Capital is Back: Wealth-Income Ratios in Rich Countries 1700–2010 *

TLDR

The study investigates how aggregate wealth‑to‑income ratios evolve over the long run and the underlying causes. Using national balance sheets from 1970–2010 for the eight largest developed economies (and extending to 1700 for the US, UK, Germany, and France), the authors trace these ratios and attribute recent increases to a long‑run asset‑price recovery driven by post‑war capital policy shifts and a slowdown in productivity and population growth per the Harrod‑Domar‑Solow framework. We find that wealth‑income ratios have risen steadily from roughly 200–300 % in 1970 to 400–600 % in 2010, approaching the 600–700 % levels of the eighteenth and nineteenth centuries, with long‑run ratios of about 300 % at a 10 % saving rate and 3 % growth and 600 % at 1.5 % growth, implying significant implications for capital taxation, regulation, and the evolving nature of wealth and capital shares.

Abstract

Abstract How do aggregate wealth-to-income ratios evolve in the long run and why? We address this question using 1970–2010 national balance sheets recently compiled in the top eight developed economies. For the United States, United Kingdom, Germany, and France, we are able to extend our analysis as far back as 1700. We find in every country a gradual rise` of wealth-income ratios in recent decades, from about 200–300% in 1970 to 400–600% in 2010. In effect, today’s ratios appear to be returning to the high values observed in Europe in the eighteenth and nineteenth centuries (600–700%). This can be explained by a long-run asset price recovery (itself driven by changes in capital policies since the world wars) and by the slowdown of productivity and population growth, in line with the β=sg Harrod-Domar-Solow formula. That is, for a given net saving rate s = 10%, the long-run wealth-income ratio β is about 300% if g = 3% and 600% if g = 1.5%. Our results have implications for capital taxation and regulation and shed new light on the changing nature of wealth, the shape of the production function, and the rise of capital shares.