It’s being called a “blockbuster rebuttal” to the popular progressive stance that wealth is being hoarded by the top 1 percent of all earners because money grows faster when invested in material things than in wages for the other 99 percent.
Matthew Rognlie, a 26-year-old graduate student from the Massachusetts Institute of Technology, is proposing an alternative economic theory that’s been highlighted in publications like the blog Medium, the Washington Post and The Economist, all of which have described the upstart as a serious rival for star “tax-the-rich” advocate Thomas Piketty.
Piketty argued in his influential bestseller “Capital in the Twenty-First Century” that the accumulation of wealth among the world’s richest people would reach a threshold at which it would snowball in perpetuity — it would effectively become self-growing through investments in stocks and other capital holdings, leaving less and less money for the working class to the point of economic catastrophe.
But Rognlie has countered in a much ballyhooed paper for the Washington, D.C. think tank Brookings Institute that Piketty overestimated the reliability of those returns over time. Rognlie showed evidence indicating that while popular investments in software and new technology often have high immediate paybacks, they have short shelf lives and diminish rapidly, stunting what Piketty predicted would be ever-expanding returns.
“Piketty’s story has multiple steps to it. I’m sort of showing that one of the steps does the reverse of what he says it does,” Rognlie told the Washington Post earlier this year.
In fact, when the trends over time are looked at, Rognlie argued the most consistent and highest appreciation of value can be found in real estate investments — buildings and land.
And so the best way for governments to redistribute the wealth is to encourage greater development of housing, the young economist wrote.
Why? Rognlie argued that when government officials restrict housing projects — or when they allow protesting neighborhood groups to effectively do it for them — they bottleneck demand for the housing already in place and by extension, drive up the value for the units in existence.
That, in turn, pushes more of the housing into the rarefied price range where only the extremely wealthy can afford it, and subsequently causes the return on investment to multiply at a rate closer to what Piketty considered a dangerous snowballing of controlled wealth.
By letting the market drive residential development with minimal government encumbrance, Rognlie continued, the supply would balance out the demand, housing values would normalize and units would fall into the price ranges of more middle class buyers, who would then be able to get their hands on properties that are more likely to provide long-term investment returns.
In Maine, Rognlie’s theories can be seen at play in the city of Portland, where public resistance to taller buildings — often considered the most economical ways to add more housing in a dense area — have gone all the way to court and to forced public citywide votes, while rents and property prices have skyrocketed.
Recently elected Mayor Ethan Strimling has already set a goal of permitting at least 2,000 new residential units in the next five years, suggesting the encouragement of more housing will serve in part to counteract growing economic inequality in the city.
But Rognlie is not above reproach himself.
“He appears to underestimate the role changing technology plays in widening inequality (by increasing the substitutability of capital for labor, for instance, or by raising the demand to live in expensive cities). …
[And while Piketty] certainly did not make housing wealth the central theme of his bestselling book, a story in which a privileged elite uses its political power (albeit through the planning system) to create economic rents for the few fits Mr. Piketty’s argument to a tee.”
