Federal debt and 1 percent wealth

"For every buyer there must be a seller, and for every lender a borrower. One man's expenditure is another's receipt. My debts are your assets, my deficits your surplus ... In the United States today one budget which is usually left holding a deficit is that of the federal government. When no one else borrows the surpluses of the thrifty, the Treasury ends up doing so."

In 1963 James Tobin wrote "Deficit, Deficit, Who's Got the Deficit?" for The New Republic.
The original article is hard to find but a nice summary is here. I was made aware of the article by a Sidney Winter Twitter post.

Atif Mian, Ludwig Straub, and Amir Sufi's more recent "The Saving Glut of the Rich and the Rise in Household Debt" (MSS, 2020)* can be partly seen as an exposition and update of Tobin's point that "Of course, many private households have financial deficits. They pay out more than their incomes for food, clothing, cars, appliances, houses, taxes, etc. They draw on savings accounts, redeem savings bonds, sell securities, mortgage houses, or incur installment debt. but deficit households are far outweighed by surplus households." MSS conclude that the saving glut of the rich has been "linked to the substantial dissaving and large accumulation of debt by the non-rich" and has also "been financing government deficits to a greater degree."

I was curious about the link between the increases in the wealth of the top 1% and the federal debt. As expected they're correlated. In the chart below,  the wealth of the top 1% of the wealth distribution is on the left hand side, federal debt is rhs.

*MSS measure the contribution to aggregate savings from different parts of the income distribution. They use Piketty et al.'s "Distributional National Accounts" (2018), and they test their results using income shares from the Congressional Budget Office and wealth shares from the Federal Reserve's DFA, which show assets by wealth percentile group.

Government has a revenue problem, not a spending problem

I do not accept the premise of this blog post.

Government debt today is not a bigger problem than collective under-investment in our health, education, infrastructure, and environment. And fortunately, there does seem to be at least a short-term consensus that government should spend what is necessary to protect us during this crisis.

However, policymakers are already preparing for the debt battles to come. Robert Rubin recently wrote that "Congress should commit now to address -- when conditions allow -- the increase in debt as a share of our economy, which was already seriously worsening before the crisis." He recognizes that "There will be ample room to increase revenues, on a highly progressive basis, for example, by increasing corporate taxes, restoring individual rates, repealing pass-through preferences and imposing a financial transactions tax."

Every 18 months or so the Congressional Budget Office publishes an Options for Reducing the Deficit report. It shows how much the CBO estimates that government could save by implementing various policies. A quick glance makes it pretty clear that anyone pushing for deficit decreases without pushing for at least some tax increases is probably not being entirely serious.

The top 10 options for raising revenues result in savings almost four times as great as the top 10 options for cutting spending. Not to mention that policies to increase revenues generally don't have much impact beyond slightly smaller numbers in the personal finance spreadsheets of comfortable Americans, while policies to decrease spending generally affect the least fortunate or do not solve problems -- for example cutting Medicaid costs and shifting parts of it onto state budgets.

PS: certain economists might say that the CBO estimates do not account for macroeconomic feedback and incentive effects. This is correct. However, those impacts are much less conclusive than is assumed in mainstream macroeconomic models, and in fact sometimes go the opposite way.

Additionally, the CBO document (and therefore the chart above) does not include estimates for recent larger revenue plans such as a wealth tax, which could raise more than $3 trillion over 10 years.

PPS: Olivier Blanchard basically said as much in his concluding remarks in November 2019 House testimony, Reexamining the Economic Costs of Debt -- government has a revenue problem, not a spending problem.