The Piketty Path to Riches
By Scott Sumner
This post is meant to be a sort of opening inquiry into what might become an important issue in the 21st century. I don’t have strong views on the question.
You may recall that Thomas Piketty assumed that savers can earn roughly 5% real rates of return on their capital, and that because this exceeded the growth rates of real GDP, this would lead to ever greater inequality. At least until some countervailing force caused inequality to level off.
A few months back there was a lot of discussion of the implications of the Piketty hypothesis within countries like the US, but not much discussion of whether this applies at the country level. The Economist lists 6 countries with current account surpluses of at least 10% of GDP:
Singapore (who else?) 19.9%
Saudi Arabia 14.6%
(By comparison, Germany is at 7.2% and China’s at 2.0%.) Let’s set aside Arabia and Norway, as they are setting money aside for the day the oil runs out. And the same is probably true of Kuwait, Qatar, and the UAE, for which I lack data. The Netherlands is currently in recession, so that might also be a bit misleading.
But what about Singapore, Switzerland and Taiwan? There’s no evidence they will suddenly become less productive. And they are small enough that they can save as much as they want without appreciably depressing the global real return on capital. So if Piketty is right, will these three countries get on a virtuous spiral of more and more wealth, as their net foreign assets pile up faster than they can be spent?
And if they did become super-rich, would that cause other countries to emulate them, depressing the global real return on capital? Let’s not forget that Switzerland is mostly German speaking, and Germany has 10 times the population of Switzerland. And I don’t need to tell you about the size of an up and coming power with the same dominant ethnic group as Singapore and Taiwan. In other words, these models may not be “scalable.”
Or will voters eventually force these governments to tax and spend some of that largess? Keep in mind that the proportion of residents in these countries who are millionaires is high by international standards, and steadily increasing. Their political power is even greater than you might expect, because many of their non-millionaires are young people who hope and expect to become millionaires at some point in the future.
I’m actually kind of skeptical of the idea that these countries will become super-rich, mostly because I don’t buy into the Piketty model, and the vast implications that are assumed to flow from r > g.
But I do think they will become somewhat richer relative to other countries, before they level off. After all, they do have a superior economic model, by which I mean one less biased against saving than the US model. Indeed in some ways the Piketty model applies to countries more than individuals. Countries live forever, and can afford to invest in high yield/high risk equities, as they never have to cash out their sovereign wealth funds.
This post explains why I don’t expect 5% real returns on capital in the 21st century–it’s too appealing for countries trying to copy Singapore—call it the EMH at the country level.