TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, January 11, 2018

Economic Inequality Is About To Get Even Worse

Washington Post, Massive New Data Set Suggests Economic Inequality Is About to Get Even Worse:

The “endless inegalitarian spiral” may be coming for us sooner than we think.

In his best-selling 2014 book “Capital in the Twenty-First Century,” French economist Thomas Piketty warned that if the already rich were able to accumulate wealth faster than economies were able to grow, inequality would skyrocket in the coming decades, potentially destabilizing societies in the process.

Wealth, after all, is self-perpetuating. You put cash in a savings account, and it grows. You buy a home, and its value (typically) appreciates. You invest in the stock market and see an annual rate of return.

Work, on the other hand, isn't like that. If you don't have wealth and want to make money, you have to keep working. If the economy is strong enough, your wages will grow, and eventually you'll be able to build up some wealth of your own. And if your wages are increasing more quickly than wealth is growing, there's a chance that someday, you could catch up with the person who started off with a million-dollar trust fund.

Conversely, if your wages are growing more slowly than wealth is increasing, you'll never be able to catch up. You can work as hard as you want and save as much as you want, but you'll never close the gap with that lucky trust-funder. To use a baseball analogy, not only did they start on third base, they're also running faster than you are.

But inquiries into how fast wealth grows relative to the economy have been hampered by a lack of good, complete, comparable long-term data on the rates of return for various assets: stocks, bonds, real estate and the like. You'd want this to know what you'd expect a “natural” rate of return to be in an economy such as ours: How much would you expect home prices to appreciate over time? What about the expected return on the stock market over the decades? How about government bonds?

Now a working paper, written by Federal Reserve Bank of San Francisco economist Òscar Jordà and others, purports to calculate just that: “The Rate of Return on Everything.”

After compiling this first-of-its-kind data set, Jordà's team makes a startling conclusion: If anything, Piketty's book underestimates the historical rate of return on wealth. “The same fact reported [by Piketty] holds true for more countries and more years, and more dramatically,” the researchers conclude.

Wealth accumulates faster — much faster — than economies can keep up. If this is true, it means that in coming years, wealth inequality could grow even faster than Piketty feared.

The gap between wealth accumulation and economic growth has been a constant feature of the world's most advanced economies for nearly the entire period from 1870 to 2015, the researchers found. They compiled a database of the annual rate of return on four major types of wealth: government bonds, treasury bills, stocks and residential real estate. ...

With the exception of wartime, when instability rattles stock markets (or shuts them down completely) and bombs literally destroy housing wealth, the rate of return on wealth has been considerably higher than the growth rate of the major economies. Overall, if the average annual return on wealth since 1870 has been 6.28 percent, average annual economic growth works out to just 2.87 percent.

WaPo

https://taxprof.typepad.com/taxprof_blog/2018/01/economic-inequality-is-about-to-get-even-worse.html

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Comments

May I assume that if, if, the Gini Coefficient and whatever is used to measure wealth inequality doesn't "skyrocket", that the Washington Post will run a giant, conspicuous editorial retraction?

Because, you know, they always get their predictions right, and always apologize when they make mistakes...

Posted by: MM | Jan 11, 2018 7:23:56 PM