Good Times for Capital

By James Kwak

Last week, the Wall Street Journal highlighted a Federal Reserve report on total household net worth. Surprise! Americans are richer than ever before, both in nominal and real terms.

At the same time, though, wealth inequality is increasing from its already Gilded Era levels. The main factor behind increasing household net worth over the past year was the rising stock market (followed far behind by rising housing prices). These obviously only help you if you own stocks—not if, say, you never had enough money to buy stocks, or you had to cash out your 401(k) in 2009 because you were laid off. Put another way, rising asset values help you if you are a supplier of capital more than a supplier of labor.

Is there anything we can do about this? The conventional wisdom from the political center all the way out to the right fringe is that we shouldn’t tinker too much with the wealth distribution—otherwise people won’t work as hard, which is bad for everyone. But perhaps it isn’t true.

In a new paper (Vox summary; hat tip Mark Thoma), three IMF economists look at the relationship between redistribution—measured by differences between the pre-tax-and-transfer income distribution and the post-tax-and-transfer income distribution—and overall economic growth over five-year periods, across countries and across time. They find (from the summary) “remarkably little evidence in the historical data used in our paper of adverse effects of fiscal redistribution on growth.” In general, that is, average levels of redistribution tend to be associated with higher levels of growth that are sustained for longer.

Why would this be? One reason is that inequality, in and of itself, seems to be associated with lower levels of growth. So if you redistribute income in order to reduce inequality, even if it is true that this hurts incentives to work hard, the reduced inequality has a countervailing (and, in most cases, stronger) effect.

Indeed, there’s a strong argument to be made that a capitalist society needs systematic redistribution to survive. Thomas Piketty’s new book—which I plan to read the next time I have time to read a 700-page economics book—free markets generally produce higher returns on capital than on labor, which means, to a first approximation, that people with capital will get richer faster than people with only labor. In a world where the political system is open to money, this means that the capitalists will also accumulate a disproportionate share of political power, leading to the type of extractive society described by Acemoglu and Robinson in Why Nations Fail. Which is not a world that most of us would want to live in.

23 responses to “Good Times for Capital

  1. The balance sheet is one sided, on the other side of the balance sheet, there is $60 trillion worth of personal debt, along with the $17 trillion of national debt and another $4 trillion of local and State debt, and that’s not to mention the $120 trillion of unfunded liabilities. No, the only ones who have real wealth are the 1% and the other 9% who get some trickle down perceived wealth effect from that. The rest are slaves to money.

  2. ‘Put another way, rising asset values help you if you are a supplier of capital more than a supplier of labor.’

    Can you prove that? I.e., that rising stock prices aren’t simply a reflection of greater productivity that benefits the people who work in the corporations to a greater degree than the people who own the corporations.

    Especially since, in modern corporations like Microsoft, Google, Facebook, they’re the same people. And it’s pretty clear that national income goes in far greater share to labor compensation than as returns to investors. And that ignores the benefits to consumers.

  3. and what benefits to consumers are those you are talking about? the one where we pay multiple times higher rates for wireless, than say in Europe and for less quality?

  4. I had an expanded take on this. First, real, inflation adjusted real wealth per capita was not at record levels as of the date of the Z1 data, although it will be at the end of Q1 2014. But aside from the fact that all the benefit accrues to the top of the wealth strata as Professor Kwak points out, is that wealth real? Not really. It’s based on distorted markets and in particularly, and unreliable measure of real housing “value.”

    What The Hell Is That Ticking Sound In My Head! Household Wealth – The Real Story

  5. It would be quite helpful if Patrick R. Sullivan could provide some support (proof) for HIS allegations. It seems pretty obvious that over roughly the last 30 years growth in worker productivity (enormous) has become decoupled from real growth in wages (paltry). In the post-WW 2 period until the late ’70’s the two were closely interlinked and workers (labor) actually benefited from increases in productivity – now almost the entire benefit of increased productivity goes to shareholders (capital). And, no, the workers are NOT typically the shareholders, although Fortune 500 executives may have enormous stock incentive packages.

  6. A permanent exemption of the first $30k of incomes from payroll taxes would reduce inequality.

  7. This is such a sticky subject isn’t it? One side says there’s is this massive gap between the rich and the poor(er) while the other side basically says, “share.” I think it will take a lot to even approach this topic but I think one easy way to approach would be some sort of legislation that states when someone receives a raise everyone under them has to receive the same percent raise. For example, if a CEO gets a 10% raise, this may mean a million a year to them, then everyone under that person also gets a 10% raise. I think this would go along way to tackle the fact that the average CEO makes 350 times more than the average employee.

  8. On the reverse side of that wes, is a reduction of wages across the board to bring prices back to Earth where they belong. Not the stratospheric approach which exists today about wages and price controls.


    Really, Paddy? The workers got equal stock benefits?

    All you gold diggers panning for dust, how about getting the heavy mineral pollution out of the rivers? Is “capital” going to pay you to pan for the “heavy metals”?

    This REAL story about the REAL material world goes on and on – 3 years before a KNOWN defect in an automobile gets admitted to and recalled (is there a maximum death # figured out instead of letting the engineers FIX THE PROBLEM before they make manufacture millions of “defects”?

    Even WORSE than the wage war against workers is the lack of bargaining power that they have now to BLOCK the release of KNOWN defective food and goods to the miserly managed “consumer”.

    It’s a circle jerk of cash that the 1% created – and the “political” funding that goes to make iniquity a “law” – retroactively, no less – is definitely the INTENDED consequence of having no Union of Ethical Scientists.

    USA KILLED the agriculture base to its economy to have a manufacturing base economy and now the vapor virtual base of “internet” is replacing the other two. Always savagery – kill and take what came before….you sleazy punks rich from faceslap sites will be the shortest lived “foundation”.

    I N V A S I O N of privacy a billion times more vicious than keeping the nukes in Crimea, in Crimea.

  10. Some solutions might come from Japan and Northern Europe. The Japanese have what they call “worker sovreignty,” less stockholder more stakeholder focus, very good job security and annual bonuses which are tied to productivity . They have a huge market share of many important US markets especially cars. Northern Europeans are protected with co-determination where workers are on the boards of companies , keeping down CEO salary requests , reducing outsorcing and forcing corporations to co-operate in a highly developed apprenticeship programs in over 400 fields . We could learn much from both approaches which have tampered inequality in interesting ways.


    What seems obvious to you, happens not to be factual. As Robert Gordon of Northwestern puts it;

    ‘The rise in American inequality has been exaggerated both in magnitude and timing. Commentators lament the large gap between the growth rates of real median household income and of private sector productivity. This paper shows that a conceptually consistent measure of this growth gap over 1979 to 2007 is only one-tenth of the conventional measure. Further, the timing of the rise of inequality is often misunderstood. By some measures inequality stopped growing after 2000 and by others inequality has not grown since 1993. This cessation of inequality’s secular rise in 2000 is evident from the growth of Census mean vs. median income, and in the income share of the top one percent of the income distribution. The income share of the 91st to 95th percentile has not increased since 1983, and the income ratio of the 90th to 10th percentile has barely increased since 1986. Further, despite a transient decline in labor’s income share in 2000-06, by mid-2009 labor’s share had returned virtually to the same value as in 1983, 1991, and 2001.

    ‘Recent contributions in the inequality literature have raised questions about previous research on skill-biased technical change and the managerial power of CEOs. Directly supporting our theme of prior exaggeration of the rise of inequality is new research showing that price indexes for the poor rise more slowly than for the rich, causing most empirical measures of inequality to overstate the growth of real income of the rich vs. the poor. Further, as much as two-thirds of the post-1980 increase in the college wage premium disappears when allowance is made for the faster rise in the cost of living in cities where the college educated congregate and for the lower quality of housing in those cities. A continuing tendency for life expectancy to increase faster among the rich than among the poor reflects the joint impact of education on both economic and health outcomes, some of which are driven by the behavioral choices of the less educated.’

  12. I do not see it as the cause of inequality, either, in the strict sense. “Personal” choices – even cumulative ones done as “cultural choices” – do not add up to pay off the debt of toxic derivatives – those leveraged at 600 or beyond.

    They’re going to mangle and maim as many lives as they can from the SKILLED LABOR economic strata – “youse have been replaced by a computer”. Scum bags. I can’t live under the laws they are writing to do the maiming and mangling using “technology”. Suicidal and religiously nihilistic – they cut too deep into “good” – in the foundation roots growing in civilization planted by “good”. Why do they always attack “Constitutions” – agreements among man when man acts as a human being that is higher than animal?

    They TOTALLY took over “big pharma” – people should be running screaming in the streets, quick go the other way… come the biotech meds….participating in the plan to raise massive amnesia around 911, there’s your rethug govenors like Crispy Creme throwing your life’s earnings around as “legal” crap against you

    …..what is “good” was not defined by those who had to figure out what “good” is, since they have no such sentiment inside their heads….”good” defines itself….

    The inequality is the capital funding going to what is not “good”.


    Well, they didn’t get the news out in space – the sanctions crap….

  14. Now Annie……. do you see the consequences of not bending your knee to the “global” drug lords.
    It’s not easy to take care of business and then abandon the one you love in order to take care of your health, now is it?
    No, we proved that over and over again. So now can we open our minds to see the destruction we have wrought in hopes of a lost dream, or do we have to see it in person??

  15. urban legend

    When will progressives begin to realize that politically they are starting out with two strikes when they insist, always, on using the term “re-distribution” “? A minimum wage is not “re-distribution,” it is simply setting a basic rule for how business revenues may be distributed in the first place. The same goes for laws assuring workers can participate in setting their own share of the revenues, and even for progressive taxation, which is not re-distributing anything but merely setting a fair burden for funding government.

    Welfare, unemployment compensation, sure, maybe even the earned income tax credit (as long as all business tax credits are likewise deemed re-distribution). But the term implies that some state of nature (and natural law) permits ownership to keep the entire proceeds of labor and capital unless government intervenes and takes some of ownership’s natural share for “re-distribution” to others. When applied to taxation, it implies that the natural state is a flat tax rate.

    It’s all about power. Call it the “rules of Income distribution” rather than re-distribution.

  16. One theme seems to be the common person is too stupid to manage his own affairs or vote intelligently. At the same time the propaganda and misinformation abound coming from think tanks and scholars who are bought off by the wealthy and the right wing. They have had much success and have invested great amounts of money to produce the results they want, to put forward their agenda. The common man votes against his own interests and believes the distortions and revisionism.


    War mongering cretins using economic NIHILISM to fund their murdering schemes to steal and then protect their FINITE energy source calling people that they DELETED from the economic roll call “stupid”, yeah, we all bought into it…

    As usual, I have no clue what the anon da mouse is blathering about – but her psychobabble existence is the straw that broke the camel’s back of her “propaganda”…

    Abusing “religion” to turn it into an “authority” that is allowed to blather a hyper-critical autopsy of a human soul with monkey brain political “ism” words while the eternal soul is still alive in the flesh is INIQUITY – worse than war because it is the CREATION of reasons for war – hatred of the other.

    Bottom line – “financialization” is a nihilistic parasitic cosmically insane shredding of everything humanity DESERVES as a JUST right because WE earned it through honest work.

  18. Ignorance is bliss in your case, just in case you needed reminding.

  19. Sorry, can’t hear you – war drums banging….

    Only “activity” O’bambi never claims “will take time”….into the history booke we go – the 8 year Presidency that “will take time” to do anything other than perpetual war….

    It’s a FINITE energy source!

  20. Income inequality and wealth inequality was by the express design and purpose of God, and came through the hand of Jesus Christ, acting in dispensation as presented in Ephesians 1:10, driving the creature from Jekyll Island to its achieve its maximum credit intervention to reward shred executives and to drive up stock market values

  21. I think apart from just looking at ways to resolve income or wealth inequality, perhaps the new metric for the government should be based on the quality of life for its people.