The math is easy: the federal budget over the next decade cannot be made to square without raising a lot more money. The nonpartisan Congressional Budget Office estimates that if we stay on our current path, federal debt held by the public will grow from about two-thirds of gross domestic product today to roughly 100 percent in a decade and twice that much by 2040. It is unlikely that even the most committed Republicans could reverse the trend without higher taxes.
But an equally compelling reason relies on a new understanding of the economics of taxation. For 30 years, any proposal to raise taxes had to overcome an unshakable belief that higher taxes inevitably led to less growth. The belief survived the Clinton administration, when taxes rose and the economy surged. It survived George W. Bush’s administration, when taxes were cut yet growth sagged.
But now, a growing body of research suggests not only that the government could raise much more revenue by sharply raising the top tax rates paid by the richest Americans, but it could do so without slowing economic growth. Top tax rates could go as high as 80 percent or more.
Admittedly, it seems inconceivable that our political system could stomach a tax increase that big. Today, the richest 1 percent of Americans pay a top federal rate of 29 percent, according to Emmanuel Saez, an economist at the University of California, Berkeley. That’s because almost a third of their income derives from capital gains and dividends — which are taxed at a 15 percent rate — while the rest is ordinary income taxed at a top marginal rate of 35 percent.
Nonetheless, the research suggests there is much more money available to close the budget deficit than we previously thought, if only we were willing to raise tax rates to where they were back in the early ’70s, in the administration of Richard M. Nixon.
Taxpayers always want to pay less to the tax man. Still, there’s nothing inevitable about low taxes. In the early 1950s, coming out of World War II, the top federal income tax rate exceeded 90 percent. In 1980, the top marginal rate was 70 percent for families making more than $215,400 — about $587,000 in current dollars. And these families pocketed a much smaller share of the nation’s income than they do now. Today, people earning over $200,000 a year capture more than a third of national income.
– Eduardo Porter, “The Case for Raising Top Tax Rates,” The New York Times, March 27, 2012 (here), linking “The Budget Message Paul Ryan Really Sent,” by Howard Gleckman, The Tax Policy Center, March 22, 2012 (here). Emphasis added.
This post follows up on my initial discussion of the economics associated with Standard & Poor’s (S&P’s) recent recognition that income inequality reduces income growth, and Paul Krugman’s assertion that this is a “new view” of economics. I will occasionally refer back to points made in that post, but here I set forth evidence demonstrating the correctness of this view of inequality, and showing that inequality poses a serious, ongoing danger for the United States economy.
To set the stage for that review, let’s connect some important dots: The opening quotation, to which I called immediate attention in this blog nearly two and one-half years ago (here) is presented for its observation that tax increases on top incomes needed to balance the budget have been blocked by the ideological belief that raising taxes on top incomes reduces growth. This is a form of the “trickle-down” argument against taxation, which incorrectly asserts that lowering taxes on top incomes enhances growth. The truth is the opposite: higher taxes at the top serves to redistribute income and wealth to people who spend a greater share of their incomes, thereby increasing investment, jobs, production, and growth.
What may appear to be a different topic — the effect of inequality on growth — really is a the same topic: Inequality is the measure of the concentration of wealth and income, and it occurs naturally in a market economy. The progressiveness of taxation is the measure of the degree to which society allows income and wealth concentration to develop; the immediate effects of reducing the effective taxation of the wealthiest people are to reduce central government’s tax revenues and to increase inequality; and by suppressing income growth, income inequality further suppresses tax revenues.
That is why saying that increasing growth requires reducing inequality is virtually the same as saying that increasing growth requires higher taxes on top incomes. Likewise, the “trickle-down” myth that progressive taxation has no effect on growth is therefore intrinsically linked to the myth fostered by neoclassical economics, discussed in my last post, that inequality has no macroeconomic consequences. It occurred to me several years ago, as it more recently occurred to the IMF economists whose work is cited by S&P, that inequality and growth are “two sides of the same coin.” It’s a bizarre variation of this metaphor, but given the intrinsic relationship between inequality and tax progressiveness we can say that tax progressiveness, inequality, and growth are “three sides of the same coin.”
Inequality and Taxation
To start, let’s pin down the point that reducing taxes on top incomes causes inequality growth. Intuitively, this has to be the case, because doing so instantly increases the incomes of wealthy people relative to the incomes of everyone else. This was obvious to Keynes (see the last chapter to his General Theory), and presumably to all thoughtful people at the turn of the 20th Century when the contrary mythologies were being developed. There is no longer any question, for now there is an ironclad factual record:
This graph was presented by Thomas Piketty, Emmanuel Saez, and Stephanie Stantcheva in their November 2011 CEPR discussion paper “Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities,” Working Paper 17616 (DP8675, here). It shows that the top 1% share of income and capital gains has varied inversely with the top marginal income tax and capital gains tax throughout the century, ever since income taxation was adopted.
In his book End this Depression NOW! (2012, p. 82) Paul Krugman mentions this evidence, but sees in it no implications for aggregate income:
As Piketty and Saez note, there is a fairly close negative correlation between top tax rates and the top 1 percent’s share of income, both over time and across countries.
What I take from all of this is that we should probably think of rising incomes at the top as reflecting the same social and political factors that promoted lax financial regulation.
Well, across countries it is purely a matter of correlation, but for an individual country, over time, its a matter of causation. To be sure, the causal relationship is between income distribution and effective taxation, not marginal income tax rates; but this graph shows that the top marginal rates track inequality closely. The relationship is so tight that, so far as I know, the researchers did not even bother to confirm it with regression analysis.
Recall (from the previous post) that mainstream economists are said to have universally accepted Arthur Okun’s alleged trade-off between inequality and “efficiency” (a basic element of growth), which postulated that efforts to reduce inequality by reducing after-tax income at the top would backfire, reducing growth, even though the only cited support for the proposition was the false mythology developed from Adam Smith’s “invisible hand” metaphor. Mainstream economics is still in the grip of that fantasy: It permeates the S&P report and its call for a cautious approach to curing inequality. It permeates Congressional Budget Office (CBO) forecasts. And this has to be the main reason why the cornucopia of potential research projects available to pin down the real world relationships between effective taxation, inequality and growth were not included by Raj Chetty in his list of ongoing research projects in “scientific” macroeconomics.
Paul Krugman’s perspectives remain a significant part of our problem: Unfortunately, two and one-half years since the alert sounded by Eduardo Porter, Krugman still fails to sense America’s continuous decline, and continues to express his doubts about the economic implications of inequality, openly rejecting Stiglitz’s perspectives. In his Op-ed in today’s New York Times (“The Forever Slump,” August 15, 2014, here), he opens with this:
It’s hard to believe, but almost six years have passed since the fall of Lehman Brothers ushered in the worst economic crisis since the 1930s. Many people, myself included, would like to move on to other subjects. But we can’t, because the crisis is by no means over. Recovery is far from complete, and the wrong policies could still turn economic weakness into a more or less permanent depression.
Following reiteration of his familiar neoclassical assessment, he then concludes that compared to some other countries “things don’t look that dire in America.” I, too, would like to move on to other subjects: but among “liberal” economists, Paul Krugman holds perhaps the biggest megaphone and bears a heavy responsibility. And he is spreading dangerous misconceptions.
Mainstream economics has no way to distinguish between a weak recovery from a prolonged cyclical downturn and a steadily worsening depression. Today the situation is being labeled “secular stagnation” and “the new normal.” From a neoclassical perspective, these seem like obvious explanations, but there is a better explanation based on a proper understanding of the effect of inequality on growth, and on the active money supply, as revealed through trends in the national debt (see below). In neoclassical ideology, the storm clouds are always on the horizon, and the horizon keeps receding — until the next big crash. Thus, the responsibility for all this confusion lies with the economics profession.
Inequality and Growth
The Standard & Poor’s report (“How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide,” August 5, 2014, here) is an important summary of the transitional thinking now taking place on the income inequality issue. I feel compelled to vet the entire report. Here’s a summary of its discussion:
* * * * *
- (1) S&P concludes that “the current level of income inequality in the U.S. is dampening GDP growth, at a time when the world’s biggest economy is struggling to recover from the Great Recession and the government is in need of funds to support an aging population;”
- (2) S&P places heavy emphasis on education, arguing:
a. In line with the rate of educational achievement seen from 1960 to 1965, adding another year of education to the American workforce from 2014-2019 would likely increase U.S. potential GDP by $525 billion, 2.4% higher than the baseline forecast; and
b. “If education levels were increasing at the rate they were 15 years ago, the level of potential GDP would be 1%, or $185 billion higher in five years”;
- (3) U.S. growth has averaged “a mere 1.4% over the last 10 years, through 2013;
- (4) In recent years, forecasting entities have been reducing their projected growth:
a. S&P has reduced its 10-year U.S. growth forecast to a 2.5% annual rate, down from 2.8% five years ago;
b. S&P has reduced (again) its expectation to 2.0% in 2014; but expects over 3% in 2015;
c. The Fed long-run forecast has drifted down even more, from 2.65% five years ago to 2.2% (mid-point of 2.1-2.3 range);
- (5) The cited reasons for declining growth rates include:
a. The Fed’s explanations are: (1) the aging population; (2) more modest prospects for productivity growth; and (3) the leveling off of growth in women’s participation in the workforce;
b. S&P now cites extreme inequality as well, which it associates causally with the decline in educational achievement;
- (6) S&P quotes Robert E. Hall of Stanford: “The years since 2007 have been a macroeconomic disaster for the [U.S.] of an unprecedented magnitude since the Great Depression,” with output in 3013 falling “about 13% below what the previous trend had suggested. Hall does not believe that a sudden surge in output can recover lost ground;
- (7) S&P notes that income inequality is increasing:
a. Emmanuel Saez reported in 2013 that U.S. income inequality is growing and “has now reached levels not seen since 1928” in similar circumstances: “a boom in the financial sector [together with] the two worst economic slumps in U.S. history — the Great Depression and the Great Recession;”
b. More recently, the Congressional Budget Office (CBO) reported that in one year, from 2009-2010, after-tax income soared 15.1% for the top 1% but grew less than 1% for the bottom 90%;
c. From the distribution of income among the five quintiles (20 percent groupings) “CBO estimates that the dispersion of market income grew by one-quarter from 1979-2007, but the dispersion of after-tax income grew by one-third”;
d. A Federal Reserve Survey of consumer finances shows that the average household wealth of the top 10% (as shown on Chart #7) grew from about $1.07 million to $1.2 million from 2004 to 2010;
- (8) S&P notes arguments against concluding that inequality reduces growth:
a. “To be sure, it seems counter-intuitive that inequality is associated with less sustainable growth, since some inequality by providing incentives to effort and entrepreneurship, may be essential to a functional market economy”;
b. S&P mentions and briefly discusses the related Okun “trade-off” theory;
c. Kristin Forbes (MIT, 2000) argued that “in short and medium terms an increase in inequality has a significant positive effect on expansion — but that was weakened over longer periods of growth;” moreover, a World Bank study found that this positive effect was “almost exclusively reserved for the top end of the income distribution;”
- (9) S&P reports IMF statistical studies indicating that inequality reduces growth: “Do societies inevitably face a choice between efficient production and the equitable distribution of income? According to IMF economists Andrew Berg, Jonathan Ostry, and Jeromin Zettelmeyer, the answer is no;”
- (10) S&P argues for restraint and caution in efforts to reduce inequality, in particular by raising taxes at the top and increasing the minimum wage.
* * * * *
This presentation constitutes a fairly comprehensive summary of the main arguments concerning inequality issues that have been raised by mainstream, “neo-Keynesian” economists, and it begins to cast doubt on these arguments by observing that growth is being suppressed. I’ve previously discussed the IMF studies on this blog, and review them again below. A discussion about the alleged need for caution in dealing with inequality is called for as well. First, though, let’s fact-check S&P assertion by comparing trends in income inequality with a selection of contemporaneous trends in average GDP growth, over various time periods:
1. S&P reported average growth of 1.4% from 2003-2013;
2. The Center on Budget and Policy Priorities (CBPP) in 2009 (here) computed cumulative per capita growth over two adjacent 30-year periods, shown on this bar graph, which averaged about 3% annual per capita growth from 1946-1976, and roughly 2.2% per capita growth from 1976-2006:
3. The Pinnacle Digest, in August of 2013 (here) includes a graph of the rolling 10-year average of GDP growth, which provides a different look at changing GDP growth. It shows rolling averages of roughly 4.4% from 1967-1973, 3.3% from 1977-1979, about 3.0% from 1987-1997 and 2002-2005, and about 1.7% from 2009-2012.
4. One final source of data is CBO’s “The Budget and Economic Outlook: 2014 to 2024″ (here), Table 2-2. p.41. CBO reports 4.0% average annual growth for 1950-1973, 3.3% for 1974-1981, 3.2% for 1982-1990 and 1991-2001, and 2.2% for 2002-2013.
Piketty, Saez, and Stantcheva included, in their in their November 2011 CEPR discussion paper, p. 49 (DP8675, here), the following graph comparing both top 1% and bottom 99% real income shares per adult, from 1913-2008, with the top marginal income tax rate. Each share’s growth rate is indicated by the slope of the trend line. Aggregate income is not shown. For comparison, the trends in aggregate income percentage average annual growth rates listed above are roughly aligned below the graph, by year:
S&P | 1.4 |
CBPP | 3.0 | 2.2 |
Pinnacle Digest |4.4| |3.3| | 3.0 | | 3.0 | | 1.7|
CBO | 4.0 | 3.3 | 3.3 | 2.2 |
* * * * *
These numbers are all consistent, except for the CBPP figures, which display per capita growth. (This may be a dubious approach, because growth is a “flow” statistic, and per capita distributions are appropriate for “stock” items. Per capita growth tends to be lower than aggregate growth.) What these numbers show is a steady decline in the income growth rate beginning in the 1970s, remaining steady until the Great Recession when growth was substantially further curtailed. Annual differences are, of course, precisely shown on the Pinnacle Digest graph. Note the consistent correlation since WW II of three causally connected factors – annual income growth, income inequality, and income tax progressiveness.
It was in this report, incidentally, that Piketty, Saez, and Stantcheva reported their comprehensive study (NBER Working Paper 17626, 2011, here) of the income elasticity of the top income tax rates. That study simply eviscerates the ideologically-conceived “Laffer Curve,” and with it the “trickle-down” myth. Here is their graph:
The IMF Study
Earlier in 2011, in “Inequality and Unsustainable Growth: Two Sides of the Same Coin?,” IMF Staff Discussion Note, April 8, 2011 (here), Andrew G. Berg and Jonathan D. Ostry reported their statistical study directly testing the effect on income growth of income inequality. They used multiple regressions of growth against inequality and other factors that might explain growth, and across countries. S&P included this chart of the factors included in the study:
A follow-up IMF Staff Discussion Note, “Redistribution, Inequality, and Growth,” was reported by Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides in February 2014 (here).
The authors’ found in the 2011 study that inequality is “one of the most robust and important factors associated with growth duration” (pp. 13-14). Judging from their discussion, this finding had not been expected. They timidly concluded: “The main contribution of this note may be to push slightly the balance of considerations towards the view that attention to inequality may serve both equity and growth at the same time.” (p. 18) Translation: Abject faith in the the Okun “trade-off” theory is probably unjustified.
The report on the second study acknowledged a significant connection between inequality and growth, and the results were reported a bit less timidly:
First, inequality continues to be a robust and powerful determinant both of the pace of medium-term growth and of the duration of growth spells, even controlling for the size of redistributive transfers. Thus, the conclusions from Berg and Ostry (2011) would seem to be robust, even strengthened. It would still be a mistake to focus on growth and let inequality take care of itself, not only because inequality may be ethically undesirable but also because the resulting growth may be low and unsustainable.
And second, there is surprisingly little evidence for the growth-destroying effects of fiscal redistribution at a macroeconomic level. (pp. 25-26)
In short, inequality leads to low and likely “unsustainable” growth; and, by the way, there is “surprisingly little evidence” supporting Okun’s theory. The implication is that their mainstream colleagues, including those at S&P, should not be so reluctant to aggressively correct the inequality problem.
A Recap of Inequality Economics
There has always been inequality in market economies and, so long as civilization continues to flourish, there always will be. Wealth naturally concentrates, and concentrated wealth entails income concentration. Given the utter failure of planned “communist” economies, market economies offer a superior system, so long as they can be kept under control. Absolute equality is an impossible and unworthy goal for a modern economy. But central government’s control of income and wealth distribution, by retarding the growth of income and wealth concentration and redistributing money into the active economy, is essential for the optimal functioning of a market economy.
This conclusion requires an understanding of the “principle of effective demand” Keynes introduced in 1935: optimal growth requires consumer spending and, therefore, optimal inequality. Keynes, however, assumed away the inequality problem when he focused on cycles occurring when society collectively increases its saving relative to its spending. Economics ever since Keynes has focused on avoiding the inflation resulting from too much consumer spending when government over-stimulates an economy; but everyone, including Keynes himself, ignored the much greater problem of decline when the active money supply is sequestered from the active economy through income and wealth concentration. We are only now discovering the stunning swiftness with which unfettered capitalism can destroy itself through this mechanism.
Inequality grows through the collection of “economic rent,” i.e., payments made beyond any contribution to the growth of tangible, “real” production of consumer goods and service. Early economists focused on land rents, but corporations have come to control or dominate all of the factors of production (including labor), so “unearned” profits are effectively the main vehicle for increasing inequality while reducing actual production, and real income. This is the mechanism through which inequality reduces growth.
A number of factors determine the ability of corporations to make unearned profits, including monopolistic market power, suppression of wages, and tax avoidance. Beginning with the Reagan administration, efforts to unshackle corporate profiteering through deregulation, already underway, were enhanced. The wealthiest people were making a lot more money, and to keep as much of their gains as possible, they reduced their income tax rates, as shown above.
People still don’t comprehend the enormity of those tax reductions. The enormous national debt, now over $17 trillion, was raised to replace the revenue losses resulting from those tax reductions. That is to say, government debt was used to make the rich richer — to finance income inequality and a vastly higher concentration of wealth.
One reason why the full extent of the damage has been obscured is that analysts continue to evaluate income inequality, as demonstrated by the S&P report, by comparing top 20%, top 10%, or top 5% incomes to those below. To be sure, all of these segments have been growing faster than other incomes below them, but such comparisons drastically understate the true magnitude of transfers of income and wealth to the top. The tipping point is in the top 1%, and wealth and income moves into the top 1%, for example, from the rest of the top 10%: Thus, the transfers to the top 1% are much greater than the net transfers into the entire top 10%. Put another way, top 10% inequality growth is the average of the much lower inequality growth (or even decline) in the second 9% with the extremely high rate of inequality growth in the top 1%.
The stunning fact is that all of that $17 trillion has ended up in the hands of the top 1%, with exponential concentration within the top 0.1% and the top 0.01%. Not finding such an analysis anywhere, I undertook more than a year ago to calculate the growth of top 1% wealth (net worth), using Census Bureau net worth tables and wealth concentration data published by economist Edward Wolff, and others. These are my results, in constant 2005 dollars:
The volatility of top 1% net worth corresponds to the volatility of top 1% income shown by Piketty and Saez above. Top 1% wealth is growing faster that GDP, at roughly the pace of the national debt. This is what we would expect: as explained, the national debt has effectively financed growing top 1% net worth.
The more or less continuous 3.0% annual growth of GDP from roughly 1985 to 2005, despite declining median income, appears to be accounted for by the increase in the money supply provided by the federal debt; that additional money mainly accounts for this massive wealth concentration. But this is not a full accounting. Left out is American income and wealth at the top that is not reported in the U.S. This is a difficult assessment to make, but European analysts have for some time been estimating the amount of “off-shore” wealth in the world, and the amount attributable to Americans (See “Inequality: You Don’t Know the Half of It,” Tax Justice Network, July 2012, here).
My best estimate is that top 1% net worth has increased by an unimaginable $22-25 trillion between 1980 and 2012. Consequently, as much as $9 trillion, by my rough estimate, has been transferred to the top 1% from the bottom 99% over these years. My sense of it is that the top 1% had already sequestered the new money associated with the national debt by 2008 and, with the Crash the hollowed out middle class had to collapse, with the consequences for growth we have seen. Obviously, this is a crucial topic, sorely in need of further investigation.
Meanwhile, as I explained in my recent posts on the national budget crisis, the woefully underfunded federal government is, more rapidly than the Republican-influenced CBO is willing to allow, approaching the point that the growth of debt and debt interest is ultimately “unsustainable” (February 2014 CBO report, p. 26). But the CBO baseline forecast remains essentially unchanged since March 2012 (here). It now projects about 2.1% growth continuously into the future, out to 2039, shrugging off the fact that growth has only averaged 1.4% for the last decade. It not only expects a magical, automatic return to full employment “equilibrium,” but in conformity with neoclassical dogma, it has never adjusted its forecasts for growth reduction due to inequality, which continues to rise and will have an ever increasing impact on future growth.
CBO seems unlikely to react sensibly to the guarded warning from S&P. It has, as I reported in my earlier posts, projected debt interest to rapidly outgrow other categories of federal spending, surpassing the entire defense budget by 2021. Yet in its July “Long-term Budget Outlook” (here) it failed to reflect that growth on its graphs, and continued to project this “unsustainable” trend out to 2039!
CBO may well take comfort in S&P’s overly cautious analysis. E.g.:
- “A cautious approach to reducing inequality would benefit the economy, but extreme policy measures could backfire;”
- “Any clear-headed consideration of these options must recognize that heavy taxation–solely to reduce wage inequality–could do more damage than good. While the IMF studies found that some redistribution appears benign, extreme cases may have a direct negative effect on growth;”
- “Heavy taxation solely to equalize wages may reduce incentives to work or hire more workers. A number of studies have indicated that losses from redistribution are likely to be minimal when tax rates are low but rise steeply with the tax or subsidy rate.(fn.)”
Again, the second IMF study found no evidence at all supporting the Okun “trade-off” idea, which has basically been refuted anyway by the history of the American economy from WWII until the late 1970s. Only two studies were cited by S&P (Barro R.J., “Government Spending in a Simple Model of Endogeneous Growth,” Journal of Political Economy, 1990 (here); and Jaimovich, N. and S. Rebelo, “Non-Linear Effects of Taxation on Growth,” NBER, 2012 (here), but they do not make even a colorable showing of support for the trade-off argument:
Jaimevich and Rebelo presented a mathematical model, not a study: It makes the theoretical representations behind the Laffer Curve thesis, which have been disproved.  The Barro article also presented a model, not a study, but it has no bearing at all on our issue. Even Thomas Piketty — who many of us have argued improperly relates short-term inequality issues to supply-side models of growth in long-term equilibrium — has no use for Barro’s model.  Such is the confused state of neoclassicism.
The bottom line: S&P has come up with no reason to believe that returning to the tax policies in effect when the economy was working well and flourishing, or that aggressively increasing the minimum wage, would be “extreme policy.”
Inequality issues are nowhere near as difficult to understand as modern neoclassical economics has made them appear. Once the fundamental importance to stability and survival of the control of income and wealth distribution is understood, the rest should follow in a reasonably straightforward manner. The economics profession, however, long ago abandoned the search for scientific truth in favor of result-oriented mythology. A three-dimensional view of macroeconomics is now available, and economists can for the first time understand how the economy really works, but “scientific” economics still has not recovered from its fantasies.
Our immediate concern has got to be that the continuing concentration of income and wealth within the top 1% spells imminent trouble for our government and our society. The next crisis will come much sooner than CBO wants to believe. All supply-side growth forecasts, which take no account at all of the gradual but exponentially increasing effect of income inequality on growth, are vastly overoptimistic. Indeed, the problem is worse than that: CBO’s forecasts proceed from a “baseline” forecast of GDP which does not change with alternative scenarios varying factors like government spending and revenues, in which the levels of economic activity and GDP necessarily must change. (More on that later.)
We certainly cannot survive until 2039. The consequences of the next bursting “bubble,” or a default on the national debt, if history is any guide, would likely be a decline to 0.0-0.5% growth, another great depression.
JMH – 8/17/2014 (ed. 8/18/2014)
 The intent of the model is to reflect that: “Taxes have a small impact on long-run growth when taxes rates and other disincentives to investment are low or moderate. But, as tax rates rise, the marginal effect of taxation also increases.” That’s not illogical: No one would work for nothing, or invest with no prospect of a fair return. But it’s a factual question as to how much opportunity people are willing to give up in exchange for no opportunity at all. That question was answered by the Piketty, Saez, Stantcheva study which showed that the high levels of taxation in effect in the U.S. from WW II until 1980 not only optimized government revenue, but sustained the higher growth rates that the U.S. experienced then.
 “Since the 1970s, analyses of the public debt have suffered from the fact that economists have probably relied too much on the so-called representative agent models, that is models in which each agent is assumed to earn the same income and to be endowed with the same amount of wealth (and thus to own the same quantity of government bonds). * * * In the case of public debt, representative agent models can lead to the conclusion that government debt is completely neutral, in regard not only to the total amount of national capital but also in the distribution of the capital burden. This radical reinterpretation of Ricardian equivalence, which was first proposed by American economist Robert Barro, fails to take account of the fact that the majority of the public debt is in practice owned by a minority of the population.” – Capital in the 21st Century, p. 135