Why is the rich getting richer?

Ability to invest more and lose relatively less

One of the reasons why the rich get richer is that they have more opportunities to invest their money in assets that generate higher returns, such as stocks. Stocks tend to perform better than housing, which is the main asset for most people. By investing in stocks, the rich can increase their wealth faster and more easily. This is an example of how privilege works: having more wealth gives you more access to more wealth. This idea of privilege has become more controversial in the context of the COVID-19 pandemic, which has worsened inequality in many ways. A recent paper by economists from the IMF and other institutions supports this idea. The paper shows that wealthier people are more likely to earn higher returns on their investments than less wealthy people. It also shows that the children of wealthy people are likely to inherit their wealth, but not necessarily their ability to make high returns on investments.

 The richer you are, the higher your returns

The paper uses data from Norway, which has a comprehensive tax system that allows tracking the income and wealth of individuals and households over time. The paper finds that there is a positive relationship between wealth and returns on assets: the richer you are, the higher returns you can get. This relationship is stronger for financial assets, such as stocks and bonds, than for real assets, such as housing and land. The paper also finds that this relationship is not explained by differences in education, occupation, age, or risk preferences. Rather, it is driven by factors such as access to financial advice, diversification, economies of scale, and market timing.

 Persistence in wealth across generations

The paper also examines the intergenerational transmission of wealth and returns. It finds that there is a high degree of persistence in wealth across generations: children tend to inherit a large share of their parents’ wealth. However, there is less persistence in returns: children do not necessarily inherit their parents’ ability to make high returns on investments. In fact, the paper finds that the children of wealthy parents tend to have lower returns than their parents, especially for financial assets.

 Conclusion

The paper concludes that wealth inequality is likely to persist and increase over time, unless there are policies that address the sources of privilege and the barriers to equal opportunities. The paper suggests some possible policy interventions, such as improving financial literacy and inclusion, promoting fair competition and innovation, and taxing wealth and inheritance more progressively.