Piketty maintains that a key reason why wealth inequality has worsened dramatically in recent decades is that the return on capital r has exceeded the growth rate of the economy g. As capital is concentrated in the hands of the wealthy, a long period in which there is a growing gap between the return to capital and growth (i.e., r > g) must lead to widening wealth inequality. Citing evidence from eight high-income economies—the United States, Japan, Germany, France, Britain, Italy, Canada and Australia—Piketty shows that, since 1970, long-run growth has slowed but the return on capital has not changed significantly. Thus, in developed economies and throughout the world, wealth has become increasingly concentrated in the hands of the rich. What is more, Piketty predicts that future growth rates are likely to slow down further. Thus, in the coming decades the gap between r and g will widen, and thus wealth inequality will increase.
However, as pointed out by The Economist, Piketty’s evidence concerning r > g has been challenged in a forthcoming article in the Cato Journal by Robert Arnott, William Bernstein and Lillian Wu. The authors do not dispute the slow-down in long run growth g. Instead, they maintain that the future return r to capital, principally bonds, stocks, equities and other financial wealth, will also fall. This is due to two principal reasons.
First, because yields in the developed world are so low, the future returns from bonds are likely to be reduced. Similarly, sustained periods of low interest rates—such as the current situation—are also associated with reduced equity returns over the long term.
Second, Arnott and colleagues argue that the net capital return to investors is even lower, once one accounts for taxes, fund-management costs, and other investment expenses. If based on the net return to capital, the future level of r will decline further.
However, this “RG-bargy” controversy has a major shortcoming, which is that it ignores an important source of economic wealth—natural capital.