Piketty, Thomas, and Gabriel Zucman - Capital is Back: Wealth-income Ratios in Rich Countries 1700-2

A copy of the paper can be found here.

The Point: Capital is back. Over the period 1870-2010, the wealth-income ratio has followed a U-shaped pattern. The nature of wealth has changed over the period 1700-2010, note the increasing role of housing after 1970. The low wealth-income ratio in the 1950s-70s is attributed to the world wars and anti-capital policies destructing a large part of the capital stock and reducing the market value of private wealth.

From 1970-2010 aggregate wealth-income ratio has risen from about 200-300% to a range of 400-600% in the top eight developed economies. This level is close to the 600-700% observed in the 18th and 19th century. The authors attribute the rise in the wealth-income ratio to (1) the slowdown in productivity and population growth and (2) a long-run swing in asset prices. Which, according to the authors, has been driven by changes in capital policies in the course of the 20th century. A number of anti-capital policies were put into place which depressed asset prices through to the 1970s and were gradually lifted from the 1980s onwards.

Furthermore, it is hypothesized that low growth and savings can lead to a higher wealth-income ratio in the long run. These findings have implications for capital regulation and optimal taxation and point towards the increased importance of inheritance in the twentieth century.

Contributions: (1) create a new macro-historical data set on wealth and income (2) exploit the database to establish a number of new results on these measures (3) attempt to assess the internal consistency of the flow and stock side of existing national accounts and pinpoint in the areas in which progress needs to be made.

Method/Data: Piketty and Zucman have compiled a new database of national balance sheets. Statistical offices have recently started publishing national stock accounts, including annual and consistent balance sheets. They use these figures to measure the stock of private and national wealth at current market value.

Main definitions used throughout the paper are:

• Private wealth W = assets - liabilities of households

• Government wealth Wg

• Market-value national wealth Wn=W+Wg=K(land+housing+other domestic K)+NFA

• Domestic output Yd = F(K,L) (net of depreciation)

• Capital-Income ratio = W/Y

• Capital-output ratio = K/Yd

See the data appendix for a detailed explanation of the construction of the data.

The Quotes:

“Capital-output ratios and capital shares have no strong reason to be constant”

“A high capital-income ratio implies that the inequality of wealth, and potentially the inequality of inherited wealth, is likely to play a bigger role for the overall structure of inequality in the 20th century than it did in the postwar period. This evolution might reinforce the need for progressive capital taxation. (...) if international tax competition prevents these policy changes from happening, one cannot exclude the development of a new wave of antiglobalization and anti capital policies”

“One expects a higher elasticity of substitution in high-tech economies where there are lots of alternative uses and forms for capital”

Citation: Piketty, Thomas, and Gabriel Zucman. "Capital is back: Wealth-income ratios in rich countries 1700–2010." The Quarterly Journal of Economics 129, no. 3 (2014): 1255-1310.Harvard

DOI: 10.1093/qje/qju018