The world economy entered the COVID-19 crisis with very low interest rates and very high debt levels, which will complicate policy efforts to boost the economy. We released two @nberpubs papers that address how this happened and what it means for policy ( @AtifRMian @ludwigstraub)

Both studies point to the rise in income inequality as a central culprit. The rich save more than the non-rich, and therefore a rise in income inequality creates a "saving glut of the rich" which has fueled the rise in household and gov debt since the 1980s.

When non-rich households and governments borrow from the rich, it creates a transfer of future resources from those who spend to those who save. This puts downward pressure on aggregate demand, and interest rates must fall in an effort to keep demand high.

Eventually, as inequality continues to rise, interest rates cannot fall further, and the economy enters a zero interest rate, low growth, high debt liquidity trap, which we call a debt trap. In a debt trap, fiscal and monetary policy don't work, and likely make the problem worse

In the indebted demand model, policies that redistribute (progressive income taxes, wealth taxes) are effective at helping economy escape a debt trap. That is, redistribution becomes a central tool for macroeconomic policy. See Section 8 of indebted demand paper in particular.

The ungated papers can be found at:
https://scholar.harvard.edu/files/straub/files/mss_richsavingglut.pdf

and

https://scholar.harvard.edu/files/straub/files/mss_indebteddemand.pdf

These two studies were originally written before the COVID-19 crisis, but we believe the policy conclusions are even more relevant now, as the COVID-19 crisis has already lowered interest rates even further, and the rise in gov debt will be immense.