Should-Read: Adrien Auclert and Matthew Rognlie: Inequality and aggregate demand

Should-Read: A very interesting exploration of how inequality that is or is perceived as risk by the relatively young potentially destroys entrepreneurship and growth. I am going to have to think about this some more. But it is very plain to me that rising inequality is not best thought of as “rising dispersion in individual fixed effects”, but rather as individuals—in their teens, in their twenties, in their thirties—finding themselves in the right (or the wrong) place at the right (or the wrong) time: Adrien Auclert and Matthew Rognlie: Inequality and aggregate demand: “We explore the transmission mechanism of income inequality to output…

…In the short run, higher inequality reduces output because marginal propensities to consume are negatively correlated with incomes, but this effect is quantitatively small in the data and in our model. In the long run, the output effects of income inequality are small if inequality is caused by rising dispersion in individual fixed effects, but can be large if it is the manifestation of higher individual income risk. We formalize the connection between partial and general equilibrium effects, and show that the two are closely related under standard assumptions about the behavior of monetary policy. Our economy features a depressed long-run real interest rate, allowing us to quantify the potential contribution of income inequality to secular stagnation…