Excerpted from an interview conducted by LYNN STUART PARRAMORE:
“* LP: What’s new in your recent work on the distribution of income and wealth among individuals?
There are several things. There’s some debate about this, but I think most readers of Thomas Piketty’s book (Capital in the Twenty-First Century) get the impression that the accumulation of wealth — savings —is responsible for the rise in inequality and that there is, therefore, in a way,a link between the growth of the economy — the accumulation of capital— on the one hand and inequality and wealth. My paper begins with the observation that in fact, you cannot explain what has happened to the wealth/income ratio by that analysis. A closer look at what has gone on suggests that a large fraction of the increase in wealth is an increase in the value of land, not in the amount of capital goods.
* LP: When you say “land,” you’re not talking about land in the Jane Austen sense, that is, agricultural land under the ownership of the lord of the manor, right?
JS: It’s not agricultural land, it’s the value of urban land. I would include in that, broadly, rents associated with natural resources (“rent” is an economic term for unearned revenue). It’s the value of existing assets. As a footnote, some of what has gone on, in addition to an increase in the wealth/income ratio, is a capitalization of the increase in other kinds of rents, like monopoly rents. If monopoly rents get increased, if the market power of firms relative to workers gets increased, as when you have the ability of a few, like the banks, to get government guarantees — the value of that is increased and gets capitalized. That increases wealth but it doesn’t increase capital. So it’s that distinction between wealth and capital that turns out to be critical. That’s the first idea.
The reason that’s important is that you then begin an inquiry into the explanations of why the value of the land or other sources of the value of rents would have gone up. A lot of my book,The Price of Inequality, is about why there has been an increase in rent-seeking. But the other part is more external in terms of the value of land or the value of assets. That, I suggest, is very closely linked with the credit system.
* LP: How do you explain this link between credit and inequality?
JS: If you get a flow of credit increasing, as we’ve seen in the last few years —that flow of credit didn’t go to more wealth accumulation as we normally use the term in economics, as capital goods. What you got is an increase in bubbles of one kind or another.
What has happened repeatedly in recent years is that we’ve had monetary authorities allowing — through deregulation and lax standards —banks to lend more. But this lending has not gone for creating new business, not for capital goods. Disproportionately it has gone to increase the value of land and other fixed resources (buildings, real estate, etc). And that’s what everybody was worried about. So in that sense, in that discussion that occurred with quantitative easing—nobody linked that with inequality or linked it with the overall macro growth. The links with inequality are twofold: one is that at a very, very macro level, if more of the savings of the economy leads to an increase in the value of land rather than the stock of capital goods, then worker productivity won’t go up. Wages won’t go up. So some of what is going on is that we haven’t been doing the kind of investment that we should be doing.
But the other part that’s probably more important is that when you deregulate, you allow more lending against collateral. Then those who have the assets that can be used for collateral see those assets go up in price, like land. And so those who hold wealth become wealthier. The workers, who have no wealth, don’t benefit from that expansion. So the link is that credit affects land prices and fixed asset prices, and those go disproportionately to the rich. And that is a major part of the increase in the wealth. That’s one strand of my paper.
The other strand of the paper was an attempt to lay out a general theory of the transmission, you might say, of wealth and other advantages across generations, and trying to identify, very broadly, forces that would lead to a more unequal distribution and forces that would lead to a more equal distribution. You could almost say it’s a taxonomy — it’s a framework for thinking through things. And when you start to think about it, you see that there are many more forces going on right now for increasing inequality. And that’s also a framework for policy prescriptions. So if we have more economic segregation in a world in which we have local schools, locally financed schools, we’re going to get inequality in education, and therefore the children of rich parents are going to get more human capital.
This model actually provides a very robust general theory explaining inequality. There are many other wrinkles in the paper, but the final insight is that when you think of policies that are going to address inequality of wealth, you have to be very thoughtful about what economists call “incidence of taxes.” If most of the savings is being done by capitalists, and you tax the return on capital, then they will have less to invest. That would mean, over the long run, that the rate of interest would go up. That would therefore undo some of the intent to lower the income of capitalists.”