The efforts of the right to discredit Piketty’s Capital have so far ranged from unconvincing to risible (Chris picked up a particularly amusing one from Max Hastings in the Daily Mail, to which I won’t bother linking). One point raised in this four-para summary by the Economist is that ” today’s super-rich mostly come by their wealth through work, rather than via inheritance.” Piketty does a good job of rebutting this, but for those who haven’t acquired the book or got around to reading it, I thought I’d repost my own response, from 2012.
The coming boom in inherited wealth (repost)
As everyone who has been paying attention knows, the news on inequality is nearly all bad. Not only has inequality increased dramatically in the US, but intergenerational economic mobility is declining. And, where the US leads, the rest of the world looks likely to follow. The top 1 per cent lost more than most during the crisis of 2008-09 but, as Stephen Rattner reports here (drawing on work by Piketty and Saez), that was just a blip. A stunning 93 percent of the additional income created in the US in 2010, compared to 2009, went to the top 1 per cent, and there’s no reason to think things were much better in 2011 – average real earnings have fallen yet again, and employment growth, though positive, was still modest. Wealth inequality is also high, though it has not increased as much as income inequality.
The one bright spot mentioned by Rattner is that ” those at the top were more likely to earn than inherit their riches”. Since I’m already noticing that point popping up in the places you might expect to see it (can’t find a link right now), let me point out that Rattner’s explanation, that “the rapid growth of new American industries — from technology to financial services — has increased the need for highly educated and skilled workers” is wrong, and that there is every reason to expect a boom in inherited wealth.
The fact that currently wealthy Americans have not, in general, inherited their wealth follows logically from the fact that, in their parents’ generation, there weren’t comparable accumulations of wealth to be bequeathed. More generally, starting from the position of relatively (to earlier periods and to the current one) equal income and wealth that prevailed between about 1950 and 1980, growing inequality of income must precede growing inequality of wealth, since wealth is simply the cumulative excess of income over consumption (and US high-income earners have not been notable for restraint as regards consumption).
So, given highly unequal incomes, and social immobility, we can expect inheritance to play a much bigger role in explaining inequality for the generations now entering adulthood than for the current recipients of high incomes. That will include direct transfers of wealth as well as the effects of increasingly unequal access to education, early job opportunities and home ownership.
fn1. More precisely, since intertemporal comparisons are difficult, the chance that a person with parents at the top (or bottom) of the income distribution will end up in the same or a similar position is now higher in the US than in Europe, whereas, until at least the late 20th century there was good reason to think that the oppositewas true.