One of my favourite books on economics is Thomas Piketty’s Capital in the twenty first century, partly because it is brilliant (although long) and partly because it is packed full of enormous quantities of data. One of key points of Piketty is that the ratio of wealth to income is very important. You can think of this ratio as how many years does an average person have to work to accumulate an average wealth. If the wealth-to-income ratio is 8, it takes 8 years, but only if you avoid spending and save every penny earned. If you manage to save 10% of your income, it will take 80 years and you might conclude that relative to wealth, work does not pay, enough. In the nineteenth century, the ratio was very high (above 6), then it started to fall to around 4 during the economic golden age (1945-75), and then—with the switch to neoliberalism (the supremacy of capital and the debasement of labour)—it started to rise again. Rather shockingly, the wealth-to-income ratio in the UK is now breaking all previous records as reported in this article by Ed Smythe of Positive Money. Below I show a plot of the wealth-to-income ratio going back to 1920 using the Bank of England’s Three Centuries of Data archive, where you can clearly see the dramatic rise after the economic golden age (shaded).
Ed shows that since 2014—where my plot ends—the wealth-to-income ratio has continued to rise and net wealth over disposable income has now reached 8.6—the highest level for any developed economy ever. This is quite shocking and I am surprised that it has not been more widely reported (I found it via Brave New Europe). In my plot, I also show how wealth divides roughly equally between financial and housing wealth. Looking at the data, we can see that a lot of the `new’ wealth is in housing which brings us back to the housing crisis. As Peter showed it is not so much a lack of housing (a supply problem, although regional supply is a problem) as a store of level versus an affordability problem. But housing is not the only problem. A high wealth-to-income ratio has other negative consequences. Piketty retells a story from Honoré de Balzac’s 1835 novel Le Pere Goriot. The protagonist, Rastignac, arrives in Paris planning to work hard and earn a good income, but is advised to pursue wealth through marriage instead, because at the time it was a much easier route towards prosperity. This story illustrates the problem with a high wealth-to-income ratio—getting on in life via productive economic activity becomes less attractive than wealth mining or rent seeking. Like in Michael Rostovtzeff quote on the decline of the Roman Empire:
The prevailing outlook of the municipal bourgeoisie was that of the rentier: the chief object of economic activity was to secure for the individual or for the family a placid and inactive life on a safe, if moderate, income. The creative forces which [….] produced a rapid growth [….] suffered a gradual atrophy, which resulted in an increasing stagnation of economic life.
From The Social and Economic History of the Roman Empire. A consequence of a high wealth-to-income ratio is that productive economic activity stagnates with a negative impact on everyone over the longer term. There are other negatives too in terms of social mobility, and stories about so few northerners or ethnic minorities going to Oxbridge are a part of this. When incomes fall so far behind wealth, those without wealth suffer disproportionately and claims by politicians that inequality is falling are complete nonsense, because wealth matters too. The Gini index for financial wealth in the UK (calculated from the Lorenz curve below based on ONS data) is an astonishing 0.91 (a Gini index below 0.3 is considered optimal for growth, see e.g. this IMF study).
I agree with Piketty that we have to address this because if we do not then our economy will simply stagnate, and neoliberals will continue to argue that we cannot afford to address climate change and health inequality. Piketty suggests wealth taxes to get things flowing again, and I do not disagree (land value tax has advantages over all other forms of taxation), but I would add the caveat that the economy is like an oil tanker and whatever changes we make have to be introduced gradually. However, the longer we wait the more likely we are to end up on the rocks.