Princeton University economist Atif Mian says record wealth inequality has become a major macroeconomic problem. Born and raised in Pakistan, Mian came to the United States to study math and engineering at MIT, where he discovered economics and eventually earned his PhD. After the 2008 financial crisis, he rose to prominence with his groundbreaking research on the relationship between debt, the financial sector, wealth concentration, and the macroeconomy, which culminated in his influential book “House of Debt,” with colleague Amir Sufi. Mian says “distribution matters,” and that today’s record levels of economic inequality represent not just a moral issue, but a serious threat to the functioning and stability of the macroeconomy. Mian says the massive inequality at the top of the wealth pyramid—think of the top 1% of Americans, who now control as much wealth as the bottom 90% combined, for example—has created a system that is dangerously out of balance. His research has found that the savings rate among the bottom 50% is effectively zero, while the top 1% are able to bank 40% of their income.
All that money being removed from the economy, he says, “has to go somewhere.” So where is it going? Not where it’s needed, Mian says. Instead of channeling it into productive uses, like investments in businesses and factories, the financial sector is pushing it out as unproductive consumer debt at a rate that isn’t sustainable, he says. And in fact, U.S. consumer debt rose to a record $18.6 trillion dollars in the third quarter of last year. It’s a system that is dangerously out of balance, he says. To rebalance it will require looking at regulations, incentives, inherited wealth, and particularly taxation, especially on unproductive assets. Atif Mian joins Economics for Inclusive Prosperity Podcast host Ralph Ranalli to talk about how we got here economically, what it means if we do nothing, and ways we might be able to get to a better, more sustainable place.
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Reading materials mentioned in this episode:
Academic Papers:
"The Goldilocks Fiscal Theory of Government Debt," Atif Mian, Ludwig Straub, Amir Sufi (Washington Center for Equitable Growth - June 2022)
"The Saving Glut of the Rich," Atif Mian, Ludwig Straub, Amir Sufi (National Bureau of Economic Research - April 2022)
"Indebted Demand," Atif Mian, Ludwig Straub, Amir Sufi (Bank for International Settlements, October 2021)
Books:
"House of Debt," Atif Mian, Amir Sufi (University of Chicago Press, 2014)
Key Terms in this episode
Digital Land Asset - Also known as digital real estate, such as a website or another type of online asset.
Full market - A theoretical market with negligible transaction costs (and therefore also perfect information) and one where every asset in every possible state of the world has a price. In a full market, the complete set of possible bets on future states of the world can be constructed with existing assets without friction. Also known as a complete market.
Time Series Data - Time series data consists of observations of economic variables (like GDP, inflation, or stock prices) collected at regular time intervals to identify trends, patterns, and relationships.
VARs - Vector Autoregression (VAR) models how interconnected economic variables influence each other over time, explaining dynamic relationships and aiding policy analysis.
Atif Mian is the John H. Laporte, Jr. Class of 1967 Professor of Economics, Public Policy and Finance at Princeton University. He started my academic career in 2001 after completing his bachelor’s degree in Mathematics with Computer Science and Ph.D. in Economics from MIT. Prior to joining Princeton in 2012, He taught at the University of California, Berkeley and the University of Chicago Booth School of business. Mian’s research focuses on finance and macroeconomics, with a focus on understanding the human connections that help form the economy. “I see the goal of economics as helping society connect with itself in ways such that the sum is bigger than its parts,” he says. His current work focuses on the deeper implications of rising inequality for the macroeconomy—including growth, financial markets, monetary policy and fiscal policy. Mian co-founded the Center for Economic Research in Pakistan (CERP) in 2007, a non-profit research institute dedicated to economic research, teaching and innovation. He is also the director of the Julis-Rabinowitz Center for Public Policy and Finance at the Princeton School of Public and International Affairs. Mian co-authored the influential 2013 book, “House of Debt,” with Amir Sufi.
Cold Open: This podcast is a production of Economics for Inclusive Prosperity, a network of leading economists looking beyond neoliberalism and economic nationalism to answer the question: How do we build a more inclusive, more sustainable, and more prosperous economy for everyone? Our show is based at the Malcolm Wiener Center for Social Policy at Harvard University’s Kennedy School of Government.
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Dani Rodrik: Economics has changed and, in particular, has become much more empirical. It's become less wedded to theoretical preconceptions about, such as, markets will always take care of problems or that the governments cannot ever solve things…
Stefanie Stantcheca: What we do find in our survey work is that fairness matters a lot to people…
Suresh Naidu: …inclusive prosperity meant thinking about democracy and its relationship to economic policy and democratic politics as something that we were committed to…
Atif Mian: …those deeper questions of how we want to organize ourselves as a society, so we deliver not just economic growth, but we also deliver the values that we need to aspire to.
Intro (Ralph Ranalli): Hi. It’s Ralph Ranalli. Welcome back to the Economics for Inclusive Prosperity podcast. We’re excited to be joined this episode by another co-director of the EfIP network, Princeton University Economist Atif Mian. Born and raised in Pakistan, Mian came to the United States to study math and engineering at MIT, where he discovered economics and eventually earned his PhD. After the 2008 financial crisis, Mian rose to prominence with his groundbreaking research on the relationship between debt, the financial sector, wealth concentration, and the macroeconomy, which culminated in his influential book “House of Debt,” with colleague Amir Sufi.
If he’s learned one key lesson in his research, Mian says it would be that “distribution matters,” and that today’s record levels of economic inequality represent just a moral issue, but a serious threat to the functioning and stability of the macroeconomy. Mian says the massive inequality at the top of the wealth pyramid—think of the top 1% of Americans, who now control as much wealth as the bottom 90% combined, for example—has created a system that is dangerously out of balance. His research has found that the savings rate among the bottom 50% is effectively zero, while the top 1% are able to bank 40% of their income. All that money being removed from the economy, he says, “has to go somewhere.”
So where is it going? Not where it’s needed, Mian says. Instead of channeling it into productive uses, like investments in businesses and factories, the financial sector is pushing it out as unproductive consumer debt at a rate that isn’t sustainable, he says. And in fact, U.S. consumer debt rose to a record $18.6 trillion dollars in the third quarter of last year. But all that mountain of debt also pushes a non-virtuous cycle, first requiring lower-and-lower interest rates to sustain itself. Then those low interest rates drive up asset prices, push even more wealth to the rich people who are disproportionally owners of them. Finally, perverse regulatory incentives on lending are pushing even more capital into unproductive debt.
It’s a system that is dangerously out of balance, he says. To rebalance it will require looking at regulations, incentives, inherited wealth, and particularly taxation, especially on unproductive assets. Atif Mian joins us to talk about how we got here economically, what it means if we do nothing, and ways we might be able to get to a better, more sustainable place. Here we go.
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Ralph Ranalli: So welcome, Atif. It's terrific to have another of the founders and co-directors of Economics for Inclusive Prosperity on the podcast. It's great to see you.
Atif Mian: Thank you very much for having me. It's a pleasure.
Ralph Ranalli: I love it because it gives me insight into the group and what it's trying to accomplish from the source, the very beginnings. I hope you don't mind, but I'd love to chat first about you a little bit and your journey.
Atif Mian: Yeah.
Ralph Ranalli: You've had an interesting path from...
Atif Mian: Yeah.
Ralph Ranalli: …basically you were a young man coming from Pakistan...
Atif Mian: Yeah.
Ralph Ranalli: ...to MIT with an intent to study engineering.
Atif Mian: Yeah.
Ralph Ranalli: And then you ended up as an influential economist who's interested in the connection between inequality and the macroeconomy as a research focus. Can you give me the interesting-but-abridged version of that path, how you got from that Point A to point B.
Atif Mian: Absolutely. I think it's fair to say that for someone who works in macro and finance, my path is a bit atypical. As you said, I came from Pakistan, wanting to do—as everyone else I imagine—science, engineering at MIT. I did math and computer science. I had no idea what economics was all about.
But the great thing about education in the US is that they make you take all kinds of courses and I just fell in love with economics in the following sense: It had all the questions that were the most interesting, you know, about the society. Especially coming from Pakistan, I was always like, you know, why are we so poor? Why can't we be like the US or Canada or whatever? And because I liked math and the technical aspects of it, this was like a perfect combination. I could ask the questions that I always wanted to ask and I could use the tools that I had learned, or I had some comparative advantage in terms of the quantitative understanding of those questions. So, I dived right in.
I was lucky enough to get into the MIT PhD program after my undergrad. But I was, so sure I would do development. And so that's what I did—actually, my advisor was Abhijit Banerjee, the famous Nobel laureate. And I did development. I just happened to sort of start working on banking in developing countries and, as life would have it, went more into finance. But because of my development background, I would say, I was always interested in sort of the big picture, macro-level questions. And so, I kept gravitating towards it. And I think my training helped in allowing me to think from first principles, even though I was not trained as a macroeconomist. And then also the other aspect of my training was using granular micro-level data to answer all kinds of questions. And I thought, why not use these techniques to answer macro questions? Which wasn't as much the fashion back then, when I was kind of grappling with these issues.
And then the big break came with the financial crisis, and I remember a reporter from the New York Times once asked: "How come you, from Pakistan, are ahead of the curve?" I'm like, well, you know, I just focus on emerging markets and the US became an emerging market in terms of having this financial crisis. So, it kind of it kind of fell in my lap. It's not like I was that smart. But I as always, you want to be luckier than want to be smart.
Ralph Ranalli: So, it's very economics for Inclusive Prosperity, that sort of ethos of wanting to lens out and really talk about the bigger underlying macro problems. And you're wondering, like, why are things the way they are? And I know you believe that inequality isn't just a moral and a social problem, but it's a macroeconomic and a financial stability problem, and that was a real eyeopener for me. When in your research did you start understanding that that could be true?
Atif Mian: Yeah. Great question. So first of all, if you work in the intersection of macroeconomics and financial markets, one thing becomes clear to you very early on. And I think everyone knows this, so I'm not saying anything controversial, which is distribution really matters. So, for example, the reason a financial crisis can have a big impact on the macro economy is because financial crises can take a lot of value away from the banking sector, which really needs that net worth to lend to households and firms subsequently and so on. So, this notion that distribution matters has always been there in the background.
What has not been there as much in the background is how much or how it matters, number one. And which aspect of inequality really matters. And when I started looking at that question, what really struck me is the following: It's not just that more generally, inequality matters. It's really inequality at the top. Extreme inequality is what really matters, number one. And number two, the reason it really matters is because the most important action, economic action, that you and I take is the consumption-saving decision. We all get some income through our assets, our labor. How much of that income do we end up spending, by buying groceries, by going on vacation, things like that? Versus what we save, and we put back in the financial system? And what really struck me—again, it's kind of has always been there, but that is sort of the start of this journey on the inequality side—is how different that consumption-saving behavior is for people who are very rich. And now I'm thinking top 1% or even further. They can't spend it all.
So now when you combine that simple observation with the simple fact that there has been this incredible rise in extreme inequality, okay, that money has to go somewhere. And that's a macroeconomic question. So that sort of led me into it. The other part of your question was, okay, inequality is a obviously a sort of a loaded question, if you will. It has a lot of political, social implication, moral, philosophical implications. It's all extremely important.
But I've learned one thing in life: Understand your lane and understand your comparative advantage. Right? And so, the question is, as an economist, am I adding much value if I am the next Nth one to pontificate on the moral value of whatever? And the answer is—of course, I have my views, don't get me wrong, and I feel very strongly about them like any other human being and I hope that I have a core set of moral values and all of that—but when it comes to engaging with the public and trying to make an argument, I wanted to focus on the economic system and let people understand, in addition to everything else around inequality, why does it matter for the macro economy as a whole, as a system?
And that's the last comment I'll make. Which is what I realized—it's my body of work that I really value a lot—is this understanding that when that consumption-saving decision is so much different at the very top because they save a lot, it can have really grave and important macroeconomic consequences through its impact on debt, on interest rates, and on the broader functioning of the society. And the key philosophical insight that comes out of it, for me, is this notion of balance. Just like in nature, like in an ecosystem. I remember my class on differential equations, where they would talk about the predator and prey system, which you can model as a differential equation. And the key thing was the sense of balance, which is if you have too many predators, the prey will run out. But then the predator cannot survive without the prey. And so you need this balance between the two for the jungle to survive, so to speak. And it's exactly the same sense of perfect balance that you need in the economy for it to function well. And we have lost that balance.
Ralph Ranalli: Right. I think that is a really nice segue, because it brings us, I think, to your recent paper, "The Savings Glut of the Rich," where you talk about how rising wealth inequality and some greater financial liberalization have caused global debt to surge and interest rates to fall since the 1980s, which is pushing the system out of balance. That equation out of balance. Can you explain for us how that mechanism works?
Atif Mian: Absolutely. The starting point is what I have already mentioned. Which is that the super-rich—again, think the top 1%—they save at a much higher rate than the rest of the population. They save something like half their income.
Ralph Ranalli: Like over 40%...
Atif Mian: Exactly.
Ralph Ranalli: ...and then the next 9% saves maybe 20%, but the savings rate for the bottom 50% is effectively zero. Right?
Atif Mian: It's effectively zero. It's hand to mouth. Everybody is free to save as much as they want, of course, given your income. And so that's how they behave. And the question is, okay, again, not making any moral judgment on it: What are the macroeconomic implications of that? And the thing is, if in that world, when you raise inequality as it has risen since the 1980s, you're going to have a larger and larger surplus of savings. More of the pie is going to the small segment of the population that is saving at a much higher rate.
And so, things have to balance. Again, coming back to demand has to equal supply, that's a basic law of economics. So, the question is, where do those savings go? Now, this is where the financial sector come in. One observation that I think is very important: If I just told you that if given all of these dynamics, the amount of saving, the gross amount of saving in the economy has expanded—I'd say it's doubled—it could have gone into one of two different directions. The first could have been the case that the financial sector takes those surplus savings, and it lends them for productive investment: more CapEx, greater employment or better employment, more infrastructure, things of that nature. It could have done that; there is nothing theoretically stopping the economy from doing that. So that's one important observation that I think we need to understand from a policy perspective, from a deeper structural perspective. None of that additional money—we are talking about hundreds of billions of dollars every year, huge sums of money—the big puzzle is almost none of that additional amount was channeled by the financial sector into productive investment.
So that's observation number one, and kind of a damning judgment in my view, if you will, about what the financial sector as a whole is doing. Let's take that as a given, and this is where the problems start to emerge from a system perspective. If that's what they had done, I think we would've been living in a much different world. You and I would've been having a very different conversation. But because that did not happen, the question now still remains... Now you have these hundreds of billions of dollars in surplus saving. If you cannot put it to productive use, it still needs to go somewhere.
And that’s a very important macro point, which is: If it does not go anywhere, the whole system will literally collapse. We economists use jargon like liquidity trap, secular stagnation, things of that nature, but what that basically means is the system must absorb those savings. For the listener, that's the important thing to understand. It must go somewhere. And so, the financial system tries to do that, and so what has happened is the financial sector has pushed essentially all of that additional surplus into A) debt, and equally importantly, B) unproductive debt. What do I mean by that? By unproductive debt, I mean debt that on the other end, has financed not investment, which would've been good, but consumption expenditures.
And there are two types of consumption expenditures that this debt by and large has financed. I would say in the first phase of this expansion that runs from the eighties until 2008, the great financial recession. In that first phase, the bulk of that financing of unproductive debt has been to finance household consumption, expenditure. So, this is like the big boom in household debt, consumer credit. All of that financed that huge consumption boom, private consumption boom.
And post 2008, it shifted to financing, again, consumption expenditures, but this time borrowed by the government and spent through salaries and all of that, and into the economy.
Ralph Ranalli: Right. That was because people who... the consumers, after the housing crash, they pulled in their economic horns and they pulled back their spending, so you had to have the government step in to keep pushing that debt and keep the demand side going. Right?
Atif Mian: Exactly. And this allows me to circle back to my point about the importance of balance. That's what the economy is actually trying to do. Which is, as I said, if you have the savings, the economy must absorb it somehow. Otherwise, we have a massive problem. And just like, you know, you have changes in pressures, the weather system, that's the planet trying to equilibrate, so one part does not get too hot or too cold. That's basically what's happening in the same way through the price mechanism. And one important price is the interest rate in the economy. The broader macroeconomy tries to balance or equilibrate by trying to then absorb those savings in the way that we have seen it, which is interest rates get lower.
So, this is the other paper that we wrote called "Indebted Demand," with Ludwig Straub at Harvard, which shows that once you have this system where these additional savings are being channeled into unproductive debt, you have of course a rise in debt. But the more important and subtle insight is that the only way that debt can sustain itself is through lower and lower interest rates. Right? And the reason for that action is very simple. If you are the one lending to me, Ralph, and I'm borrowing all that additional amount. The interest rate at which I'm borrowing is typically above the average growth rate of my income. So, I'm borrowing something which I must pay back to you in interest at a rate above my income growth. That doesn't square up. Something has to give.
So the only way, again, the system tries to find a balance. And how? You have to lower your interest rate more and more over time. And so, this logic then ends up also explaining what otherwise has been a very important fact which has otherwise been hard to explain, which is both this rise in incredible amounts of debt in the global economy as a share of GDP and these falling interest rates, this downward persistent pressure on interest rates. And we have argued that, through these mechanisms that I've tried to highlight, it is the rise in inequality, extreme inequality once again, that has been important for explaining these very important dynamics.
I'll just end on that by reemphasizing one thing. This process is trying to rebalance the economy, but if the structural problem of extreme inequality does not go away, ultimately you're going to have a serious problem. And so that's why I sometimes say, “Yeah, the economy is trying to make it work.” But I sometimes joke that this is no way to live. As a society, this is no way to live. And I just hope that somehow I'm able to put that point across—that it is for our collective good that there are limits to how unequal the society gets.
Ralph Ranalli: Right. So, let's go back to 2008 because that's a very interesting period where I think a lot of these sort of learnings... it's kind of a crucible in which a lot of these learnings emerged. Because in addition to the interest rates, there was also another factor, right? Which was inflated asset prices and how that affected consumer behavior. Can you bring those inflated asset prices into the equation and how they affected consumer spending among the lower percentiles of the wealth scale, both before and after the housing crisis?
Atif Mian: Yeah, absolutely. This causes sometimes a lot of confusion in people's minds, but it's actually quite straightforward if you continue to follow the logic of what I said earlier. Which was rising inequality. Remember, in that story, what is going on: Rising inequality is generating these surplus savings, which in turn are pushing higher and higher levels of debt, and in particular, debt for financing unproductive consumption expenditures. Precisely because that debt is financing unproductive expenditures, a very important implication of that in equilibrium for the macroeconomy is that interest rates have to push lower and lower. Right?
Okay. Now let's come to asset prices. What does all of this mean for asset prices? The very simple relationship between asset prices and interest rates is that one is the inverse of the other. That is to say, when interest rates go down, asset prices naturally rise. You can call it a bubble or whatever. It doesn't matter. It's actually not a bubble in that sense. And so, one of the consequences— this is partly why I say this is no way to live—because one of the consequences of relying on this debt finance consumption with interest rates going lower and lower is that that system also becomes frothier and frothier in terms of asset prices. And that's exactly what has happened.
So, for example, and this is the thing that confuses people at times, if you think, “Oh, asset prices were just out of whack, and there was some irrational exuberance bubble” or whatever. Before, the house prices were really too high and it burst and that's the end of story. No. Prices are back where they used to be, for example, house prices. And my point is that's because the underlying problem was not just a simple bubble that burst, but the structural problem that kept pushing interest rates lower. So that local disturbance around 2008—actually, once that went away, prices went back up to that level. That's the way to understand this mechanism.
And so, like I said earlier when I said this is no way to live, there is an irony here. Let me bring that out. The irony here is the following. If I'm able to keep people's attention up to this point, what is happening is—in this narrative I'm building—is this rise in extreme inequality that is generating debt, pushing interest rates lower, and hence pushing asset prices up. There's an irony here. I hope people get that. The irony is people getting richer is causing the system to do what I just said, which makes them even richer. Because who owns the wealth? Who owns most of the assets? Obviously. the people on average who are much richer. And this fall in interest rate, essentially, that's the key idea. If rising inequality pushes interest rates down, ironically, it makes the super-rich even richer. The stock valuations go up. The land they own, the land valuation goes up.
I said I'll stay in my lane, and I pretty much will, mostly. But let me highlight one other aspect of that which I think has become an extreme problem in the political environment that we live in today. Right across the aisle; it's not about right or left. It is the extreme influence of these exorbitant levels of wealth in politics. Because it's free money for them. I was already a billionaire, now I'm a trillionaire. You know, it's like, if a fall in interest rate doubles my wealth. I can now use it to do all kinds of things. Jeff Bezos recently had a wedding, right? Everybody talked about it. How exorbitant the wedding was. How much did he expend? I wish him and his wife all the best and may they happily live ever after again. But my point was, I would joke that he's spending too little on his wedding. The problem with Jeff Bezos is that his income is so high he cannot spend enough.
Ralph Ranalli: Right. And I think that's ultimately a big question that I think Economics for Inclusive Prosperity—E-FIP sometimes we call it—is trying to answer. Which is: At what point does wealth stop becoming wealth and it becomes power. Right? And how do you deal with that disparity of power that comes along with extreme wealth and its effects on democracy. And its effects on these other things that we're trying to bring into the equation in terms of what's talked about and what's considered by quote unquote mainstream economics. We're trying to lens out, again, and to see that bigger picture of the effects.
If you don't mind though, can we just take a little turn onto a side road? Because one of the things that I think is really fascinating is the extent to which your work has helped you become an economic empiricist, versus just a pure theorist. It’ss the availability of these large data sets that you work with. They've influenced your work and they allow you to empirically test theories that were theories but then they just sort of became conventional economic wisdom. Can you talk a little bit about what sort of myth busting, I guess for a lack of better term...
Atif Mian: Yeah.
Ralph Ranalli: ...those big data sets have allowed you to do?
Atif Mian: Yeah, that's been a very important part of my work. And as I've alluded to it earlier, when I was telling you about my background, that because I came from an atypical background into asking macro questions, my training in development, and particularly the micro empirical training, even though development questions are also big picture, there was this tendency to appeal to these kinds of methods to answer those pictures.
And I remembered this thought early on. I'm like, okay, I want to think about consumption responses and so on. And the tradition at that point was largely to just work with time series data, right? And this idea that, okay, I need to talk about the economy, so I just need to look at the aggregate GDP numbers and so on. So, you had this sort of literature and a lot of looking at the VARs, looking at time series data—I'm throwing some minor technical jargon out there—but broadly there was this notion that if you want to study the broader economy, you have to look at the aggregate data. And that's just one number at any given point in time. Now the problem is that, when as an economist you ask a question of: Why is the economy going up? Why is it going down? Why are people getting laid off? And you think through various hypotheses. It could be because of A, because of B. The statistical power of just aggregate time series data, it's basically too little to separate whether it's A or B. And it's very obvious, when you think about it, that the granularity of the data actually allows you to further parse out Story A versus Story B by saying: “Okay, does Story A versus B have different implications at a more granular level?”
I'll give you one small example of that, which was very much in my mind at... now I'm talking like before the 2008 crisis. Early 2000s, mid 2000s. Greenspan is the Fed chairman and people are seeing all this kind of boom in housing and people borrowing, and so they're like: “Why are people doing this?” And I remember hearing his response a few times, where he is saying: "Oh, we are not too worried about this excessive growth in credit because we think this is related to something else happening in the economy, which is higher productivity growth." Okay. He's making a perfectly internally consistent argument. He's a smart guy. But is it actually the case? Now, to test that hypothesis, you have to go to micro-level data because the hypothesis is saying: “Look, people are borrowing because they expect to be richer in the future.” We can test that. Because not everybody's borrowing with the same intensity. Are people who are borrowing more, are they the ones getting richer?
Now, this connects back to inequality because. What we know is that it's not the middle class that's been getting richer proportionately. It's the rich that have been getting richer disproportionately. And so that started, okay, let me try and get some more granular data to see if this assertion of Mr. Greenspan's is correct or not. And so that partly sort of got started all of that research agenda that we then worked on around the Great Recession.
Ralph Ranalli: So, your book, "House of Debt," received a lot of acclaim within economic circles, but there's also pushback from people like Timothy Geithner who are sort of downplaying your assertion that debt relief—and I want to start really talking about debt and what you call the addiction to debt, right? That debt relief could have been a more effective remedy than the other financial intervention, the bailouts. And that it can be more effective in times of economic crisis. Can you explain that? What are your main arguments there in favor of debt relief as a prescription for helping things get better.
Atif Mian: Yeah, absolutely. So first of all, I would strongly push back on any assertion, especially in hindsight. I think that one of the big mistakes of the Obama administration was that they misunderstood the importance of exactly this point. Which is in the middle of a crisis, which is driven by highly indebted households, providing relief to those indebted households... so I will just reframe. It's not necessarily debt relief; it's relief for the indebted households. Because there are many different ways you can do that. Not necessarily just write down the level of debt. No. The important point is providing relief to the indebted household. Why and how? What the administration effectively did was they bailed out bankers at a very high cost at that time for the economy. Justified. I understand the argument. I'm not saying they should not have done that. What I'm saying is that logic is entirely incomplete if you don't, at the same time, and for exactly the same economic logic, also provide relief to the indebted homeowners.
Now, let's count the mistakes that were made. The first and the most important mistake, in my mind, was forcing over 4 million homes into foreclosure. It's an obvious first thing, because who's going to buy 4 million homes? That's all only going to make the problem worse and so on. It's not moral hazard. It wasn't their individual fault that the market was crashing. You're in the middle of a crisis. You need to put a moratorium. By the way, this is exactly what the U.S. government did the second time we had a big crisis, which was the pandemic, and it was absolutely the right thing to do. It was the Trump administration at the time, kudos to them, they did the right thing and we saw the advantage of that. We never had a crisis and so on.
You put a moratorium on foreclosure and things like that. Especially when you had so much leverage over the banking sector. You were putting all of the big bankers in the room. You could have negotiated better terms, and said, don't push these homes into foreclosure. In various ways, it could have been done. So, I think it has to be recognized. It's important that we learn from our mistakes. I'm not political, doesn't matter is right or left. But I think what is important is that we learn from our mistakes. And again, the key mistake was relief should have been provided. Lower interest rates were not passing through to those homeowners because they could not get their mortgages refinanced easily. Their houses were being put into foreclosure, which worsened the unemployment problem because it reduced demand even further. It reduced the value of their neighbors who may not have been defaulting, but now they're feeling the squeeze of lower housing prices. Everybody is becoming more cautious by cutting back their spending. Those are exactly the wrong dynamics.
And so, in subsequent work, we show all of this, that all of that multiplied and amplified the overall cost of the crisis. It could have been a lot less if the government had favored providing relief to the indebted homeowners in different ways. That doesn't just mean writing off the debt. No. There are many different ways, and we know how to do that, just like how to restructure the balance sheet of the banking sector. Should have been done, wasn't done. Big mistake, big cost to all of us.
Ralph Ranalli: What are the long-term consequences, you think, if something isn't done to address that addiction to credit and if we don't rebalance the economy. What do you see happening in the long term?
Atif Mian: Okay. There are many different threads to your question. Actually, let me try to touch upon what I think are the sort of the main threads of that question. Think of what this means, you're pushing more on debt, asset prices are rising as a result of that. If that leads to even more wealth inequality, they're becoming more powerful. And first of all, I think it's important to understand that this is why I say more broadly, this is no way to live. We are seeing the political consequences of that. For example, something that worries me a lot is, you know, democracy is about not just one vote, one person, one vote. It's about one-person, similar voice in the system.
But now the money in politics has so disproportionately amplified the voices of the few versus the many. Because of money in politics, number one. But the other thing equally or perhaps even worse, is through the use of algorithms of these digital platforms, how certain voices are amplified and others squashed very deliberately. It's like I've been on social media. I used to tweet a lot more than I do now, partly because of this. It's depressing. And so, I think it's a big problem, number one.
But let me come now just to the pure kind of the boring nuts and bolts, macroeconomic nuts and bolts, of this addiction to debt and the problems with that. The problem with that is—and we wrote a recent paper called the Goldilocks Fiscal Theory of Government Debt—which is the following: as you push, it's like pushing on a string. As you push on more and more debt, you ultimately have to rely on government debt. That's the first of all the key thing. Because you have to generate demand, you have to generate expenditures. And then because you have saturated the private households, they cannot borrow more. You now have to rely on government debt. And theoretically you can, but it's literally like pushing on a thread or maybe like balancing yourself on a string, you know? Because the government needs to run a deficit to generate demand. That's addiction part.
But it also faces the other side of the constraint, which is it must not borrow too much. Or otherwise, inflation or interest rate or both will start to get out of control. And we saw that with the COVID experiment or the COVID experience. So, for example, I can tell people if people are interested in this question, they should just go and Google sovereign bond yields for Switzerland versus the U.S. and follow the trend before and after COVID. It's like they have separated. Since COVID, Switzerland has not experienced a rise in sovereign borrowing. The U.S., of course, has. The key difference is that the U.S. spent a lot, and in all likelihood, too much. This is the problem. This is, again, no way to live.
You can solve certain problems if you calibrate your fiscal policy just right. But getting fiscal policy just right is next to impossible, especially in the current political environment. You know, where it's easy to ramp up spending, but how, like, how do you ramp it down? What spending do you cut? Whose taxes do you raise? The answer often is you can't solve that problem and then you run into problems. So what is the structural issue here? Let's go back to the basics. We can get into the weeds of his government spending too much, Biden spend too much, or Trump is spending whatever, like those are just political... I know they make for good political talk shows, but that's not the main issue. The main issue is that the economy is structurally imbalanced and we need to work on that.
Ralph Ranalli: So how do you work on that? If someone said, okay, Atif, you're in charge of rebalancing the economy. What would the top two or three policy prescriptions you would put forward if all of a sudden you had the power to start pushing things back in the direction of balance the way that you say is so important.
Atif Mian: There's some important things that need to be done, A) on the demand side of the economy, and then B) on the supply side of the economy. So let me talk about both separately. Let me start with the supply side, actually. Remember, as I was building the narrative, one of the key ingredients or components of this narrative was the inability of the economy to channel savings for more productive investment purposes. That's a real problem. That's the supply side. Those are all supply side issues. In my view, the evidence has been building up over and over that the economy around the world, especially in the U.S., faces restrictions, supply side restrictions, driven by regulation, driven by zoning, laws, driven by the ability of a minority to block certain things which are good for infrastructure.
Like I live in New Jersey, look at New Jersey Transit it like hasn't changed since the seventies or eighties. It's like depressing, right? But that's what I'm saying. There are like so many examples like that. Like many people have now these books on this, right? A number of people, "Abundance" and all that stuff.
Ralph Ranalli: Right.
Atif Mian: So, there's that pure supply side I think all of that, we need to go in and we need to rule some serious supply side reforms to boost investment. So that's number one. Now before I go to the demand side, I'll come to taxation on the demand side. But before I go there, let me now talk about sort of the intermediation, the financial side of it. I think we have made some big mistakes, first order mistakes, thinking about regulation of the financial sector.
Let me just give you one example, which is Basel Regulation. So Basel regulation, for the audience, these are rules that are enforced upon by supervisors for all banks around the world. It's kind of this unified regulatory framework for banks around the world. Now, these Basel rules essentially incentivize banks what kind of loans to give. That's one way to think about it. And so, these Basel rules would say, for example, to the banks that you have capital, your equity on the balance sheet, and that equity is charged because you don't want banks to be over-levered. So, if they lend too much, leverage increases. That's where these Basel regulations come in.
But here's the kicker in Basel regulation. They charge equity, or capital, not equally based on whether they're lending to you and I, the government, whether they're lending against land or whether they're lending to new, small, or medium businesses for example. The Basel Regulations say that if you're lending to small, effectively lending to small, medium businesses, we will charge much higher so risk rates will be larger. That is to say, effectively we will charge a much higher slice of your equity against that lending to small businesses.
But you know what? If you lend against very high valuations of land in Manhattan and you give a commercial loan against that, we'll consider that very low risk, very little capital to be charged against that. So, guess what do you think banks are going to do? They can get much higher levered return on lending against land value as opposed to lending to what really matters for the economy, which is business. We have it upside down. There's no economic logic in my mind for doing things the way they have been done. I have a political story for why things have gone, you know, there is a certain special interest that wants to do things the way, but we need to think about collective interest when we are designing regulation.
Okay. So supply side. Financial. That's my second piece. Let me get to my third set of policies, now that you have made me the czar in charge of the global economy. So, my third would be on the demand side, and that comes on the taxation side. And I think the whole taxation system needs to be reformed to rebalance the economy. How? First labor taxes, especially on lower and middle, or even upper middle class, they need to come down. Payroll taxes, labor income tax in general.
Now, because it's about rebalancing, I'm not trying to raise more revenue. I'm trying to rebalance. I think taxes need to go up on things like capital gains, especially capital gains on idle capital if you will. Estate, inheritance, estate taxes, that's a big issue. We do need to think about wealth taxes more seriously, especially on types of unproductive assets. So, for example, people on the right or left, or whether they are Stiglitz or Milton Friedman, they’ve all agreed that taxing land is efficient. There's a number of assets… there are digital land assets today that can be taxed the same way, right?
So, because we don't have time, I won't go into it further, But I think the system of taxation needs to be rebalanced. The key idea is lowering taxes on productive investment, and also taxes on productive physical investment. So, my earlier example of Basel Regulation—it's an effective tax on productive physical investment. I am an economist. I firmly believe in efficiency and so on, but we have those incentives upside down and so we need to realign those incentives.
Ralph Ranalli: Yeah, the incentives go to the unproductive and not to the productive. This has been incredibly enlightening and interesting and fun. So, I’ve got to ask, what's next for you in terms of where you want to follow this thread and take your research? And what do you think might be some promising other unexplored avenues for other up and coming economists to explore—people who want to follow this path that you're trailblazing?
Atif Mian: Well, my first advice to young people is don't listen to people like me. And I think that's one advantage I've had, which is I didn't know much. I didn't know much about macro or so on, and so I just thought from first principles. Right? And I think that would be my first advice to young people is to think from first principles about the big questions and don't be too influenced by whatever the current paradigm is suggesting as the answer. Put that aside. Think about the big question and work from first principles and say, okay, if I did not know anything and I wanted to understand this question, how would I think about it? What kind of evidence would convince me of this?
So, the only place where I can nudge is about what are the big questions. And I think many of those are like, what is AI going to do to this distribution? And then, what is our response if it makes winner take all even more winner take all? Which I think is quite likely to happen. I mean, we were talking about rebalancing that's going to further unbalance the economy. So, I think that's a very serious question. That question, by the way, goes very deep. It's very deeply aligned to the sense of legal frameworks. Because ultimately, it's law that gives value to property, right?
Ralph Ranalli: Right.
Atif Mian: I can write a law that says your shirt is mine. And so, I think, how do we apportion rights?
The other big question is: When are markets good and when are they not good? That's a whole very fundamental question. This notion that markets always work is of course wrong. I can give you tons of example. For example, digital media, only one platform can exist because of network externalities. Who should own that platform? In full markets, the richer person will own that platform, because the richer person can pay the highest price for that one platform that we must have. But then he will do whatever he wishes with that platform. We are literally living in that world. That's not a good world to live in if you want, you know, democracy and that sort of stuff.
Those are very serious questions of mechanism design. Right. How do you design rules of the game, which goes into constitutional design? The law is very fundamental, and I think we live in very exciting times from that perspective. It's opening up the space to go back to the very moral philosophy, if you will, going back to those deeper questions of how we want to organize ourselves as a society so we deliver not just economic growth, but we also delivere the values that we need to aspire towards. It motivated us to kind of think about putting this group together, economists for inclusive prosperity, and going back to when you ask: Why did I become an economist? And that's what motivated me. I couldn't care less for the stock prices going up or down. What really motivated me was how should we live as a society? What makes certain societies better?
This is the beauty of economics in my mind. It tells you when and under what circumstances the sum is bigger than the parts. We use different terms for that—externality, this and that, general equilibrium—but at the end of day that's what it is all about. And I think for young economists, and some of the older ones as well, I think this time is really exciting that is forcing us to think about those fundamentals. I very much dislike this socialism, capitalism, communism, this fight of “ism.” It’s just total nonsense. Let's get real. Say, okay, you know what? Nothing is perfect. We live in an imperfect world. The gray area you need to understand, from first principles, is: What conditions do we want to inculcate in the society so that the results those conditions maximize our collective welfare so that the sum is bigger than the parts? That's kind of the core excitement in my mind about what economics or the tools of economics can do potentially.
Ralph Ranalli: I agree with you. I think this is a very exciting time in economics because,we seem to be emerging from these orthodoxies and are in a mindset now where we can ask a lot more questions and fundamental questions. And yet at the same time, we have these newer empirical tools to apply to them and learn deeper lessons. So, I will be watching with great interest, both your future and the future of the field. So, thank you so much for being here and...
Atif Mian: Thank you Ralph.
Ralph Ranalli: ...sharing this with us.
Atif Mian: Really appreciate your questions and your time. Thank you.
Outro (Ralph Ranalli): The Economics for Inclusive Prosperity podcast is produced in collaboration with the Reimagining the Economy Project at the Malcolm Wiener Center for Social Policy at the Kennedy School of Government at Harvard University. The co-producer of this podcast is Tony Ditta.
Please join us again in two weeks for another new episode featuring E-fiP co-director and Harvard economist Stefanie Stantcheva, the winner of the 2025 John Bates Clark Meda. We’ll talk about her work on zero sum thinking and her pioneering research methods that use large-scale social economics surveys and experiments to understand how people form their attitudes towards issues like taxation, trade, immigration, climate change, and social mobility. Thanks for listening, and if you like this podcast, please remember to subscribe on Apple Podcasts or your favorite podcasting app.