We’ve known for a while that wealth and income inequality are getting worse. One of the worrying conclusions from Thomas Piketty’s runaway bestseller economic text, “Capital In The Twenty-First Century,” is that this could be just the beginning.
The key chart to watch is the ratio of capital to income. As this number rises, wealth, which can be inherited, becomes that much more powerful than income, which is somewhat meritocratic.
From 1700 until the first world war, the capital to income ratio hovered near 700% in Europe and near 500% around the world.
Then the wealthy took a hit as “wars brought physical destruction of capital, nationalisation, taxation and inflation, while the Great Depression destroyed fortunes through capital losses and bankruptcy,” notes The Economist, driving the global capital to income ratio below 300%.
But following the second world war, the value of capital has been rising. In the next century, this trend will become more extreme as the value of income falls due to slower economic growth and slower demographic growth. All told, Piketty expects the global capital to income ratio to approach 700% — as bad as it ever was in Europe and worse than ever in most of the world.
“In a way, the United States is becoming like Old Europe, which is very strange in historical perspective,” Mr. Piketty told the New York Times. “Absent drastic policy changes, I doubt that income inequality will decline on its own.”
Here’s the chart: