The Surprising Truth About Wealth Inequality in the West

Introduction

For years, we've heard that wealth inequality is spiraling out of control in Western nations. Headlines proclaim we're living in a "new Gilded Age" with inequality at record highs. But what if this prevailing narrative is wrong?

New research by economist Daniel Waldenström challenges these assumptions and reveals a surprisingly positive story about wealth inequality trends in the West over the past century. In his book "Richer and More Equal: A New History of Wealth in the West", Waldenström presents data showing that ordinary citizens in Western countries are now both wealthier and more equal than in the past.

This article will examine Waldenström's key findings on wealth inequality trends, explore the factors driving these changes, and discuss the policy implications of this new understanding of wealth distribution in Western economies.

The Great Equalization: Wealth Inequality Trends Over the Past Century

Waldenström's research, drawing on wealth data from multiple Western countries over the past 130 years, reveals a clear pattern:

Dramatic Decline in Wealth Inequality

• In the early 20th century, wealth was extremely concentrated among a small elite in European countries. The richest 10% owned around 90% of all wealth.
• Over the course of the 20th century, wealth inequality declined dramatically in all Western nations studied, including the United States.
• This "great equalization" continued until roughly the 1970s-1980s in most countries.

Stabilization in Recent Decades

• Contrary to popular perception, wealth inequality has not increased significantly in most European countries since the 1980s.
• Levels have remained relatively stable at historic lows reached in the 1970s.
• The U.S. has seen some increase in wealth concentration at the top since 1980, but inequality remains lower than pre-World War II levels.

Global Perspective

• On a global scale, wealth inequality between countries has been declining since 2000 as developing nations catch up economically.

These findings paint a very different picture than the common narrative of ever-increasing inequality. But what explains this long-term equalization trend?

Key Factors Driving the Great Equalization

Waldenström identifies several important factors behind the century-long trend toward greater wealth equality:

1. Lifting the Bottom Through Broader Wealth Ownership

The primary driver of equalization has been the expansion of wealth ownership among the middle and working classes, not the destruction of wealth at the top. Key developments include:

• Rise in homeownership: Homeownership rates rose dramatically in Western countries during the mid-20th century, from 20-30% to 60-70% in many nations. This allowed ordinary citizens to build housing wealth.
• Growth of pension savings: As lifespans increased, more workers began saving for retirement through pension funds and similar vehicles.
• Democratization of stock ownership: Financial innovations like mutual funds made it easier for average households to invest in the stock market.

These trends mean that assets once held primarily by elites (property, stocks, etc.) are now owned much more broadly across the population.

2. Institutional and Policy Changes

Several institutional developments helped expand economic opportunities:

• Expanded education: Reforms increased access to education, allowing more people to develop valuable skills.
• Labor market reforms: Improved working conditions and regulations helped boost worker productivity and wages.
• Democratization: Extension of voting rights empowered more citizens to influence economic policy.

3. Economic Growth and Technological Progress

Overall economic expansion created new wealth-building opportunities across society. Importantly, Waldenström argues wealth is not a zero-sum game - growth can lift all boats.

4. Changing Nature of Wealth

The composition of wealth has shifted dramatically:

• A century ago, most wealth was in assets held by elites (e.g. industrial/agricultural capital).
• Today, 75-80% of private wealth is in housing and long-term savings vehicles held by ordinary households.

This transformation naturally leads to a more equal distribution.

Challenging Previous Narratives

Waldenström's findings challenge some influential theories about wealth inequality trends:

Capital Destruction Theory

Some economists argued equalization was driven mainly by destruction of elite wealth through wars and high taxes. Waldenström's data suggests this was not the primary factor.

Return to the Gilded Age

Claims that we are returning to extreme 19th century levels of inequality are not supported by the data, at least for wealth (as opposed to income).

Role of Inheritance

Contrary to fears about growing dynastic wealth, the relative importance of inheritance has actually declined over time in most countries studied.

Policy Implications

This new understanding of wealth inequality trends has important policy implications:

Focus on Broadening Wealth Ownership

Policies that help ordinary citizens build wealth have been key to reducing inequality historically. Potential focus areas include:

• Promoting homeownership
• Encouraging retirement savings
• Improving financial literacy and access to investment vehicles

Rethinking Wealth Taxes

Waldenström cautions against some proposed wealth taxes, arguing they can create liquidity problems and valuation challenges. He suggests focusing on:

• Taxes on capital income (e.g. corporate, dividend, capital gains taxes)
• Rather than taxes on wealth stocks or unrealized gains

Maintaining Pro-Growth Policies

Economic growth has been crucial to expanding wealth-building opportunities. Policies should aim to promote innovation and productivity gains.

Improving Economic Mobility

While wealth inequality has declined, ensuring economic mobility remains important. Education and labor market policies play a key role.

Conclusion

The story of wealth inequality in the West over the past century is more positive than many realize. Far from spiraling out of control, wealth has actually become significantly more evenly distributed as ordinary citizens have gained opportunities to build assets.

This doesn't mean all concerns about economic inequality are misplaced. Income inequality has followed different patterns in some countries. And even with improved distribution, significant wealth gaps remain.

However, Waldenström's research suggests we should recalibrate how we think about wealth inequality trends. Rather than focusing solely on the concentration at the top, policies aimed at further broadening wealth ownership and creating opportunities for all citizens to build assets may be most effective at promoting a more equitable society.

Ultimately, the lesson of the past century seems to be that a rising tide of wealth creation, combined with institutional reforms that expand access to wealth-building tools, can lift all boats and create a more broadly prosperous society. As we navigate economic challenges ahead, keeping these historical insights in mind can help guide more effective policy approaches.

Key Takeaways

• Wealth inequality declined dramatically in Western countries over the 20th century and has remained relatively stable at lower levels in recent decades.
• The primary driver was expanded wealth ownership among middle and working classes, not destruction of wealth at the top.
• Key factors included rising homeownership, growth of pensions/retirement savings, and democratization of stock ownership.
• The nature of wealth has transformed - ordinary households now own most private wealth through housing and long-term savings.
• Policies focused on broadening wealth ownership and maintaining economic growth may be most effective at promoting further equalization.
• Some proposed wealth taxes may be counterproductive; capital income taxes may be preferable.
• While significant wealth gaps remain, the long-term trend has been toward greater equality, challenging narratives of ever-increasing concentration.

As societies continue to grapple with economic inequality, maintaining perspective on these long-term trends can help inform more nuanced and effective policy approaches. By learning from the factors that drove equalization over the past century, we may be better equipped to create more broadly shared prosperity in the decades ahead.

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