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.