51±¾É«

June 2, 2021

Stephen Snudden, an associate professor of Economics at 51±¾É«’s Lazaridis School of Business and Economics, was recently awarded the C.A. Curtis Prize for Best Doctoral Thesis by Queen’s University for his paper “.” Using data from the Panel Study of Income Dynamics, which has surveyed 5,000 American families over three decades, Snudden’s thesis is the first to provide empirical evidence on the differences in rates of return on wealth among U.S. households. 

Snudden became interested in the issue of wealth redistribution while helping to design and evaluate the fiscal stimulus and consolidation at the Bank of Canada and the International Monetary Fund during the 2008 global financial crisis. He completed his PhD at Queen’s between 2013 and 2019, during which he began investigating the relationship between asset income inequality and wealth inequality.

“There have been a lot of assumptions made to guide policy, and so far, the consensus has been that we don’t want to redistribute too much wealth because it’s really harmful on the aggregate,” says Snudden. “In my thesis, I came along and said, ‘Let’s look at the data and test those assumptions,’ and that’s just not what I found.”

We asked Snudden to reflect on his award-winning research.

How would you summarize your PhD research?
SS: “My general area of research is wealth inequality. A lot of people who have studied wealth inequality have focused on labour income inequality, but we know that the wealthiest households are often business owners. We know that the importance of asset income grows as households become wealthier, but no one has been able to study that until recently, because they just haven't had data on household level returns.

“One of the contributions of my PhD thesis was to produce the first data set that tracks households over time and observes the rate of return on wealth for their entire portfolios.”

Why is it significant to be able to track that data?
SS: “One of the contributing factors to wealth inequality is the fact that people have different rates of returns on wealth. We are interested to know why. If you have $100 and I have $100, why is your wealth growing a lot and mine is just increasing by two per cent a year? If we look at the wealth distribution as households become wealthier, does the rate of return on wealth increase or decrease? We really don't have a good sense of that.”

Now having analyzed household return data, what did you discover?
SS: “When you look at the data, rates of return are consistently higher for less-wealthy households and decline systematically over the wealth distribution. So as households become wealthier, their rates of return on wealth are declining. There has been an assumption that wealthy households have a higher rate of return on their wealth because they are more likely to be business owners and more likely to make investments. That’s completely opposite of what I find.”

Why do you think that is?
SS: “It has everything to do with leverage. As much as my paper looks at different rates of return, one of the big contributions is actually to show that there are permanent differences across households in their degree of leverage.

“The simplest example is if I own a house, I could put the minimum amount of wealth in that house and then put the rest into the stock market, or I could try to pay off my house as fast as I can. Those two different debt strategies will result in large differences in wealth accumulation and rates of return. As households become wealthier, they are systematically paying down their debt, which reduces the rate of return on their wealth.

“Another explanation is that when you look at rates of return within individual asset classes, I find that rates of return decline the more a household specializes in an asset category. The more someone specializes in a certain business or in housing or something specific, the less likely they are to achieve those high returns.”

How can we apply your findings to address wealth inequality?
SS: “One of the major arguments for not taxing the wealthy is the assumption that they are the most productive and have the highest rates of return. If you take money away from the Elon Musks of the world, then maybe they're not investing as much. But it turns out that less-wealthy people are getting even higher returns, and so these assumptions that we make by just looking at one or two people don't translate to the average.

“If we want to maximize returns and investment in the economy, we should actually redistribute wealth to less-wealthy households and business owners. If I give an extra hundred dollars to someone who owns a small business, they're going to get a lot higher return than if I gave an extra hundred dollars to Elon Musk.”

How do you hope you and your peers can build off of your research?
SS: “I hope that researchers who are interested in redistribution and wealth inequality take a look at the assumptions that underlie policy prescriptions to see whether or not they really exist in the world. My paper is all about trying to test those underlying assumptions.”