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Washington Post: Massive new data set suggests economic inequality is about to get even worse

Washington Post, January 04, 2018, by Christopher Ingraham.

“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.”

“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.”

“Add up the returns on everything, plot the average rate over time for all 16 countries in the data set, and you get a chart that looks like this:”

“Now let’s compare that with the rate of overall economic growth.”


“The weighted rate of return on capital was twice as high as the growth rate in the past 150 years,” the authors conclude.
Now, many economists point out that this isn’t necessarily a problem. There are many factors, such as inheritance taxes and depreciation, that can chip away at the value of capital over time. Ultimately, “more capital will erode the economy-wide return on capital,” as one of Piketty’s critics put it in 2014.
But the numbers compiled by Jordà’s team don’t appear to bear that out. They note that the total value of capital assets in the economies they studied, relative to GDP, roughly doubled between 1970 and 2015. But over that period, the return on those assets was relatively stable. More capital did not erode the economy-wide return on capital.
The implication is that Piketty may have been correct after all with his dire prediction of accelerating inequality in the decades to come, perhaps even more correct than he realized.
Regardless, the data set compiled by Jordà’s team should help economists further refine their understanding of the issue — and what it means for all of our pocketbooks.”

Read the full article here.