Capital in the 21st century
By Andrew Haldane and Rachana Shanbhogue of the Bank of England and Professors Orazio Attanasio of University College London, Timothy Besley of the London School of Economics, Peter Lindert of the University of California, Davis, Thomas Piketty of the Paris School of Economics, and Jaume Ventura of Universitat Pompeu Fabra
Inequality has risen within many advanced and emerging market countries. In the United Kingdom and the United States, the share of income that goes to the top 1% of earners has doubled since the 1980s, and their share of overall wealth has also risen over this period. These trends and their public policy implications have been increasingly analysed by academics and policymakers. From a central bank perspective, inequality can affect the fragility of the financial system and growth in the economy.
On 19 December 2014, the Centre for Economic Policy Research and the Bank of England hosted a discussion forum on Capital in the Twenty-First Century, with its author, Thomas Piketty, Professor of Economics at the Paris School of Economics. The event, which was chaired by Andy Haldane, featured presentations from four speakers on various issues relating to inequality. Further information on the event is available at www.cepr.org/3562.
This article briefly considers the links between inequality and central bank objectives, before presenting a summary of the debate alongside each speaker’s key arguments:
- Peter Lindert, Professor of Economics at the University of California, Davis, discussed the sources of inequality from an economic history perspective. Historical accidents can render economies more equal, and public policies are key to ensuring that they stay equal over time. A successful education policy is one of the key common factors among those countries that currently have relatively low inequality.
- Orazio Attanasio, Professor at University College London, presented on the intergenerational transmission of inequality, based on research with Richard Blundell, Professor of Political Economy at University College London. UK cohort data suggest that there is a strong correlation between the cognitive development of five-year old children and their subsequent earnings as adults. Since parental income influences children’s development, this result suggests that inequality can be passed down from one generation to the next.
- Jaume Ventura, Professor at Universitat Pompeu Fabra, discussed inequality and macroeconomic models. A key challenge for macroeconomists is to build models that can explain the trends in inequality. Capital may have a ‘bubble’ component, which grows in line with anticipated capital gains. Empirical studies suggest that, on average, capital gains accounted for about 40% of the increase in capital to income ratios across countries between 1970 and 2010.
- Timothy Besley, Professor at the London School of Economics, discussed how inequality can shape policy. Liberal democracies tend to have tax systems that rest on the notion that the rich accept taxation in return for secure and well-enforced property rights. But, in the worst case, that contract can be undermined by inequality.
The views expressed do not necessarily represent those of the Bank of England, the Monetary Policy Committee or the Centre for Economic Policy Research.
The rest of the Q1 edition of the Bulletin will be published at 00:05 hrs on 12 March 2015.
