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The Protestant Ethic and the Spirit of Trumpism


The thesis of Thomas Piketty’s book Capital in the 21st Century is that the historical rate of return on wealth is markedly higher than the rate at which wages grow. (ETA: Commenter Marcel Proust points out that Piketty’s actual thesis is that the return on wealth grows faster than the economy as a whole. As a practical matter this almost guarantees that wealth grows faster than wages, but the theoretical statement is about economic growth, not wages per se.) A fascinating new paper suggests that if anything Piketty’s book underestimates this trend:

[I]nquiries into how fast wealth grows relative to the economy have been hampered by a lack of good, complete, comparable long-term data on the rates of return for various assets: stocks, bonds, real estate and the like. You’d want this to know what you’d expect a “natural” rate of return to be in an economy such as ours: How much would you expect home prices to appreciate over time? What about the expected return on the stock market over the decades? How about government bonds?

Now a working paper, written by Federal Reserve Bank of San Francisco economist Òscar Jordà and others, purports to calculate just that: “The Rate of Return on Everything.”

After compiling this first-of-its-kind data set, Jordà’s team makes a startling conclusion: If anything, Piketty’s book underestimates the historical rate of return on wealth. “The same fact reported [by Piketty] holds true for more countries and more years, and more dramatically,” the researchers conclude. . .

[O]verall, if you were a typical investor and you wanted to buy a representative chunk of the wealthy world’s economy, you could expect an annual rate of return of about 6.28 percent. . .

With the exception of wartime, when instability rattles stock markets (or shuts them down completely) and bombs literally destroy housing wealth, the rate of return on wealth has been considerably higher than the growth rate of the major economies. Overall, if the average annual return on wealth since 1870 has been 6.28 percent, average annual economic growth works out to just 2.87 percent.

“The weighted rate of return on capital was twice as high as the growth rate in the past 150 years,” the authors conclude.

The moral here is pretty obvious: being born into wealth is a far better choice than working hard at some stupid series of jobs.

This is especially true in contemporary America.

Median wage in constant 2017 dollars:

1990: $27,468

2016: $30,533

Total increase in median wage, 1990-2016: 11.16%

Total increase in S&P 500 average, adjusted for inflation, January 1990 – present: 305.6%

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