The extremes of wealth and poverty are still with us. But if we survey the accumulation and distribution of wealth over a long-run perspective, argues Daniel Waldenström, we find Western societies to be “richer and more equal” today than they were a century ago.
Wealth ownership in the West has reached historic dimensions. We now have more billionaires than ever before. Housing and stock prices have risen to record levels. The taxation of labour and capital, meanwhile, has undergone major changes. How has all this affected household ownership and wealth inequality?
For a long time, data gaps prevented clear answers, and the void was filled by speculation and scattered policy announcements. In a book on wealth inequality and ownership in the Western world, I present new facts about the situation today and the historical development going back to the beginning of the 20th century. The book is based on several years of research on household wealth ownership and the role that the drivers of capital formation have played in our prosperity and the gaps between rich and poor.
My analysis leads to three key discoveries, which are displayed in Figure 1.
Figure 1: Wealth in the West: The three historical facts
First, we are significantly richer today than in the past. The value of household net worth has increased ten times over the last century, after adjusting for inflation. And the increase in value since 1980 has actually been at a faster pace than it was in the distant past.
Second, the composition of wealth has changed. A century ago, agricultural and business assets dominated, owned by a small social elite. Then came political and economic reforms which brought democracy, education and improved working conditions, raising workers’ incomes and allowing them to save for their own homes and old age for the first time. Today, housing and funded pension savings account for three quarters of all property ownership.
Third, our wealth is more evenly distributed than in most historical eras. At the beginning of the 20th century, the richest one per cent of all households owned well over half of all private wealth (in the United Kingdom, the share was around 70 per cent, probably the highest in the world at that point in time). This share then fell dramatically, down to around 20 per cent in the 1970s. Over the recent period, this share has increased somewhat, but remains at a historically low level in the European countries. In the United States, however, inequality has increased notably, with a top percentile wealth share of between 35 and 40 percent.
Have the recent increases in wealth concentration in Western countries come at the expense of the middle class? No, the evidence speaks against this. Top ownership is dominated by successful entrepreneurs. Their wealth grew by an average of 4.7% per year between 1980 and 2010 in a sample of six countries. However, the wealth of the rest of the population grew by almost as much, 4.0% per year, over the same period.
The new findings add nuance to our understanding of capital formation and wealth distribution in modern economies. In particular, the findings challenge my former colleague, the French economist Thomas Piketty, who has put the equalisation witnessed over the middle part of the 20th century down to the capital destruction of the wealthy during the world wars and the redistributive effect of capital taxes. But war-torn countries such as Sweden and Spain followed the same trend as the belligerent countries, and while capital taxes have certainly inhibited entrepreneurship and capital formation, the largest tax increases have historically fallen on workers’ wages.
Instead, I argue in the book that the political and economic reforms of the 20th century, combined with growth and financial development, are emerging as the real reasons why we are both richer and more equal today than in the past.
Can today’s and tomorrow’s policymakers learn from this new wealth analysis? I believe so. History never fully repeats itself, but a number of lessons are highly relevant today.
(1) Question zero-sum thinking. The view of the economy as a zero-sum game – that someone’s success comes at someone else’s expense – has little support in the data and should be challenged. During the 20th century, ownership of assets increased at both the top and the bottom of the distribution. New businesses created products, jobs, incomes and tax revenues that previously did not exist and thus were not “taken” from anyone. My book instead emphasises that dynamic and value-creating growth lifts everyone.
(2) Homeownership leads to a reduction in wealth inequality. Higher rates of homeownership benefit households’ personal finances as well as reducing inequality in ownership. OECD countries with a higher share of home-owning households generally have lower wealth inequality. Research also shows that owner-occupied housing wears less than rented housing and that housing investments tend to provide as high a return as shares but at half the risk.
(3) Private pension planning: security through funded savings. Tax benefits linked to long-term savings plans, especially for retirement, encourage workers to build private wealth. A private pension buffer strengthens personal finances in retirement and provides the opportunity to invest beforehand if needed. We should continue to move towards a funded pension system, which addresses the demographic trend towards more retirees and fewer contributing wage earners and allows wage earners to share in stock market returns at low risk.
(4) Tax capital income, not wealth. Capital taxation is a natural part of the tax system, but how we tax capital matters. Taxes on capital income, such as corporate profits and dividends, are most effective in both redistribution and revenue generation. Wealth taxes, and even inheritance taxes, have always caused problems. They drain the free resources of entrepreneurs, are difficult to collect, and generate little revenue, so most countries no longer use these capital taxes.
(5) Power and wealth: fix politics and media rather than hamper business activities. One potential externality resulting from large fortunes and wealth inequality is that rich individuals may get a disproportionate amount of power over policymakers and the media. The most direct way to handle this is not to hamper businesses and growth but to shield policymakers and media outlets from unwarranted influence. This can be done by improving transparency, strengthening rules about campaign contributions and media ownership, and supporting public service media.
Overall, then, economic history shows that expansive and equitable ownership is not achieved by restraining those at the top – where successful entrepreneurs are – but by lifting everyone below who has not yet had the opportunity to build their own wealth. Two main assets in particular, housing and pension savings, have been crucial in this regard. Encouraging home ownership and long-term savings thus serves a dual purpose: wealth creation and economic equality.
Richer and More Equal: A New History of Wealth in the West, published by Polity, is out now.
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All articles posted on this blog give the views of the author(s). They do not represent the position of LSE Inequalities, nor of the London School of Economics and Political Science.
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