There is nothing wrong with a little inequality. But whereas income inequality in many countries may be quite modest, the inequality of wealth is a very different matter. This is huge. The increase in wealth - the unbridled rise of the value of assets such as houses and equities - has, moreover, been an important driver for the increase in prosperity in recent decades. And the main beneficiaries were those that already had assets, which left those that depend exclusively on income struggling behind. Our economy has been reduced to a wealth-based economy. And that causes a disruption of the economic process.
Wealth inflation is the main source of material prosperity. Within this process, central banks have an important role. For decades, their automatic response to bad economic news has been to inject more money into the economy. But they have been failing to reach their primary goal: getting the economy's internal pressure back up to the required level in order to create inflation for goods and services.
The inflation that does exist, is the sort that central banks do not manage but that they view as a by-product of their policy measures. This is the inflation of asset prices, which arises when excess liquidity has nowhere else to go. And this makes the expansion of the economy mainly financial: money is turned into more money. Normal growth, because we are doing things smarter or better, has been in super slomo for years.
A bigger risk of the wealth-based economy is its disruptive effect. The gap between incomes and wealth is growing. For someone with an average salary it has become virtually impossible to buy a decent house. And the interests of the two groups are also growing further apart: those that have wealth mainly want a safety net under their assets but are less concerned about good health care and decent education for everyone. They are quite capable of taking care of that for themselves. Without assets you simply do not count for anything: incomes are rising much more slowly than the value of assets, while the uncertainty for many workers is increasing.
Economic development has reached a phase where it is no longer about the person with the best plan or the most perseverance contributing to the real economy and thus earning money. It is now mainly about making money with money. The foundation for our existing wealth-based economy is a pot of money that is passed on within families.
There is a perfectly good and democratic solution for this issue. This begins with capital gains tax and ends with inheritance tax.
This is a translation of Hans Stegeman's column in Het Financieel Dagblad, published May 4th, 2021.
Read Hans' previous column The price tag on a polar bear.