Is r>g in Canada?

Here is a little bit of rainy day economic doodling that may be of interest.

Piketty famously argues that there is a tendency for r – the rate of return on capital- to exceed g- the rate of growth of income. If r>g, wealth and income inequality will grow inexorably since ownership of capital and claims on income from capital are highly concentrated in a few hands.

Piketty’s definition of capital is very broad, and boils down to wealth, including housing and financial assets.

I am not at all sure that house prices must or do increase at a faster rate than nominal incomes. Though they certainly have done so for the past decade or so, I would see this as unsustainable

As for the rate of return on financial assets, it does seem to be true that r has been greater than g for the past twenty years.

Nominal GDP growth (g) for 1989-1999 averaged 4.1%;  for  2000-2008 it averaged 5.7%. (I leave out the recent recession, weak recovery,)

The risk-free return on capital proxied by the 10 year Government of Canada bond rate (January number) averaged 7.8% 1989 to 1999, due to high interest rates in the early to mid 1990s. However, it fell to an average of 4.8%, 2000-08. This was below the average nominal growth rate.

The average annual rate of return on capital employed (as equity and debt) in the business sector as reported by Statistics Canada was 6.2% from 1989 to 1999, rising to 6.9% from 2000 to 2008 – a rate of return comfortably greater than g.

(Data from Cansim 187-0002. I used Q1 numbers for each year)

Today, interest rates are very low compared to the nominal growth rate, but returns to capital in the business sector remain well above g.

So recent Canadian experience seems to broadly support the Piketty thesis.






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