A 26-year-old MIT grad student’s proposed theory on income inequality has challenged one of the most influential economics concepts of this century.
Last year, Matthew Rognlie, a student on his way to earning his doctoral degree at MIT, posted a comment to a section of a popular economics blog that would turn into one of the most influential critiques on the economics of inequality. That blog comment gave Rognlie a rare career opportunity to present his research in front of an audience of world-famous economists including Nobel Prize winner Robert Solow, reported the Washington Post.
Rognlie challenged renowned French economist Thomas Piketty’s argument that inequality is rooted in the cycle of the wealthy’s accumulation of capital with high returns for investment in his bestselling book “Capital in the Twenty-First Century.” He explained during his research presentation at the Brookings Institution in Washington that the problem of inequality stemmed in the housing sector.
A budding technology sector is often blamed for allocating a majority of the wealth in the hands of the few. However software and tech inventions depreciate in price and doesn’t hold as much value as it previously did. Therefore, such investments in capital will not give rich individuals a long-term advantage.
On the other hand, housing and land property are among the only investments that allow wealthy people a long-term advantage. Rognlie wrote in his paper that “recent trends in both capital wealth and income are driven almost entirely by housing.” Thus, the issue would be handled properly if the government concentrated on housing policy rather than taxing the wealthy. If Rognlie’s theory follows, then the problem of inequality would be ameliorated by stimulating the development of new housing rather than focusing on taxing the rich.