Inequality, not gerontocracy

Who killed interest rates?

Cory Doctorow


A chart labeled ‘Savings rates across the within-cohort income and age distribution,’ from Mian, Straub and Sufi’s ‘What explains the decline in r∗? Rising income inequality versus demographic shifts.’

The received wisdom among economists is that the US’s historical low interests rates are driven by high savings by aging boomers who are getting ready for, or in, retirement.

The idea is boomers have salted away so much cash that banks don’t bid for their savings, so interest rates fall.

But at last week’s Jackson Hole conference, a trio of economists presented a very different explanation for low interest, one that better fits the facts.

In their NBER paper “What explains the decline in r∗? Rising income inequality versus demographic shifts,” Atif Mian (Princeton), Ludwig Straub (Harvard), and Amir Sufi (Chicago) show how inequality, not demographics, is to blame for low rates.

The problem with the “boomers have so much in retirement savings that interest rates are low” theory is that boomers are incredibly unprepared for retirement. There’s a small cohort — ~10% — of very well-off boomers sailing into their sunset years. The rest? Fucked.

It’s true that boomers put in most of their working days before wage stagnation kicked in, that they paid hilariously low university tuition, and enjoyed low housing costs and substantial down-payment assistance from their New Deal-subsidized parents.

But! They also were the earliest cohort of workers that were forced to rely on gambling in the stock market for their pension, and their savings were eroded by multiple crashes that revealed them for the suckers at the poker table.

Their homes have hugely inflated values, but they’re being liquidated to pay for eldercare, medical debt, and their kids’ and grandkids’ usurious student loans and otherwise unattainable down-payments.

So we can’t really say that low interest rates are being caused by an aging population with high retirement savings, because while the US population is aging, it does not have high savings. Quite the contrary.