization of that economy, that one time series, that one time when the U.S. economy sometimes goes up, sometimes it slows down, and so on?
We have a number of different explanations for what might be causing those booms and busts, what might be causing some countries to grow more aggressively than others. But our number of theories is much larger than the number of observations we have, which is a limiting factor of macroeconomics just from an empirical standpoint. So, this is where I feel micro data comes in, which is that it allows us to open up this space by giving us, in technical terms, a lot more degrees of freedom. And that can be used fruitfully and intelligently if you keep the theories in mind as you dive deeper into the more micro level of granular datasets.
That’s the first advantage that micro-level datasets allow you to do, which is to tease apart the various theories that might be behind the macro dynamics in a way that you could not do without the micro-level data. Let me just give you one quick example. I mentioned earlier that you can observe growth in credit, and ask what is behind that? This is something that the Fed and [former Fed Chair Alan] Greenspan were openly thinking about during the 2000s. If you just look at the aggregate data, you see credit going up, you see aggregate income going up as well, and you can ask yourself the question: What is the reason credit is going up related to the fact that incomes on average are going up as well? And you might conclude from the aggregate evidence that, yes, that’s what’s happening because both variables are increasing at the same time.
But when you look at micro-level evidence, you might not come to the same conclusion because it depends critically on who is borrowing. And so, is it that the top 1 percent is borrowing as much as the bottom 99 percent, or even more than the bottom 99 percent? If it were higher incomes that were driving credit growth, then since income growth is concentrated in the top 1 percent, we should really expect the top 1 percent to borrow a lot more.
Hiesey: I’m not following that logic—because if you’re in the top 1% (of wealth, at least) then that likely means you already have great access to cash, so you are likely focused on loaning money at interest, not borrowing what you already have in abundance. So not surprised by your conclusion (next sentence.)
Mian: Yet that clearly was not the case. So, even a basic breakdown of the data along a more micro level starts to give you a lot more insights than you might be able to deduce from just looking at the macro aggregates. That’s the first advantage of looking at more granular data. It allows you to parse through the set of theories that you otherwise have that are difficult to separate by just looking at the time series aggregates.
The second advantage of micro-level data is that it really highlights some of the key factors that we need to incorporate in our theoretical models to make them more realistic. Let me just point out one important element that has come out as a result of work not just by me and my colleagues, but a number of other people as well, using this more granular micro-level data for answering macro questions. Historically, a lot of the macro modeling had been done using your present division household, which has been extremely useful putting a framework around our thinking, but what the micro-level evidence really suggests is that heterogeneity across households is really important if you want to understand aggregate dynamics.
Now, it’s not just heterogeneity in general. Obviously people are different. What we have realized is that heterogeneity along the dimension where credit operates—and in particular heterogeneity across borrowers and lenders, or savers and borrowers if you like—is that those two sets of households are really different. And that really allows us then to connect finance to the macro economy in a way that is much more based in actual data.
Hiesey: I am in great agreement about respecting heterogeneity. But an important question, heterogeneity with respect to what variable or variables? The variable I believe is most important with respect to understanding important aspects of the macroeconomy is distinguishing groups by “wealth held.” I’m assuming this is very close to your measure of heterogeneity by borrowers and savers, which is explained in my macroeconomic hypothesis. I believe distinguishing by wealth is more significant than by income—however obviously high income over time is an obvious “cause” of wealth inequality. My analysis explains how understanding this is necessary to understanding overall health of an economy: specifically through a distribution of wealth that is less lopsided than it is now.
Mian (continued): Because borrowers and creditors behave very differently to shocks such as house prices going up or down, to expectations about the economy and so on, that naturally lends itself to a view that finance and financial shocks are really important for the macro economy because if there is an expansion in credit, well, guess what, by definition, credit is going to be received by people who tend to be borrowers. And so, if they respond much more aggressively to a house price increase, then that’s going to have a much bigger impact on the macro economy as opposed to a similar period where house prices are going up on average but credit is not expanding at the same time for one reason or another. Understanding the importance of heterogeneity is something that has come about because of the proliferation of micro-level data in the past 10 years.
ECONOMIC INEQUALITY AND THE EXPLOSION OF CREDIT IN CHINA
Boushey: It’s been so exciting to see these new ideas filtering their way through economics from where I sit at the more policy end of it. Well, we’re running out of time, so I want to ask you one more question. Equitable Growth has a competitive grants program. We fund academic research from scholars all across the United States, including you and your colleagues. So, I would like to end our conversation today by asking you what are the big important questions or trends that we need more research on? Where’s an area that you think could use some more attention, could use some more support, or where there needs to be more work?
Mian: Well, first of all, thank you for the support, and not just for us but also to the wider academic community. I think this is an important point that needs to be recognized explicitly as often as we can, which is the social value of funding research.
The most successful societies, in my mind, are societies that have the capacity to analyze themselves. And that’s really what research is trying to do, to analyze the economy, the society, the political economy around us. And institutions such as yours are extremely important and instrumental in making that happen. So, thank you for all the work that you and your colleagues do.
In terms of interesting research or questions, we’ve talked about credit and the macro economy, and as I mentioned, the really important question is not just the fact that credit appears to affect the macro economy, but more importantly where does credit come from in the first place? And what does it really mean?
This raises the question about inequality. But the other angle that this line of work suggests is that the global economy has been suffering from lack of demand over time, and in order to solve that problem through the markets, through policy responses, and so on, the way we have tried to solve that problem is through more credit creation. And you see that in some places very clearly. China is an excellent example. The country is relying on the rest of the world borrowing to buy its goods and services. Post-2008, that was not possible to the same degree because the rest of the world—the United States in particular—stopped borrowing at the rate that they were borrowing before.
And so, China had to adjust internally and domestically. China had to generate the demand domestically. And guess what happened? China went through an enormous credit boom and is still going through an incredible credit boom at a pace that we have essentially never seen before. The research question is, what’s really behind that? There is a more fundamental force that’s driving all of this behavior, and those forces are extremely important to understand.
NEW RESEARCH QUESTIONS ABOUT WHETHER LOW INTEREST RATES ARE LEADING TO SLOWING ECONOMIES, RISING MARKET CONCENTRATION, AND RENEWED POLITICAL EXTREMISM
Mian: A related thread that I would like to mention is that because lower and lower interest rates are needed to sustain a higher level of credit globally, there’s a very important question of what happens in that kind of environment. What are the consequences of a very low interest rate environment, not just locally but globally, and not just for a short period of time but for a sustained period of time?
This is a question that I don’t think has received as much attention. We just have this tendency to take interest rates as given and use that as a price that equilibrates the markets, so to speak, and take it as a given. I think there is an interesting and important question of what are some of the consequences of low interest rates on the economy.
My colleagues and I have a new project where we’re exploring that question. The angle we’re taking is trying to understand if low interest rates have an impact on the strength of competition within an industry. In particular, could it be the case that low interest rates actually promote monopolization of industries and sectors? This would link interest rates back into the supply side of the economy. And that’s just one question or angle that we think is worth exploring more. There’s a lot more to think about here.
Along the same lines—and this is related to everything I’ve talked about—is this question of this slowdown in productivity growth or slowdown in growth more generally. When you combine slow productivity growth with this increased inequality and increased monopolization or reduction in competition globally, that raises a number of very important political economy questions. Anyone who reads the news globally knows this is a first-order thing, right? And to what extent are these economic forces responsible for some of the political economy shifts that have happened globally, among them the rise of extremism of various sorts all over the world, which is extremely troubling for anyone who values basic human values or the liberal democratic order?
What we are observing is this pent-up anger, this level of social unrest or discontent with the status quo institutional arrangements that exist today. I think that does raise some very important questions about how we decide to organize our financial markets, how we decide to organize economic institutions, and whether these things have been done the right way, or is it the case that some of this discontent is a result of us ignoring the distributional dimension of these policies?
Hiesey: This has very much to do with my strong interest in macroeconomics during my retirement.
There’s a lot here, obviously. This is a loaded set of questions that I’m raising here. But I think understanding these connections methodically, one by one, it’s extremely important. And it’s also extremely important that we do all of this in a very objective manner in this world where people are becoming more and more or polarized and ideological. The other beauty of research is if you can stick to that integrity, if you can approach all of these questions from an objective, data-driven process, then you can figure out what is really the reason things are happening the way they are happening and what we can do about it.
Hiesey: Your (and Sufi’s) commitment to an objective, data-driven process with clearly explained logic is what has gained my respect for your economic analysis.
Boushey: Thank you. That is a lot and gives us a lot of guidance for how we should be thinking about our work here at Equitable Growth. I will certainly be taking all this into consideration. Thank you so much for your time. It’s just been a real pleasure.
Mian: You’re welcome.
Hiesey: On my website I describe The Fundamental Monetary constraint. This essay describes how I believe a constant flow of credit and customers for credit is created.
A warning is that the “monetary constraint” is based on logic that has traditionally been regarded by academic economists as heterodox. The only logic that I can find for so regarding it seems to be that traditional economists find the result disagreeable, rather than wrong. The argument strongly in favor of it, for which I give reasons, is that it makes it easy to describe some important empirically observed economic facts. For one, it easily answers the question of where credit comes from. It also makes it easy to explain why nominal debt, both public and private, virtually always increases in a “normal” economy except when severe devaluation happens in an economic crisis.
Here is a very brief outline: The “monetary constraint” is most easily described in a simplified, somewhat unrealistic economy with no financial system, where all goods/services are exchanged only using money that has an unchanging total quantity for the whole economy. That implies that total cash saving by agents equal to zero—if some save, others must dissave an equal amount, since total cash for everyone does not change. When too much is saved by some, a high percentage of money becomes non transactional, strangling an economy that needs transactional money to exchange goods/services.
To combat that problem in a more realistic economy: to allow saving while maintaining flow of transactional money, other economic institutions must be present: of which the possibility of credit: loaning/borrowing is one; those who save money can lend to those that dissave to maintain the flow of cash. Then “saving” has a new meaning: holding a promise to be paid back for loaned money, as well as holding actual money. That transformation of the meaning of “saving” creates debt equal to such saving which greatly expands the possibility for spending, and also unfortunately wealth inequality.
My analysis describes how other institutions such as government taxation of income, fiscal monetary policy, government borrowing, direct money transfers like social security, and expansionist monetary policy also make the economy work better despite the constraint—but these too can eventually fail to compensate for declining monetary velocity, with GDP reduction resulting in longer term decline called secular stagnation with high wealth inequality.
I’ve explained The monetary constraint in greatest detail in the sixty page mostly completed major essay “A New Macroeconomics to Explain Wealth Inequality.” I then wrote two shorter essays: Here are the web references that explain it. The first is most brief: (1) Five page introduction to Main Macroeconomics (2) is more detailed and precise: Shorter Essay on Monetary Constraint The main essay is the longest: New Macroeconomics to explain Wealth Inequality: 60 pages.