Friday, April 11, 2014

A somber thought about the economy

Mother Jones magazine offers an interesting set of graphs on the American economy, including the one shown above.  Note that productivity (which I assume is labor productivity) has been increasing at a reasonably consistent rate for decades, while wages have not kept up. On the other hand, the average income of the top one percent is now several times greater than it was in 1979.

Labor productivity is improved generally by improving technology or by increasing capital investment per worker. Of course, the improvement of technology often involves capital investment (e.g. better, more expensive machines, or training and education in human capital).

I understand that this is consistent with a theory put forth by Thomas Piketty as described in this article:
  • The ratio of wealth to income is rising in all developed countries.
  • Absent extraordinary interventions, we should expect that trend to continue.
  • If it continues, the future will look like the 19th century, where economic elites have predominantly inherited their wealth rather than working for it.
  • The best solution would be a globally coordinated effort to tax wealth.
Piketty suggests that the return to capital has been about 5% per year for centuries. If the GDP grows more slowly than 5% per year, the rich get richer, and the rest lose economic ground to the rich. Clearly the average rate of growth of GDP in the USA and other developed countries has been less than 5% per year on average for the period in question, and clearly the rich have been getting richer.

Piketty is suggesting, however, that this situation will continue.

No comments: