New research could upend our understanding of economic inequality

Two new pieces of economics research released by the Brookings Institution could upend a big piece of our understanding about economic inequality.

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Inequality has become one of the most hotly debated topics in economics, spurred on by Thomas Piketty’s book Capital in the Twenty-First Century, which argued that inequality could inexorably rise if the income from capital continues growing faster than the income from labor. This rise of inequality has spurred much debate about its causes, and led to speculation that rising inequality could even have consequences for political stability.

One new paper, being presented as part of the Brookings Papers on Economic Activity, suggests the rising share of capital income can be explained entirely by housing. The second paper, presented at the same event, shows that political support for redistribution is not increasing in the U.S., even as inequality rises.

The first new story about inequality comes from Matthew Rognlie of the Massachusetts Institute of Technology. Rognlie looked to understand the rising share of income that’s been accruing to capital in recent decades.

For most of the past century the share of income going to capital has remained between 20 and 30 percent but from the end of World War II to the 1970s the share going to capital was mostly trending downward. From the mid-1970s onward, it’s been trending up.

To understand why capital was rising in developed countries, Rognlie broke down the various components of capital, with a special focus on housing.

It turns out that the rise in capital across the G-7 countries has come entirely from housing. In other words, the notion of people getting rich off of trust funds isn’t quite right: It’s more about families getting rich off of their homes.

“Since housing has relatively broad ownership, it does not conform to the traditional story of labor versus capital, nor can its growth be easily explained with many of the stories commonly proposed for the income split elsewhere in the economy—the bargaining power of labor, the growing role of technology, and so on,” writes Rognlie. Instead, if the rising share of capital has been driven, in large part, by housing, then restrictions on land use and residential construction may be the most important culprits behind one of Piketty’s key findings.

Author: Josh Zumbrun is a national economics correspondent for The Wall Street Journal in Washington, D.C. He graduated from Georgetown University where he studied international economics.