Does the End of Growth Mean the Rise of Inequality?

Classical economics argued that eventually a stationary state or the end of economic growth was going to be reached but they did not forsee the technological change of 19^th century industrialization.  The result was income and wealth growing by leaps and bounds.  However, yet another paper - this time by Thomas Piketty and Gabriel Zucman of the Paris School of Economics - suggests it may all be coming to an end with important effects this time for wealth and inequality. 

In a long, comprehensive and very detailed paper which a short blog post cannot do justice, Piketty and Zucman put together a new macro-historical data set examine wealth to income ratios over the period 1700 to 2010 for eight developed countries. They discover that the ratio of wealth to income is going up again to levels not seen since the late 18^th and early 19^th centuries.  They find:

“ in every country a gradual rise of wealth-income ratios in recent decades, from about 200-300% in 1970 to 400-600% in 2010. In effect, today’s ratios appear to be returning to the high values observed in Europe in the eighteenth and nineteenth centuries (600-700%).”

So, tomorrow is yesterday.  Why?  Two reasons.  First, there is a long-term upward trend in relative asset prices.  Whereas before the First World War, capital markets were relatively unfettered, the combination of world war in the twentieth century (which blew up a lot of capital) and policies that limited capital mobility reduced the return on capital.   This by extension depressed the growth of wealth.  Second, the twentieth century particularly after the Second World War and up until the 1970s saw high-income growth.  However, since the 1970s, there has been a slowdown in productivity and income growth.  Again, in their words: “In short: capital is back because low growth is back.” Of course, a rising wealth to income ratio could have future implications for tax policy but for that you should read the paper.

I suppose one question is whether or not economic historians several hundred years from now will view the economic expansion of the twentieth century and the broadening of wealth and income as merely a short-term aberration resulting from the industrialization phase.  The role of the two world wars in “blowing up the capital stock” and setting the stage for the post war recovery and boom is also another interesting if somewhat depressing variable to contemplate.  However, I think much of the post-war boom was also fueled by the baby boom – which I suppose could be seen as pent-up demand from the years of war and austerity.

The baby boom and demographics in general are important to economic history.  The one variable that Piketty and Zucman don’t seem to mention in their reasons for the upward trend in the wealth to income ratio since 1970 in developed countries is the effect of an aging population.  A big difference between Europe of the late 18^th century and Europe today is life-expectancy:  populations are a lot older now as so many more live beyond age 65.  Wealth rises with age whereas working income eventually drops off so wealth to income ratios naturally will rise with age.  This would make the current high wealth-income ratios less alarming from an inequality perspective than they would be in the much younger population of the late 18^th century. Moreover, in the long run the inequality may be at least partially self-correcting.  After all, as fertility rates fall and the aging baby boom embarks on the "Great Dying", one might expect to eventually see excess supply in assets and increased demand for labour again affecting the balance between wealth and income.  However, we have to live through the short run to get there.

Comments

[Marko]

Wrong question. Try this one :

Does the Rise in Inequality Mean the End of Growth ?

[oblivious]

I was under the impression that inequality was being driven by the knowledge economy rather than money attracting more money. ie that these days the "haves" are those with the skills to leverage accumulated human knowledge for profit rather than those with rich parents.

Growth being good for equality doesn't /feel/ like the whole story to me. It seems like growth is a special case of some type of change.

[The Keystone Garter]

One thing I notice on a map of synchrotrons is Africa doesn't have one. Around a decade ago it was noted much aid and investment to Africa doesn't address African strengths and faculties and problems. So there is an underinvestment in R+D and it will otherwise take a while to grow R+D and subsequently develop African domestic industries. A synchrtron is used for a wide variety of research, both applied industrial and more basic longer-term. The R+D can be customized such as projects that focus upon malaria and sickle cell anemia and developing local GMO crops, ex).

Our synchrotron cost just under $200M and just over $10M/yr to finance. I think we should spearhead a synchrotron in Africa. It would take more time to educate freshmen college graduates on upwards, to specifically be ready to use the synchrotron upon graduation or whatever, but just like a virology lab, the number of researchers will steadily grow. We can afford this. I think Harper cut our foreign aid from $8B/yr in half. But this is a very smart way of investing in the developing world. Very high social ROI over decades as you are helping Africans solve their own problems.

[marris]

@Marko

Wrong question. Try this:

Does the Growth in Inequality Mean the End of Rise?

[Mandos]

Marko more or less has it right. The very wealthy rentier class now sees fit to lock in their gains and become our pharonic overlords in truth. The rise of inequality has meant the end of growth.

[Peter T]

"excess supply of assets"??? Assets mostly produce income (rent). As Pikety and Saez note, up to the mid C19, the bulk of assets were land. Land did not become "excess"; it's ownership became more and more concentrated except where state power deliberately set against this. Assets are heritable; income is not. So assets do not become excess, they are concentrated by inheritance into a smaller number of hands in the absence of countervailing arrangements, so producing greater inequalities.

[marris]

@Peter T, I suspect you don't know what you're talking about. My personal experience (from southern India) has been that land gets subdivided among children, and eventually becomes unable to sustain a family. So people get other jobs.

I certainly think that growth does helps poor people, since the kids of most former field workers now do other work.

[Peter T]

Marris

It's not about the desirability of growth. It's Livio's phrase "an excess of assets". A single person (say an older person in a large house) can swap some of their assets for income, but in the larger scheme of things the swap does not diminish the supply of assets - wealth does not decrease because of the swap. The work referenced noted that the large decline in the value of wealth relative to income happened where wars actually destroyed wealth. And wealth does tend to concentrate - I instanced land (thinking of western Europe), but yes, it does not always happen that way. Where claims on agricultural income are not tied to direct ownership (as in eg Ireland and Mughal India) then the claims may concentrate but the ownership fragment. As always, it's a political issue - what are the forces working against concentration of ownership of wealth?

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