The writer is a finance professor at Peking University and a senior associate at the Carnegie China CenterWhile much of the debate about limiting US government debt assumes that rising debt is a consequence of profligacy on the part of Washington policymakers, the problem is in fact structural. Americans are forced to choose between rising debt and higher unemployment largely because of the level of income inequality in their country — exacerbated by the large US trade deficit — that has sharply reduced the consumer demand for American businesses and manufacturers.
The rise in income inequality is the key driver of debt. Because the wealthy save a much larger part of their income than do workers or the middle class, and use a much smaller part for consumption, rising income inequality automatically reduces overall consumption and forces up savings by effectively transferring income from high consumers (ordinary Americans) to high savers (the wealthy).
If the higher resulting savings funded higher investment by US businesses, this would be a good thing for the economy. Lower consumption would be balanced by higher investment, with total demand remaining the same in the short term and rising in the longer term as more investment caused growth to accelerate.