The Rate of Return on Everything, 1870–2015 [pdf] 487 points by dredmorbius 15 days ago | hide | past | web | favorite | 260 comments

 Also confirming that r>>g, returns are considerably larger than economic growth, validating Piketty. I.e. it is increasingly getting more beneficial to own than to work. And from this data it seems that the difference is even accelerating.Page 53: >Despite some variation, the positive gap between r and g is a persistent feature of the data: r is bigger than g in every country and every time period that we consider. The last few decades prior to the Global Financial Crisis saw a general widening of this gap
 I never understood comparing r and g. r represents the fixed investment income for the rentier. g represents the growth in income for the laborer. Comparing these two numbers, is like comparing velocity vs acceleration.Example: Let's take r=0.1, g=0.03. Consider a Rentier with a real investment income of \$100,000/year (ie, off a \$1M endowment), and a Worker with wages of \$100,000/year. For simplification, let's assume both individuals spend their entire \$100,000 income every year.If you follow the r>>g hypothesis, you might assume that after a period of time, the Rentier will be far better off than the Worker. But that's not the case. After 20 years, the Rentier's real income will still be \$100,000/year, off the same \$1M endowment. Whereas the Worker's wages will now be \$100,000 * 1.03^20 ~= \$180,000Clearly a higher r will be to the Rentier's advantage, especially if he supplements his investment income with wages as well, and keeps growing his endowment further. But this is going to be true even for r
 Below is the logic why r-g matters for wealth inequality and is a reasonable thing to look at. In particular this happens in so-called "random growth theories" of wealth inequality or "theories with multiplicative shocks." At the same time you're right there is nothing special that happens when r overtakes g and it's kind of irrelevant whether r>g or rg -- see the discussion on p.75 and 76) and https://www.aeaweb.org/articles?id=10.1257/jep.29.1.29Consider r and g in turn. It's easy to see why r matters for wealth accumulation: if you get a high return you have high capital income and so, for any given level of consumption, you will have high wealth tomorrow. In your example with a \$1M endowment and assuming people consume 5% of their wealth a 10% return will mean next year's wealth is \$1,050,000 and a 20% return will mean next year's wealth is \$1,150,000.Next consider g: now the idea is the economy is growing at rate g and therefore people's other income sources are growing at rate g. We therefore de-trend everything by g and end up with r-g ("Detrending" here simply means looking at things RELATIVE to the average). So it does make sense to compare r and g, simply because we're thinking about a growing economy so you want to compare EVERYTHING to g.Also note that these "multiplicative shock" theories aren't really about rentiers vs workers. They are just about people making investments and either getting lucky or unlucky. Here is a good explanation of these theories http://nautil.us/issue/44/luck/investing-is-more-luck-than-t.... Of course, this is just one theory of wealth accumulation/inequality, and there are others with other predictions where r-g would not be so central.
 > the economy is growing at rate g and therefore people's other income sources are growing at rate gWhy does a GDP growth rate of g imply that people's other income sources (wages from labor?) are also growing at rate g?Wage growth in a country depends on confounding factors like worker productivity, relative bargaining power between workers and owners, outsourcing to other countries, automation, and the mix of manufacturing and service jobs in the economy.It's very possible for the rate of economic growth to be, say, +3% while rate of change in the share captured by workers is flat or negative.
 Yes you're 100% spot on. That other income sources and in particular labor income grow at g is just an assumption in Piketty's theory.If labor income is growing at a different rate, the "correct" version of the theory should have r-g(labor_income). This would probably give even more extreme because it seems like in many countries the growth rate of labor income is less than the growth rate of the economy, i.e. r-g(labor_income)>r-g(GDP).If you're interested in the dynamics of the economy and distribution if different variables grow at different rates, see here see e.g. http://www.princeton.edu/~moll/UG-slides.pdf
 So g represents growth of the entire economy, not worker income or some such thing. Note that if Piketty’s hypothesis is true then the conclusion (return on capital will capture more and more of the economy) is more or less tautological.
 Worker incomes kept pace with investment income through the 19th century where r was consistently higher than g and also in the early 20th where it didn't. If your investments are in machines that need people to work them then better machines mean that people's labor is more valuable.It's only recently that we've seen we've seen wages as a share of total income slip from roughly 50% to roughly 40% of total income. But the delta can be almost entirely explained by large amounts of capital returns in owner occupied housing which is a far higher share of the US capital stock than it had been historically. And this form of capital doesn't require (much) labor to maintain its value.
 This. A corollary of the argument is that if r > g, worker income on average grows slower than g.
 You’re looking at it from the wrong perspective. If r>>g, Rentierism becomes an ever increasing part of the economy.
 Isn't that the same fallacy as the "Joseph's Penny" - claiming because if interest, after a while a penny would be worth the weight of the whole earth in gold?Obviously, the worth via interest can't grow forever, because there is no infinite value going around.Also, isn't it a good thing if labor becomes less valuable, implying that less labor is REQUIRED? That is what people aim for when they invent technology to make life easier, after all.
 "Also, isn't it a good thing if labor becomes less valuable, implying that less labor is REQUIRED? "I think you may have this backwards.If I generate \$1 of value/hr that's kind of the maximum you can justify my wages being. If you give me a machine that increases my productivity 10 fold and the machine costs \$2/hr then my maximum wage tops out at \$8.Now in this situation less labour is required, but the labour isn't less valuable. Obviously now you need a new industry to come along to employ the other 9 people who aren't now needed, possibly now servicing me and my newfound wealth, or possibly building the machines that put them out of a job.'value' is what someone is willing to pay. My employer would have been willing to pay me a maximum of \$1 and \$8 pre and post machine introduction, so you could say my value increased. But I'm not likely to see much of that in the short term, because all my mates are now unemployed, and would be willing to do the job for their old pay, so my leverage is very low, so worst case I keep the same pay, in which the value of the job to me hasn't changed.
 With the machine, less workers would be required, so all other things remaining equal, the wages should fall because of supply and demand (assuming the machine doesn't need rare skills to operate).Of course, as you say, it could work the other way, and working could become more valuable because one worker could generate more returns. But that requires there to be more demand for everything.Like, say, people eat only potatoes, and all work 8 hours per day to harvest just enough potatoes for everyone. If a machine could do their work, and they couldn't think of anything else to do, there would still be the same amount of potatoes, but less work to do.
 I was trying to highlight that theres your value to your employer, which is kind of divorced from your pay. And the value of the job to you, which is your pay.Could your pay go down in the example? Theoretically yes, in practice we see the opposite. Economic development couldn't happen if it did. Although I suppose short term dislocations could lead to lower pay in the short term, before increasing long term?Don't forget 'progress' is people increasing productivity. In a world where everyone has to work full time digging potatoes, that's all anyone has. If it only takes 1 member of the group to dig potatoes, that frees the other members to discover science, religion, chips. We are in a situation now where a fraction of the population work in food production, but we all have jobs and more wealth than potato growing us could possibly imagine.That added productivity doesn't disappear, in our earlier example the owner of the means of production has captured all the value that I didn't get from it. He has to do something with it. Even if he puts it in the bank, that's possible seed money for a venture that ends up employing my 9 ex workmates.Also don't forget that the one potato digger won't want to dig potatoes all day whilst everyone else sits around. If there's no reason to dig more he'll dig enough for himself and take the rest of the day off. Now you could entice him to dig for you in exchange for beans, because you know he doesn't like picking beans, and as you don't like digging potatoes. And of course I could offer to trade apples...
 It does seem that less labor is required. Automation has permanently removed large percentage of human workers from various industries (like mining).The problem is that life is not easier because all that efficiency is captured by a tiny group of non-laborers.The people whose labor was replaced are not benefiting from the end of their labor. They're now jobless and forced to compete harder for lower pay.
 I don't think that is strictly true. Overall life IS easier for most people, because things are also cheaper to come by. And there still seem to be jobs.But sure, there are various ways of looking at it. As others have pointed out, with increased productivity, the value of labor could also increase.
 Food, clothing, health care, TVs, computers, pretty much everything. Maybe housing is an exception, but it may also depend on where you live. At least building is probably also cheaper (more efficient methods).
 Is health care really cheaper? It's obviously much better, more effective and leads to much better outcomes. However most of these medicines and procedures that gave us these better outcomes are very expensive.
 I would expect the medical procedures you could get 50 years ago would be very cheap today.But it is of course a relevant question how to measure.I suppose you can also get a computer that is as expensive or more expensive than a computer 20 years ago. But it would also be a million times faster (or more, I am too lazy to look). You could also get a Raspberry Pie for 30\$.
 "Also, isn't it a good thing if labor becomes less valuable, implying that less labor is REQUIRED? That is what people aim for when they invent technology to make life easier, after all."I used to think this.I came to the conclusion that families and familial lines, like individual people, are living organisms.Some of those living organisms (familial lines) are relatively young and inexperienced - and they will not gain that experience within one family members' lifetime. It will take multiple generations of growth and nurturing to "grow up" to produce individuals, like you, who can operate in a more complicated society and transact more abstracted work products for more abstracted rewards.In the meantime, as in all of history, members of juvenile family lines need meaningful, satisfying labor that they can transact for reasonable currency to thrive as a living organism.Asking why we need any labor to be done is like asking why all those infants can't just get with the program and eat solid foods already.
 > implying that less labor is REQUIREDIf less labor is required for tasks A, B and C, then that frees up people to do new tasks D, E and F.It is untrue that there is a fixed amount of work to be done, so when some of it is automated, then that necessarily creates unemployment. That's the "lump of labor fallacy".https://en.wikipedia.org/wiki/Lump_of_labour_fallacyIt's also fallacious thinking to assume that every person must be employed working for wages.If someday the economy as a whole can produce everything people need by employing 10% of the people to build robots, then we can organize it such that the people who like to build robots can do that, and the people who like to paint, or sculpt, or hike or sail can do that.There is no universal law of the universe that requires the 10% of robot builders to own everything on earth, and the other 90% should live in rags, filth and sickness.
 The economy already produces "everything people need" using 10% of the labor force in nations with industrialized economies. It's just that the standard of living would be at about 1970's levels.I know this sounds hard to believe for some. But today, agriculture takes up about 2% of labor, and manufacturing about 10%. And we consume about 2x what we did per person compared to the late 1970's. So, cut back manufacturing to about 4% of the labor force and use another 3% of the labor force for distribution. Voila, 10% of the labor force is used to sustain a 1970's level standard of living. Everyone else can improve their themselves, create arts, study nature or contemplate the nature of existence (that's sarcasm there).
 > There is no universal law of the universe that requires the 10% of robot builders to own everything on earthIn your universe the universal law is that the robot builders have (collectively) nigh absolute leverage over the rest of society. Without the angel assumption they would slowly (or quickly) use that leverage to amass power.People wouldn't live in rags or whatever but all secondary economies point to providing value to the robot builders.
 That's assuming the robot builders have some kind of a monopoly. If anybody can build robots but it only takes 10% of people to do it before we have all the robots we need to do everything then the wages for robot builders will be as low as the wages for anything else, otherwise more people would become robot builders and drive down their wages.But wages are always relative to prices. If everything is being made by robots that nobody has a monopoly on then everything should be very inexpensive. Having to work for the same nominal wages as you had in 2003 is not that much of a problem if nominal prices are now 5% of what they were then.The problem comes when you have some kind of corruption or distortion or regulatory compliance costs keeping some prices high (see: housing, education, medicine) even as general wages are flat or decline, or just grow less than those costs.
 We will have to pass regulations to keep those evil tech companies under control, and those regulations will conveniently create huge barriers to entry in the robot construction business.
 Doesn't your robot example say exactly what I meant?
 Your assumption of a 100% savings rate is not quite reality though. More realistically, suppose both people save 50%. Then in 20 years, the rentier is about 2x richer than the worker. https://www.wolframalpha.com/input/?i=sum+i+from+0+to+20+(50... vs https://www.wolframalpha.com/input/?i=sum+i+from+0+to+20+(50...
 Your numbers are off. If both people save \$50k each from their investment/wage income, then both of them will earn 10% returns on that \$50k of savings. Hence why they cancel each other out. You've only given the worker 3% returns on his savings, not 10%
 Despite the parent, it's never been an argument that owning is better than working, or anything at all to do with individual people at the micro scale.The argument is when returns are greater than growth, societal inequality increases because the "haves" continue to hold on to their wealth, essentially creating a kind of permanent upper-class, that isn't based on merit the way it should be under capitalism, and that this (arguably) feels fundamentally unfair.
 Capitalism had never been about merit. The word “Capitalism” is even a word coined by socialists in the 19th century which means « some people (the capitalists) are owning the means of production and keep all the wealth »
 During each generation of rich people about 20% go bankrupt. Maybe they are alcoholics or they are fools who fall for scams. Your example would come close — a person who is not especially wealthy and who doesn’t work and who consumes 100% of their income. That would put them at a heightened risk of dropping out of the category of the wealthy.A better example would be 2 people who work and who both make \$100,000 and who consume 100% of their labor income. But one of these individuals has a \$1 million endowment and reinvests every penny earned from interest. You can see how that would accelerate the concentration of wealth.
 When wealth increases, less and less of the investment income is consumed. It's not fixed income anymore, it's added to the capital creating compound interest.Rentier with a real investment income of \$100,000 may have just few million in wealth
 There have been some studies that show that if you remove housing, then the r>>g effect goes away (at least over recent decades; I don't think these studies went back to 1870). We could fix a lot of the rent-seeking problem with saner housing/land use policy.
 It is not surprising that property rights are the source of true wealth, and that property owners as cultural descendants of the feudal lords of the past have the history of the development of law and economy on their side
 from paper: "However, the rental yield component is typically considerably higher and more stable than the dividend yield of equities so that total returns are of comparable magnitude"my take away was that equities produce a lot of wealth, but squander it by not returning it to shareholders (lack of dividends). look how many tech companies refuse to pay dividends because 'we are a growth company, we are always a start up". i hate stock buy backs, I think it just rewards people exiting the stock.in short, if you are a property owner, you can garentee cash flows. economy goes up, down, you more less have an income stream. stocks, they will always go out of business. a company that never returns money to share holders in the end is always worthless, but today, that is in vogue.
 Putting profits into stock buy backs instead of dividends still returns money to share holders (through the retiring of shares bought back.) It’s generally preferred since it allows shareholders to postpone (perhaps indefinitely) paying tax on the money returned. Good for shareholders but bad for society.
 Unless the stock price declines after the buyback....
 If you sell enough stock to own the same dollar amount of the company whenever a buyback happens, it should be basically equivalent to a dividend.
 I would be curious as to the basis for removing one of the largest components of the economy. There's a lot of money tied up in housing!Removing housing reduces returns seems like a tautology: if you remove one of the best-returning asset classes, returns are lower.
 The basis is that when people say "r >> g" they think "business owners and the stock market" rather than "the house my parents own", and they think about reforms to the business sector rather than reforms to the housing sector.
 It seems they would be more right than wrong, though, as business owners indeed also own the majority of US real estate, with about \$30 trillion business-owned vs. \$19 trillion privately owned:* Residential real estate market size was \$33 trillion in 2018, of which about 80 million units are privately owned and 60 million units are not.* Commercial real estate market size (Office buildings etc.) was about \$15 trillion.
 I'm not sure what your point is. Business ownership of real estate is irrelevant. The fundamental problem is the structure of the real estate market, not the competitive environment for business.
 Isn't that an unfair comparison? Businesses usually make property more valuable, because businesses provide jobs and people want to live somewhere near where they work. Businesses also congregate in the most expensive areas, because they're the only ones that can afford those prices, but people usually don't buy real estate in the most expensive areas purely as a real estate investment. How many city centres have property that sits empty? So I'm not sure that this is a good comparison.
 For one thing you're talking about two different businesses. It's very common for companies to rent the space they're in. Then the commercial tenant is providing the value you're referring to but the landlord is the one who receives the increase in property values.But even regardless of that, it doesn't change the numbers. The majority of the increase in real estate prices goes to corporations rather than individuals. An explanation of why it happens doesn't change that it does.
 But it matters in a comparison like this, because commercial real estate gets used to run businesses. Businesses, especially in high value real estate areas, tend to increase real estate prices even further by providing well-paying jobs and useful services. The comparison is like looking at a fireplace and then saying that it's warmer in the fireplace areas. We're talking about justifying action against businesses here. It matters where the value comes from.
 You can remove returns generated by the housing economy and while still providing housing.Some cities and countries (e.g. Vienna, or the Netherlands) provide public housing through gouvernement and/or not for profit organisations (i.e. with 0% returns), to a large part of the population. These places also have some of the lowest inequalities, which seems to validate the parent's message.
 You don't even need public housing for this. The higher rents are the more profitable it is to construct new housing. The issue is currently that we literally prohibit it with zoning rules, then make construction less profitable (and therefore less common) by using property tax as opposed to LVT, then (to a much lesser but still relevant level) make construction more expensive through various regulations and trade licensing rules that increase construction costs.Make it cheaper and easier to build new housing and you'll see a lot more new housing.
 Henry George had that figured out over 100 years ago. I highly recommend Progress and Poverty to anyone seriously interested in political economy.
 I'm on your side regarding your implication that the reduced inequality might be helped by public housing. Correlation, however, does not provide validation for a causal implication. Validation should require stronger evidence than correlation.
 Also it's strange to not include the Norway, Sweden, Finland in this. Do they have similar programs?
 ... and also France, where ~17% (4,5 millions) of main residences are "HLM" (habitations à loyers modérés).
 The argument is that there is an artificial, government imposed basis to the scarcity of housing in high value areas due to zoning.So zoning contributes substantially to wealth inequality.
 Is that related to an increase in population driving up density and "selectivity" of highly desirable areas? What happens when population growth flattens and starts going down (for example, what is the case for Japan now?)
 I don't think they was saying we physically remove all housing.They were saying that most of the imbalance if from housing, that a lot of people own, not just from owning stocks/bonds/etc...
 Isn't the person you're replying to talking about saner use of land, not removing housing entirely..?
 Won’t this make housing more affordable and allow people to live a decent life? At least in the Bay Area, even rickety shacks now cost >\$1M to buy.
 cough cough land value taxes cough cough
 > Rognlie, Matthew. 2015. Deciphering the Fall and Rise in the Net Capital Share. Brookings Papers on Economic Activity 46(1): 1–69The paper briefly mentions it but does not address or refute the point further.
 And I'm sure you could remove the wages of the top 0.1% and r>>g would be true again.The rate at which r is growing compared to g is accelerating. For anyone who works for a living, that should be unsettling.
 We’re also (probably) at the tail end of an enormous credit cycle, with rock bottom interest rates, and that means hugely inflated asset prices (and a correspondingly grown wealth gap). After credit cycles end, though, you get deleveraging. Debts get defaulted on, and asset prices fall, both of which hurt the rich far more than those who have no assets and those who are in debt. Of course, deleveraging also coincides with unemployment and a bunch of other issues that harm the less well off.
 That didn't seem to happen after the 2008 financial crash - the rich were bailed out by Quantative Easing while the poor lost their homes and had to suffer the taxes and austerity to bail out the rich.
 Yep, QE seems to have largely limited the deleveraging in 2008 before it went all the way, and the USG took over a lot of the bad debts and socialized the costs. But the govt would have more limited options this time, since rates are so low already. Also, governments around the world have been doing QE since then, so this would be a world-wide thing. I don't know how it's going to play out, I just have some ideas.
 >Of course, deleveraging also coincides with unemployment and a bunch of other issues that harm the less well off.I don't think it's so much a coincidence, but rather a direct effect of it. Less investment into businesses usually means fewer jobs.
 Yep, that's exactly what I meant, coincide just means to occur at the same time. (https://www.merriam-webster.com/dictionary/coincide)
 I guess I was caught by the word usage. It seemed to me that you were saying that they correlate rather than have a causal relationship. My bad.
 I don't see interest rates going up anytime soon. The fed tried that and a handful of quarters later is reversing course.We know that debt will grow the economy, but it certainly seems like households are debt-saturated at this point.
 I agree, it doesn't seem politically possible with the current government to continue raising rates.
 People have been saying Japan has been at the tail end of it for 20+ years.What makes you so sure the US is at the tail end of it?
 I'm not sure, it just seems likely to me. I'm enjoying reading Ray Dalio's Big Debt Crises right now, which covers these cycles.
 Can you link to one of these studies? I can't find them.
 Inflation control I think is the notable cause of this acceleration. In the past inflation could get out of hand and thus eat accumulated wealth. Note how the paper talks about the stagflation of the 1970s and the war periods being times of reversal.Of course I would not want to see rapid inflation. Yet the numbers suggest that our strong inflation control has been a cause of labour's reduced portion of GDP. Running the QE hot by letting inflation outpace the central banks inflation goal might be a good idea for assisting labour's income mix. A dangerous idea, so I hope some other country tries it first.
 This is complicated. Debt/bonds do lose value with inflation, but things like commodities/real estate/most stock securities do not (except for via co-occuring recession, which also hits workers through layoffs).
 On the other hand, the prices of those things are quite inflated already and it's quite a painful adjustment for their nominal values to decline. If nominal housing costs go down then people end up with underwater mortgages, there is a cascade of defaults, etc.But combine e.g. relaxing zoning rules with a reasonable level of inflation and then nominal housing prices don't have to decline to adjust, they can just stay where they are as nominal wages and other prices catch up to them.
 > it is increasingly getting more beneficial to own than to work. And from this data it seems that the difference is even accelerating.If this were true, wouldn't it be prudent to take out loans and invest in the stock market (own) rather than invest in education (labor)?
 It's not a single decision, you have to decide what to do with each dollar/euro/etc. Education might provide a high rate of return for the first dollars, yet rapidly diminishing returns for the rest.
 As someone who has borrowed money in order to invest in the stock market, I do feel that it was a prudent decision. Although, I'm not sure I'd pick it if forced to choose between it and college.
 I'm far from being an expert in this field, but from what I know, r must be greater than g for investments to make sense in the first place. It also seems that the widening gap can be explained by rising housing prices since the 1950s: https://voxeu.org/article/housing-capital-and-piketty-s-anal...
 > r must be greater than g for investments to make sense in the first placeWhy would that be true? Say r was lower than g, what is my alternative to investing my capital?
 Technically, consumption (spending your whole paycheck) is an alternative to investing but that mostly comes up in macroeconomic discussions.
 Um, so I would a car every few months?
 You might be surprised how much money some people are capable of spending.There does seem to be some conflict between exhorting everyone individually to save more while complaining that the economy is suffering from shortfall in aggregate demand (i.e. people not spending enough money).
 You can buy real assets (traditionally gold). Think of a world with large inflation -- if you are rich and hold bonds or money in the bank you wealth doesn't grow or potentially diminishes, but if you are a worker you still get money and presumably your wage growth increases quite fast (in line with the large inflation).
 Real assets are great if r goes negative. What if r is still positive in real terms, but g is more positive?
 First, it's hard to imagine such a world. Under normal circumstances as productivity/automation increases worker labor will always be an increasingly smaller part of the value added, which means capex grows relative to opex which drives r.The way r can get suppressed long-term is through (1) wealth taxation, (2) depreciation of an important asset class (eg as birth rate falls further below replacement housing can start to depreciate), or (3) high inflation.If it is (1) then there really isn't much to be done, although hopefully the redistribution will be administered sufficiently well to help everyone achieve a high quality of life. If it is (2) then you can avoid the depreciating assets. If it is (3) then you once again avoid depreciating assets (don't hold cash/bonds/cash-like assets).
 You just "spend" it on "non-productive" assets like art, gold coins, jewelry....these sorts of things.
 Is housing, like Gold Coins also a non-productive asset?
 No - its production is either the rent your tenant pays you, or the money you save by not paying rent, if you live in it yourself.
 That makes no sense. If you're not invested you don’t get g, you get a slight negative return from inflation.Long term it always makes sense to invest as long as you can do better than the (generally negative) “return” of inflation.
 Let's set up a situation where r is greater than g, and also I'm getting a fair share of g so I can actually experience this tradeoff properly.Okay, so the rational behavior is for me to do the minimum amount of work possible for most of my life, since wages grow faster than savings. Then, the week before retirement, I just have to do 10 years of work all at once!Doesn't really work.If g is one percentage point bigger than r it makes my retirement savings somewhat smaller than I'd like, but it's still far better than not having any.If I already have lots of money, and I don't want to go bankrupt, my only real options are r and leaving it in a box. And r definitely has better results than the box.Preemptively buying products I don't want yet has an even worse return than the box, since they need to be stored and decay over time.
 Is that really true? r < g could still make sense if you're constrained on g and less so on r, as long as r earns some return.
 "r is bigger than g in every country and every time period that we consider"I thought Piketty himself conceded that wartime (and, I think, immediate post-war period) was a period where this didn't hold true ...
 Bobby Kennedy had a pretty good, short speech on the GDP: https://www.theguardian.com/news/datablog/2012/may/24/robert...
 Great comment. Thank you.This explains why the average quality of life/wealth gap between (Socialist) East Europe and West Europe was smaller than the raw difference of GDPs.
 Even if the GDP Soviet Union were measured in other terms, it would still be very bad, the economic output was still utterly abysmal. It went way beyond just 'inefficient'.
 the real problem with this comparison is that it's not done on risk adjusted basis. people who take risk, should be compensated for it, or g will be negative ! it's the typical marxist logic that just assumes g as a fixed number out of thin air. In fact g is only possible because some people make the effort to get r. r causes g.
 You would expect this to be true if returns to scale are concave after some point. Intuitively this makes sense, for anything, after a certain point more of it becomes bad. If production returns to capital are sub-linear at very large (macroeconomic) scales then it would be surprising to see g >= r for any long period of time.
 r > g should be an obvious corollary of an economy based on growth that is stimulated by inflationary policy. Is it a necessary consequence of capitalism in all policy universes? More study would be required, but there are very little data on economies without government driven inflationary policy, going back to the Ronan days when the mint gradually devalued the denarius.
 I jumped to the conclusion (page 57) - but the bottom line is the rich get richer.In summary:- If you take more risk you get more reward - this is true based on their 150 year dataset and true across countries.- Equity markets and housing provide similar returns (NB: I wonder if that will continue to hold going forward? But there's no reason for that change...)- Housing is less volatile. (NB: Thats strange to me considering you can get a massive loan to buy a house but not so to lever up your 401k... the thinking is leverage causes more volatility).- The return on wealth is greater than that of the economy - almost 2x growth rate over 150 years. (NB: note to self: save more...)
 > - If you take more risk you get more rewardThey kind of say this but I don't think they establish it. Bonds return less than stocks and housing but they admit they can't explain equal returns between housing and stocks but lower volatility for housing. They don't look at volatility within stocks where contrary to the theory that risk is correlated with return the data tends to show that less volatile stocks actually have higher returns.
 > the data tends to show that less volatile stocks actually have higher returnsWhich data show this? Less volatile stocks can, in certain periods of time, be levered to return more than more volatile ones. But that is dependent on borrowing rates being favourable and very specific, and to my understanding rare, equity market dynamics.
 The book The Missing Risk Premium covers a lot of the evidence. The author give a synopsis here: https://falkenblog.blogspot.com/2013/07/missing-risk-premium...Low volatility investing is based around the observation that low volatility stocks have higher average returns than high volatility stocks. This article is a good summary: https://www.researchaffiliates.com/en_us/publications/articl...
 Rents aren’t particularly volatile and landlords eventually capture all income gains in the form of rent increases.Also most companies don’t last very long, so equity in a given company is far more likely to go to zero than land with paying tenants.
 > landlords eventually capture all income gains in the form of rent increasesThis is exactly the strongest argument against universal basic income, that nobody wants to address.
 We don't have a nationwide housing shortage. UBI might relieve pressure by letting some people relocate away from the local shortages in strong labor markets.
 Even when people have the meas to relocate, they are reluctant to do it. If the housing market was fluid enough that we could consider nationwide factors, localized high-rent regions like Seattle, Vancouver or Silicon Valley wouldn't even occur in the first place.So with or without nationwide housing shortage, any income increase will still be captured by local landlords.
 It isn't so much an argument against it, but rather an acknowledgement that it is problematic if not coupled to very strong social housing provision.
 Rent controlling part of the market is so thoroughly considered a failure that it's in economics textbooks. Rent controlling all of the market is a failure to the point where it's in history textbooks.The rent problem is a de-facto blocker for UBI
 Lots of things are in economics textbooks that are not neccesarily worth the paper they are written on.Here's an article on the German method of rent control in the Financial Times, 'German rent control works for both landlords and tenants' - https://www.ft.com/content/efe1f74c-3c1d-11e9-9988-28303f70f...Also, social housing is not the same as rent control.Around 20% of the housing stock in Denmark is social housing - https://urbanlifecopenhagen.weebly.com/housing.html
 Social housing provision means the government building/renovating loads of houses though - not rent control.
 > Housing is less volatileIt's for the same reason that PE returns are less volatile. The assets are illiquid and don't get repriced often. They're sold when it's convenient for the seller, which tends to be when they can make money, so the returns appear more less volatile then they actually are.
 The document mentions that the majority of returns through housing are through rents collected (6%), not capital appreciation (1%). So, not sure about your point.
 "If you take more risk you get more reward - this is true based on their 150 year dataset and true across countries."Sounds as if they fell prey to survivor bias, neglecting to account for the people and companies who went bankrupt.
 They address survivorship bias on pages 17 and 18. Based on the methods they used, I don't think they fell prey to it. If there is something lacking in their work there, I would love to know.
 That seems to only address the stock market, and it is not obvious to me why an all share index would be immune to it. What happens if a company goes bankrupt? I think they just replace it in the index? So at least people who only invest in all shares indices would have done well?
 Why is the real rate of return on real estate anything above 0? If so, it means we're getting significantly worse at producing housing/shelter. Sure, some of it can be chalked up to land value increase. But, much of america is not land locked in any way. If real estate really is returning greater than 0 real returns (not including rent/dividend) then that is quite concerning for society. It means we haven't achieved any progress in housing for 150+ years (sure electricity/sewage/pipes, but that goes in a different category, more like utilities). If this trend continues, greater and greater percentage of people's incomes will go towards housing and more and more families will need to live in a given living space: the complete opposite of progress.EDIT: I'm talking about ONLY the capital gain portion, not the rent port. The rent portion of course should be greater than 0.
 ... it's literally the first sentence of the second paragraph of the introduction. The rate of return on real estate is the appreciation in its value plus the amount of rent you can charge for using it versus its cost to purchase. If you can buy a property for \$100k and it yields \$5k of yearly income, that's a 5% rate of return. You can't "not include rent", that's literally the function of a lot of real estate purchase.
 I'm talking about ONLY the capital gain part.
 that's not what rate of return means. You might as well say "why do real estate assets appreciate in value on average?"Why should a real estate asset that does not appreciate in value continue to exist? Assets that don't appreciate in value can be demolished and replaced with assets that do appreciate in value. Assets that appreciate in value have an intrinsic reason to continue to exist; assets that depreciate in value don't have to continue existing. (And yes of course an asset that is depreciating in value should continue to exist if it is being lived in)Existing housing appreciating in value also does not prevent new housing from being built. If every house is going up in value a little bit each year, an investment-minded person might see this and say "hey, I should build a house, as it will appreciate in value". Once housing -stops- appreciating in value in an area, people stop building additional housing in that area. So appreciation tends to spur construction until the appreciation stops. People don't build additional housing in areas where housing is depreciating in value, so on the average, construction should not be expected to halt appreciation, since appreciation encourages construction specifically in areas where appreciation is likely, and not in areas where appreciation is unlikely.There are many similar effects that lead to appreciation in value on the average. It's not clear why housing appreciating in value should suggest that "we're getting significantly worse at producing housing/shelter".
 I think he is talking about the actual building on the property. It doesn't make sense that an 20 year old house should be worth more than an "equivalent" newly constructed house. It should depreciate through wear and year like any other capital asset. That it appreciates (in real dollars, inflation adjusted) instead is confusing.
 you're ignoring everything other than the intrinsic worth of the house itself as an object.E.g., if you had a house in North Dakota in 2005 and then they discovered the Bakken formation in 2006 and the shale oil boom started, the value of your home would appreciate because of the rapid influx of oil industry labor. The price of something isn't determined by its intrinsic value alone; it's what people will pay for it. If people will pay more for it tomorrow than they will today, it's an appreciating asset.If the population is growing faster than the housing stock for that area, the demand for housing goes up.
 I'm not even sure how they calculate capital gain. If I do maintenance on my house, are the authors viewing that as raising the basis?
 it's the change in price at time of sale. The price of the asset is only known at the time of sale. At all other times, the assumed price is speculative. The capital gain is just the difference between the price you sell it at and the price you bought it at. That's all it is.
 I would imagine that money spent modifying the asset comes into the calculation somehow. Is that not the case? No adjustments to capital gains tax for renovation costs, etc.?Edit: I did a quick Google. It looks like qualifying home improvements can be added to the cost basis. However, maintenance expenses cannot.
 you're making this way too complicated in your head. Capital gains aren't paid on an ongoing basis. Gains are only realized at the time of sale. It's literally just the difference between price at which you sell an asset and the price at which you purchased the asset.Property taxes are paid on an ongoing basis. Property tax rates are a function of the value of the property. Tax for a property is periodically recalculated by recalculating the fair market value for the property. The fair market value is speculative; it's an essentially a statement of expectation about the market. There's no obligation that a sale be for that price. But again, that's property tax, not capital gains.If you buy a house at fair market value in a market with absolutely no change in housing values, and the house has a crummy kitchen and then you reno the kitchen, you have a reasonable expectation that you'll sell the house at a gain. So yes, improvements "come into the calculation somehow" inasmuch as they help you sell the property at a higher price. But that's not regulated or guaranteed in any way; the gains are just what you can get someone to pay you for the property. You could do lots of work on your house and then a sinkhole opens up in the street in front of your house and you no longer have a road in front of your house and the value will go down. You could make a house -worse- and still realize a gain if there are other factors that would make people willing to pay more for it.You can't just view the intrinsic value of the house as an object to understand its price. The price is not its intrinsic value, it's what people are willing to pay for it. The gains are how much the sale price changed over time; they're not a function of the change in the intrinsic value of the object itself.
 Thanks for the response. However, it doesn't answer the question of whether one's capital gains tax bill will be affected by any investments in renovating or improving the property. If you take another look at my comment, you will see that I already answered this question.The cost basis used in the capital gains calculation may be adjusted by qualifying home improvement expenses, but not by things like maintenance costs.P.S. A bit of friendly advice. There is almost always a better way to phrase things than "you're making this way too complicated in your head". It can be poorly received even if you are well-situated to provide useful information or understanding to the other person. It comes off especially poorly when you didn't understand what the other person was asking.
 A bit of friendly advice: starting out with "a bit of friendly advice" is passive-aggressive. It can be poorly received even if you are well-situated to provide useful information or understanding to the other person.edit: https://www.irs.gov/publications/p523#en_US_2018_publink1000... I'm not a tax attorney, that's a question for a tax attorney. Calculating capital gains taxation isn't really the topic at hand.
 That is fair. I didn't need the "friendly advice" sentence. I was a bit annoyed but that's no excuse.Edit: Addressing your edit, the capital gains calculation is literally what the comment (by usaar333) before me asked about:> I'm not even sure how they calculate capital gain. If I do maintenance on my house, are the authors viewing that as raising the basis?
 > Assets that don't appreciate in value can be demolished and replaced with assets that do appreciate in valueIt's more complicated than that.An asset isn't necessarily an investment. E.g. cars, merchandise, foodstuff etc. People need somewhere to live, so they'll keep building houses and people will keep buying them and living in them, even if the "smart money" is chasing higher returns.Now in the purest sense, someone with a family home could sell it and buy shares. Let's ignore leverage and say they fully own the home. That might be a smart thing to do. But there are other factors at play including tax, and including emotion and the practicalities of renting vs. owning. If you rent maybe you can get evicted more easily.
 I said "can be", not "spontaneously cease to exist due to their non-appreciation". Homes don't explode the moment they stop appreciating in value.> An asset isn't necessarily an investment. E.g. cars, merchandise, foodstuff etc.um sure but the topic at hand is the rate of return on real estate assets, not "how to invest your money". Cars are a depreciating asset, and so what? That is not the topic being discussed.> People need somewhere to live ...Sure but again I don't know what about this statement is revelatory. Yes everyone needs shelter, we take that as axiomatic.> so they'll keep building housesok but here's the thing: you actually can't take that for granted. Most people don't build their house, they buy one that already exists. The vast majority of people engage in real estate trade, not real estate construction. Real estate development is performed by a comparatively small number of actors, and they do it expressly for the purposes of profit. Yes, a majority of housing is owned for the purposes of residence, but that does not imply that a majority of real estate development is pursued for the purposes of occupancy by the person funding its development. People will only build houses for themselves if it's cheaper than buying on that already exists (or if they have some sort of requirements that can't be fulfilled by housing on the market, but again, the number of people hiring architects to design houses for them to live in is comparatively small).
 >>An asset isn't necessarily an investment. E.g. cars, merchandise, foodstuff etc. People need somewhere to live, so they'll keep building houses and people will keep buying them and living in them, even if the "smart money" is chasing higher returns.Yes, people will still build houses, but you eliminate a vast number of more optimal arrangements by taking profit-motivated housing development out of the picture, and that results in less abundance of housing.Efficiency returns from specialization/division-of-labor, that is enabled by trade, is as close to an economic law as there is. And separating consumption of and investment into housing is a form specialization/division-of-labor.Many cities that have penalized or restricted profit motivated housing development have seen very serious negative repercussions for housing affordability.The assumption that long-held economic principles do not apply in a particular industry or sector is a very common one and almost always wrong.
 > An asset isn't necessarily an investment. E.g. cars, merchandise, foodstuff etc.Aren't those examples consumables, not assets? I always assumed assets are by definition things you invest in, not things you consume, but maybe I'm lost in translation here...
 An asset is just anything that has value that can be bought and sold. Those are all depreciating assets, but they're assets nonetheless. Are you thinking of securities?
 > "Once housing -stops- appreciating in value in an area, people stop building additional housing in that area."Philadelphia had experienced this for a time, homes not appreciating in value and roughly 10% of the city became vacant land. Once a house got in enough distress that it needed to be demolished, it was cursed, and that curse would domino to neighboring properties.housing appreciation is a good thing. if it appreciates, people will build more housing, people will take care of their properties, etc etc
 if housing is appreciating, it means it's more expensive. For example if the price of milk were to appreciate and it goes from 2\$ to 2.50 a gallon (inflation adjusted), then we're getting worse at producing milk. And if that pattern continues forever, fewer and fewer people will be able to drink milk. it doesn't matter that we're using new technologies (sure those can help reduce price) but it's the aggregate result that matters. For example, technologies might reduce the price of milk from 2\$ to 1.50 but then we institute laws that say every cow needs at least 10 acres of space which then increases the price to 2.50. the net result, is still we're getting worse at producing milk.see what i mean?
 > For example if the price of milk were to appreciate and it goes from 2\$ to 2.50 a gallon (inflation adjusted), then we're getting worse at producing milk.by your logic, organic milk is "worse" because it costs more. Maybe the price of something was low because people simply don't want it for some reason. Maybe people don't want it because the quality is low. Maybe we get better, not worse, at producing this good and the quality goes up: now the price of that good goes up because more people want it, because it's more desirable. Price going up can signal that we're getting -better- at producing a good, not -worse-, under certain conditions.Prices changes can also have absolutely nothing to do with how good we are at producing something. Maybe the CDC puts out a notice that milk causes spontaneous combustion, and so the price of milk plummets because nobody wants it any more because they're afraid of bodily immolation. Now a bunch of producers go out of business. A new report comes out! That last report was baloney. Suddenly everyone wants milk again. Milk is great! But there aren't enough producers now. The prices skyrocket! A roller-coaster of changes in pricing can occur with literally no change whatsoever in our ability to produce a good.Rising prices does not imply that we got worse at producing something, it literally only means that people are willing to pay more for the good. It has absolutely no explanatory power to help you reason about -why- they're paying more.How did the supply change? How did the demand change? How did the product change? None of these things are addressed by stating, in a vacuum, that the price went up.
 > For example if the price of milk were to appreciate and it goes from 2\$ to 2.50 a gallon (inflation adjusted), then we're getting worse at producing milk.Or getting better at producing milk, but more slowly than we are getting better at producing everything else in the basket of goods and services used to track general inflation.Now, if the price of milk is going up compared to the average (mean, not median) pay per hour of labor, that's a good standard for getting worse at producing milk. (If it's worse by the median but not the mean, we’re just getting worse at distributing income.)
 In Japan existing housing stock depreciates. The net result is better than appreciation in my experience. LRight now the net result is buildings can be rebuilt when needed. All my friends can afford to buy a home. RE prices are reasonable and thus have reasonable rates of return.The total cost of buying a new house is similar to America as the lower interest rate compensates for the depreciation. The difference is thus smaller down payments and lower monthly payments. If you want a similar net return to America then you can invest the difference in RE or equities.Thus young people can buy homes easily while the total wealth building is not reduced. The generated wealth will be more diversified and thus less dependent on housing valuations.
 yeah I'm not sure anyone is arguing that the appreciation of housing values is a good thing, just that it's an emergent thing and it's not that surprising. Much of this paper is corroborating Piketty, whose central thesis is more or less that the rate of return on capital is too high, and that the consequence of the high rate of return on capital is increasing wealth inequality. We're in essence creating a system that says that if you want to make more money, owning stuff is better than doing stuff. That's a pretty lamewad system imho, as it encourages the growth of the rentier class as the expense of the working class.
 Were it only that simple!There are property taxes and maintenance. It's maintenance that kills you on most rental deals. I think unless you own and manage a fairly decent portfolio of properties, being a landlord is more of a break-even to loss type of situation.Where are all these \$100K properties, btw?
 Avoid the US north-east and west coast, and you can find pretty decent values. I know a guy in his 30s who is "retired". He actually works about 2hrs per week. He has 10 rental properties. He pays 0 taxes due to depreciation exceeding his rent + costs. He makes around \$90K / yr take home pay which is enough for his standard of living.So the answer is, yes. Being a land lord can work, if you get the parameters right as he seems to have done.
 it literally IS that simple, it's an economic model. The example I gave is, of course, incredibly stripped down and incredibly simplified; it's simplified for the purposes of discussing what a "rate of return" is.The rates are adjusted for maintenance cost in the paper. The example I gave is a simpler model than what is presented in the paper:> These net rental yields use rental income net of maintenance costs, ground rent, and other irrecoverable expenditure. These adjustments are discussed exhaustively in the next section. We use net rather than gross yields to improve comparability with other asset classes.did you try opening the paper and searching "maintenance" before you posted?> Where are all these \$100K properties, btw?For one thing, it's a thought experiment. We're using our imagination to define our words. Stop looking at everything so unbearably literally.And for real, that is a ridiculous question even when taken literally. Finding houses under \$100k is really not confusing so long as you look in places with low costs of living. Randomly picking Tulsa, Oklahoma, for example: https://www.redfin.com/city/35765/OK/Tulsa/filter/property-t...
 Because the population is growing, and people want to live in SF/NY/London/... not in the middle of nowhere.Real estate prices in landmark places will continue going up, probably at an accelerating pace as more people get richer and bid it up.
 https://twitter.com/geographyjim/status/1121809404049776641?...GIF of housing supply in London, New York, Paris and Tokyo, 1970-2013, showing growth of maybe 1/3 in the first three and doubling in Tokyo. Amazingly real estate prices in Tokyo are basically flat throughout this period, those of the other three, not. Real estate prices will go up in desirable locations if supply is not allowed to grow with demand.
 It turns out people have this strange obsession with living within x miles of their family. While the number of people living in New York City has greatly increased the amount of land has not. The more people demanding the same thing, the more it costs. Hence real estate in desirable areas continues to return a significant rate. Well unless you invested in Detroit of course.
 > While the number of people living in New York City has greatly increased the amount of land has not. The more people demanding the same thing, the more it costs.If there was the political will to do so they could build more densely in NYC. The amount of land is not going to grow massively but there’s no technical reason Brooklyn could not be built up as densely as Manhattan, or Queens as densely as Brooklyn. The technology for eight story walk ups or for similar buildings with elevators is about as old as the telegraph. If Tokyo can double its inhabitants from 1970-2013[1] with no rise in real estate prices or rents there’s no non-political reason NYC can’t do the same.
 It's not so simple. The value of living in cities has increased because of economies of scale, population has grown and space in cities is limited. It's not like people want to build houses in the middle of nowhere. It does not follow that a positive return on real estate means that we're worse at producing shelter.
 when the price of something goes up, it means we're getting worse at producing it. It doesn't matter if you're using new technologies. what matters is results. If a gallon of milk goes from 2\$ to 2.50\$ inflation adjusted, then we've gotten worse at producing it (increase costs), etc. And, by gotten worse, I mean in aggregate: (this includes price of land, zoning laws, regulations, NIMBYs suing developers, insurance, frequency of huricanes, etc): all these things can make us get worse at developing shelter. What you'll notice about all these causes is they're directly or indirectly all Self inflicted.
 > If this trend continues, greater and greater percentage of people's incomes will go towards housing and more and more families will need to live in a given living spaceYes this is literally a housing crisis and yes it's a real thing. Take a look at the busy markets in Sydney, Toronto, Auckland, etc. Why do you think millennials are so angry about housing?
 Per paper, it's 0.9% real capital gain return since 1950 in the US. That's smaller than the 1.9% real gdp per capita of the US since 1950, meaning people are actually spending a lower percentage of income toward housing. (mind you 1950 typical housing, which is far worse than 2019 typical housing)You can probably chalk a lot of this up to land value increases - as population increases, but targets only a small segment of land, land values will go up. (especially as that population earns more in real terms)
 A lot of reasons but two fundamental parts as I see itFirst population growth, California's population is 10x what it was 100 years ago, so a family had an acre, now you have ten families on the same piece of land. That makes the land much more valuable.Secondly people spend a stable fraction of their earnings on housing, so income growth is important, and why a house in California costs much more than a house in say Peru. And why a house in NYC costs much more than it did 100 year ago - with stable population.If you look at places with stable/falling populations and stable/falling incomes, house prices are stable/falling too, see Rural America, Midwest, Argentina, Russia etc
 And at least where I live in California, housing is much more expensive to build in real terms than it used to be.I lived in a house that would be illegal to build today (the house was too large for the lot; note that it's total square footage, not the housing footprint that is the problem, which might explain why ranches seem to be so popular around here). That's ignoring things like tighter building regulation for safety and environmental reasons.It also means that the house itself will appreciate because if you tore down the house, you would have to build a much smaller house on the lot.I looked into buying a lot and building, and estimates were showing that the permitting process could cost more than the lot itself.
 The fact that land having structures that are "grandfathered in" is a major selling point for any piece of property with said structures tells you all you need to know about how much of a success curtailing people's freedom to build what they want on their own property has been.>I looked into buying a lot and building, and estimates were showing that the permitting process could cost more than the lot itself.That's the point. The city is creating an artificial wealth minimum for people developing properties. If you don't have at least \$X to burn on their whims then you are not allowed to build in their city.
 In a “spherical cow in a vacuum“ simplified world if there was massive population growth but a fixed supply of land then real returns to land would be positive during that period. This ignores several nuances of the real world but given that the world population went up by nearly an order of magnitude in the past 150 years its still a huge effect nonetheless.
 Be careful drawing personal advice from economic aggregates. Aggregate yield on investment or labor has little to do with individual yield on investment or labor. In other words, it doesn’t really matter what aggregate yields are only what your yields are. Often I’m not sure what the point of talking about aggregates is at all when it comes to labor. The gap between a software engineer salary and fast food worker salary is so huge I’m not sure I understand the meaning of analyzing the average aggregate yield of the two together.
 I'd say that's true of salaries, but it seems that the investment portion of the analysis is still interesting, as the average investor will be pretty likely to land somewhere around the average return in the study.
 This entire analysis is predicated on a super trend of human population increase.There is an increase in demand for housing, consumption goods etc as the population increases.I doubt if this paradigm will succeed in an ageing world and a world in which climate change might introduce massive stress to the population growth continuum.It would be interesting to see how this played out during medieval era during black death era.
 > It would be interesting to see how this played out during medieval era during black death era.pretty sure the vast majority of people did not own any land at all at that time, and that land was not bought and sold in the way that it is today. Did the concept of housing prices even exist then?
 The only real hard constraints on long term population growth are, food insecurity, war, and pandemic.A secondary cause that is relevant for the aging population example you cited is gentrification, there seems to be an inverse population curve in respect to wealth - meaning the more money you have (or your society has) the fewer children you'll have - this is something that can be overcome thru public policy if deemed a priority by a society.Because of this, I see no reason why population will not continue to grow world wide - climate change is most likely to change where and what kind of food can be grown, not how much of it we can grow.
 Every country that has had a GDP ppp of over \$8k equivalent 2010 dollars does not have replenishment birth rates.
 I share the same concern. Worse, if we are right, then R > G will only be true for growth, but R < G when growth is negative (in other words, R is more extreme in both directions).If I’m right about that, then the years after reaching a global population maximum could be rough - possibly really rough, bordering on disaster.
 So to get philosophical for a minute.Is it better for society to get a better return from housing compared to other investments?My gut feeling is that equity should have the best return as it involves the most risk.Property should yield less as it's, well, safe as houses.I suppose you could divide property into 2 elements, capital appreciation (the safe, and as it turns out lowest yielding element) and rent (which seems to be the real money maker), but then stocks are made up of the same 2 elements...So all this appears to mean renters are paying 'too much'? As in landlords should be flooding the market with cheaper rentals, except they can't because of building regs and zoning, which then, for me begs the question, why should the land lords be capturing that excess return? Why not capture it for society's benefit?
 > Is it better for society to get a better return from housing compared to other investments?IDK, but when Japan was "taking over the world" in the 70's and 80's they didn't have tax laws that subsidized housing mortgages the way the US has. Japan's incentives were centered around manufacturing companies and exports. Did it work out well for Japan? One can make the case. OTOH, Japan's debt to GDP is like 200% now. And manufacturing in China has overshadowed that in Japan.In the US we've added fifty million people and built a bunch of housing. Landlords did ok. But our trade deficit continues to rise.What's better?
 But OTOOHJapan doesn't really have a 2nd hand property market, they just start again with a new house, so you could argue that Japans economy is centred around manufacturing, new houses.
 > And manufacturing in China has overshadowed that in Japan.Not surprising since China is many times bigger geographically and wrt population. It's like 8 Japans glued together.
 >My gut feeling is that equity should have the best return as it involves the most risk.'Should' is an interesting word isn't it :). However the higher the risk, the higher the chances that you may not get the return you are looking for.
 Risk should be captured in the standard deviation though.My thinking for 'should' is that faced with 2 options 1 risk free the other with a 50% failure rate, you would rationally go for the risk free option if they both yielded the same income. Even if the yield on the risky option were double it still isn't rational to go for that investment, why spend the years fretting when you can go for the risk free option for the same outcome. So clearly a risk premium is required to entice people into those riskier investments.
 Not just landlords, any property owner ie owner occupiers as well. That's the idea behind land value tax.Alternatively get more permissive with zoning, in the right places, but careful not to grant a monopoly to any developer.
 A land value tax could just get passed straight along to the tenants though, right?
 You want to know what's a terrible investment? Cash. It has lost more than 90% of it's value in the last 100 years.
 100 years isn't so bad.Try living in a developing country. It loses 50% of its value in 15 years. By the time you save up for college, you need twice as much.
 I'm guessing his greater point was that fiat cash in general loses its value.
 As does specie."On the Continuous Devaluation of the Roman Currency"http://www.rmki.kfki.hu/~lukacs/ROMLAS.htmhttp://www.rmki.kfki.hu/~lukacs/ROMLAS_files/image008.gif"For in every country of the world, I believe, the avarice and injustice of princes and sovereign states, abusing the confidence of their subjects, have by degrees diminished the real quantity of metal, which had been originally contained in their coins."
 I guess Bitcoin would be the first real "gold" standard, then.
 Bitcoin lost more value in six months than most currencies managed in half a century, and yet 'miners' were still incentivised to make more of it...
 And has since the beginning of time. Adam Smith discussed such devaluations and the incentives in his seminal work back in the 1700’s.
 This is such a great point because it underscores the importance of viewing investments with a longer time scale than I am used to.
 The statement that r>>g, except during periods of wartime, suggests a Peter Turchin-esque conclusion. The ruling class sets the rules such that r>>g, whatever rules are required to make that happen, unless they are engaged in a large military struggle such that they need the masses on their side.
 It seems a bit strange to say that the ruling classes would pay workers more to support a war. Another possibility is that war decimates the return of capital because speculative investments fail due to instability, but basic and well established needs (the "real" economy") still get funded because people still want to eat.
 I think that, in many cases, the ruling classes worry more about morale (and it's extreme failure, revolution) when there is a war on.But, you raise a good point about other impacts. You care more about factories and farms if you need war material and soldiers' rations.
 You ignore the destruction of capital war causes. Germany in 1945 had maybe three bricks still stacked on top of each other, but had lost less than 20% of its prewar population.
 In 1875 the great power of the world were the UK, France, Austria-Hungary, Russia, Germany, USA, China, Japan, Turkey. Half of those countries are not on the list, thus we truly underestimate the effect of wars and revolutions on r>>g.
 Great paper, but lots of limitations. That they can't factor in taxes all that well ("Since quantifying the time- and country-varying effect of taxes on returns with precision is beyond the scope of this study, throughout this paper we focus on pre-tax returns from an investor perspective.") really distorts knowing how well the true asset returns are for different classes.
 Real annual returns (%):Bills Bonds Equity Housing1.03 2.53 6.88 7.06Nominal annual returns (%):Bills Bonds Equity Housing4.58 6.06 10.65 11.00
 Looks legit. On a quick skim, happy to see specific measures taken like- Population used as weights- Includes both nominal and real returns- Potential for Simpson's paradox addressedCritiques- The Sharpe ratio is calculated for each group, but the weighted standard deviation is not reported. Given the higher volatility of the equities market versus the housing markets it would be nice to see the IQR.- Population _growth_ may be a large factor in housing pricing growth -- you can't capture that with birth rates alone (need inflow from immigration) but level-population controls for some of that. But (and I've only skimmed) population may make for a poor time-series control due to serial correlation.- While housing comes out on top, the p-value criterion shows only the slightest bit of statistical difference (t-stat 1.63) for geometric mean of housing v. equities -- it's on the border of statistical significance. [US Dollar returns, table A-14, geometric mean comparison]Edit: Simpsons paradox, not ratio
 Simpson's paradox perhaps? Googling "Simpson's ratio" gives you some stuff about the aspect ratio of Simpson's episodes.
 “Simpson’s paradox – the effect that occurs when the marginal association between two categorical variables is qualitatively different from the partial association between the same two variables after controlling for one or more other variables…”. https://365datascience.com/simpsons-paradox/Addressed by per capita or inflation adjustments?
 I typed faster than I intended. Yes, paradox. Another comment hit by autocorrect.Thanks for the correction.
 Yes, particularly housing in Dresden, Hamburg or Tokyo, Hiroshima or London between 1939-1945 had golden years. Or Madrid. Not to mention some other countries in Europe and Asia where real-estate assets had been not just annihilated but also confiscated under communism.The imputed rents show survival bias same as stock returns.
 All sorts of assets were destroyed in WW2, not just housing. It's not an outlier in that respect.
 So in other words, excluding outliers, housing has been a better investment than company stocks?Or am I reading this wrong?
 But there is this important tidbit:> The observation that housing returns are similar to equity returns, but much less volatile, is puzzling. Like Shiller (2000), we find that long-run capital gains on housing are relatively low, around 1% p.a. in real terms, and considerably lower than capital gains in the stock market. However, the rental yield component is typically considerably higher and more stable than the dividend yield of equities so that total returns are of comparable magnitude.In other words, it's the rental yield, not the capital gains, that make up for the difference.I'd also add the "past performance is no guarantee of future results" caveat. The time period studied was one of immense population growth, so in advanced economies with plummeting birthrates a different primary driving factor could take hold.
 Wonder whether REIT stocks act more like RE or equity stocks in that regard.
 If you’re buying a diversified basket of real estate assets it should behave like real estate over the long term. As a tradable security with a deep and liquid market measured volatility will probably be higher but that’s going to be more a function of far more frequent changes in partial ownership than actual changes in underlying value.
 Do REITs provide exposure to rental gains?
 Absolutely. In order to qualify they must pass through 90% of their profit as dividends. Just be sure to chose REITs that invest in real estate the way you want.
 Still reading, but is that factoring in the labor and opportunity cost of managing a rental property?
 I'm pretty sure you dont try to factor opportunity costs into an investment. You only compare returns of different investments. Labor is a legit expense weather you pay someone or maintain your own rental property. Maybe that's what you meant, you own opportunity to do higher paying work?
 I mean, I can:1. Invest in an index fund, which I deposit into automatically every month, at X% return and Y% risk.2. Invest in a rental property, which I then have to spend time to manage (or pay someone to manage), at the same X% return and Y% risk.I wondering how you're supposed to account for the difference between the two. Even if I don't hire someone to manage my property, I still have to spend time managing it, which can have a significant opportunity cost.
 >> Even if I don't hire someone to manage my property, I still have to spend time managing it, which can have a significant opportunity cost.I am not a finance person, but it seems you're talking about two possible investments. One in a rental property and one with your time. If you manage the rental yourself then there is an opportunity cost where your time may have been better spent somewhere else. If you pay to have it maintained/managed then you are free to invest your time in whatever you like. You need to figure out the value of your time to make sense of it.
 You simply take out the cost from the returns. If it's true that both increments have X% return (at Y % risk), then the index fund which don't require the extra maintenance cost is higher yield.The real issue is you won't know Y until afterwards.
 You are reading it ... incompletely and getting the incorrect impression that real estate is a better investment than equities, which it absolutely IS NOT. The study explicitly neglects to factor in "leveraged real estate."So you spend \$1,000,000 on a house. With interest on a 30 year note, typically, that house with interest will cost \$3,000,000 total. As an investment most people only consider capital gains, but the majority of gains according to the PDF are from rental income.Source, Page 3, paragraph 2:The majority of households in advanced economies today hold a leveraged portfolio in their local real estate market. As with any leveraged portfolio, this signiﬁcantly increases both the risk and the return associated with the investment. And today, unlike in the early twentieth century, houses can be levered much more than equities. The benchmark rent-price ratios from the IPD used to construct estimates of the return to housing refer to rent-price ratios of unleveraged real estate. Consequently, the estimates presented so far constitute only un-levered housing returns of a hypothetical long-only investor, which is symmetric to the way we (and the literature) have treated equities.
 I strongly suspect that the study, like many others before it, is flawed in the way it calculates the return on housing investment. In terms of capital gains, I see no evidence that like is compared with like, I suspect that a 1930s house is considered the same as a 2010s house for the purpose of capital gain calculation, and no account is made that the house may have been renovated or entirely rebuilt several times. The high cost of buying and selling a house is, I suspect, neglected.I furthermore suspect that in calculating rental return, no account has been made of vacancy rates, agent's fees, insurances, repairs etc.Soooo... in summary, although this report implies that housing has been a better investment than stocks... I suspect it hasn't.
 That's a glaring omission, if true. It seems that they'd be looking at earnings (that is, they'd be subtracting costs, and looking only at profit in the end). Otherwise, yeah. This is a pretty bad analysis.Either way, if real estate averages about 1% better yield than equities, I'd go with equities, because they don't require maintenance, other than reading an occasional financial statement (or if you're indexing, not even that).
 Globally yes. But not if you look at it country by country, see page 37.
 Correct
 Gold / commodities are missing from the article, and a quite significant part of the economy
 Producers of gold/commodities are included, as these are businesses financed with debt/equity.The return on buying gold bars and sticking them in your basement (or buying a note tied to the value of gold in someone vault) isn't covered because it doesn't produce income in the way that stocks, bonds, and rental properties do.
 In what way does the income on an investment on precious metals or commodities differ from the income on a paper asset?An interesting difference that I do know with respect to gold is that selling physical gold is not subject to any taxation
 Companies return capital to shareholders, bonds pay interest, and when you rent out real estate, tenants send you a check every month.No one sends you a check in the mail for having a gold bar in your basement. There is no income, but you can benefit from a change in price when you sell it.
 I thought the article is about capital returns (income+change of price), that's the only interesting way to compare assets.
 I must say I skimmed the article, however I find it interesting that the rate of return on gold and silver themselves were not really discussed or tabulated.
 Gold and silver are commodities that don't produce value outside the price you pay for and then sell for. Also, you don't really need to cover it when you can easily find graphs for their prices going back hundreds years.
 Agreed, especially as for the first half of the period gold was the literally "gold standard" of wealth preservation.
 The paper mentions survivorship bias but doesn't talk about markets that went to zero in this period. If you were investing in the last 19th century you'd have had big allocations to China, Russia etc that would have been completely lost as Communist governments nationalized everything. Also its easy to forget that Argentina, Brazil, Southern Africa, Egypt etc were wealthy and growing economies 100 years ago that pretty much went to zero too. Its disappointing this wasn't even hinted at.
 I've been wondering if they have considered survivor bias. It sounds like the most basic thing, but easily forgotten.Now this, on housing prices, makes me rather doubt it: "We combine the long-run house price series"If you just look at house prices, aren't you overlooking the risk of losing your house (damage, accidents, repairs you can't afford), and overlooking how much people have to keep investing in their houses to keep the prices up?
 Not surprising - the developing world is still thirsty for 3-4 trillion USD in infrastructure spending.Not to mention the developed world could also use a bit of infrastructure spending.
 Are you upset r >> g? What if you had to retire on savings that were sitting in a bank account earning .1% APY?If you make on average, \$100k a year over a short 30 year career, saving only 10% at .1% APY, what are your savings? \$314.5k. What if you invest instead and earn on average 8%? \$1.2MMHow about over 40 years? \$418k vs \$2.8MM.Compound interest has and will continue to be a major driver for wealth throughout the world. Reducing its benefit to a moral argument of the rich getting richer is sad.Many of the richest Americans are taking part in the giving pledge, allowing their wealth to build and take advantage of compound interest over their lifetime and giving a large portion of it back. The alternative is giving 40+% to the government each year, who will not be earning compound interest with it. https://givingpledge.org/PledgerList.aspxCompound interest coupled with the fact that people can’t take their wealth to the grave makes for a natural ability for money to both amass quickly and then be transferred back to the public or to heirs or wherever else.
 Your compound interest is generated by the hard work of other people, and when you transfer it to your heirs you’re just creating aristocrats. I don’t see the public good here.
 I’m not saying heirs are good or bad, some end up going on to make even bigger economic impact and some completely bust. Regardless, the giving pledge and other philanthropic things are changing the game for the argument against billionaires. Hard to hate someone that’s going to give 95+% of their net worth to cancer research, homelessness, etc.For some of us on HN that work in Tech, we are making great salaries on the backs of the the people that built the building we work in, or the computers we use for our job. You could say that the factory worker in China that built our PC deserves some of the wealth that we amassed via our computers/servers/etc. Follow it down the rabbit hole and you will see that everyone on this forum has benefitted from the hard work of others, and those people benefitted from the hard work of those that built their factories, homes, etc.
 The whole idea of people being paid different amount of money for their work is how much they produce. It's nonsensical to say low skilled workers should be paid as much as high skilled workers.Yes everyone benefits from everyone elses hard work. We transfer value through money. People participate in a voluntary system where the prices are controlled by supply and demand.
 Their hard work is enabled by you saving instead of consuming the product of your labour. When you transfer it to your heirs you’re giving them a temporary leg up which dissipates over time because people spend or invest money. If they spend it it’s not a long term problem, they don’t have it any more. If they invest it either they’re bad at it in which case their relative position will decline, so it’s not a problem, or they’re good at it, so they’re contributing to economic growth by efficiently allocating resources.The public good is that secure property rights are a great way of increasing economic growth which enables human flourishing. Would you rather live in a world as rich as the 1910s USA, with equal wealth per person, or now, with antibiotics, air conditioning, cheap easy and safe travel and practically free high quality entertainment available 24 hours a day?In 1904 one of the most powerful men in the world, the US President, Calvin Coolidge, has his son die of an infected blister. I’d be hard pressed to choose between living as an average Ukrainian today or Rockefeller or Carnegie back then. Economic growth does enormous good to huge swathes of people and confiscatory taxation jeopardises that.
 I have no objection to the idea that capitalism is basically a force for good, and appreciate the gains and improvements in our standard of living over the last century. Property rights, to a reasonable degree, are great.But all this is orthogonal to aristocracy and the insane wealth gap we see today. You argue well, with language like “confiscatory taxation”, but you really just are claiming we can’t have progress without embracing unlimited winner take all.This is clearly nonsense. You can have one without the other.
 Everything is generated "by the hard work of other people". And don't forget that by the time "the heirs" inherit stuff, it's already been taxed 3-4 times. The understanding of this, however, only comes when you have children and wealth of your own.Until then the situation is best summarized by this meme: https://pbs.twimg.com/media/Dypf0KDWkAUyNdn.jpg:large
 Where are you getting that the wealth has been taxed 3-4 times? Knowing someone who has inherited >1% wealth (>\$10 million, but anything less than \$22 million is exempt from inheritance tax at current caps), the principle has been taxed once so far as capital gains. When they do decide to cash some out, only the as-yet-untaxed additional capital gains will be taxed for the first time at, at most, 15%, because they aren't planning to cash out >\$400k in a year anytime soon. If they take out \$100k/year they only pay 9% long-term capital gains tax (first 40K is completely untaxed); the money will ultimately be taxed much, much less than earned income.
 Aristocrats are able to focus on the arts, culture, politics. They are the next level of social evolution.
 The joy of economic growth is that it enables more and more of us to live the lives of leisure that were the preserve of aristocrats in times past. If you want to live in what Wilde or Adams would have recognised as material comfort and devote yourself to the life of the mind you can get an undemanding part fine job, live in cheap housing and spend the rest of your time at leisure. We live in a world where the norm in developed countries is that people spend a significant fraction of their lives not working, between school and retirement, when people in the bottom decile of income take not just holidays, but international holidays. In many respects in the first world we’re all aristocrats. Most people waste the opportunity to cultivate themselves, to become excellent, but it’s not like aristocrats didn’t mostly waste it too.> I must study politics and war that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce, and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.> John Adams> US diplomat & politician (1735 - 1826)> The fact is, that civilisation requires slaves. The Greeks were quite right there. Unless there are slaves to do the ugly, horrible, uninteresting work, culture and contemplation become almost impossible. Human slavery is wrong, insecure, and demoralizing. On mechanical slavery, on the slavery of the machine, the future of the world depends.> OSCAR WILDE, The Soul of Man Under Socialism
 What would happen if there was an almost 100% estate tax (assuming that loopholes could be controlled)? Would it be all that bad?
 Well, I'm not sure if it would be bad per say, but essentially, you you be taking away the freedom for people to do with that money as they please after they pass. In many cases, people in the US agree that private organizations, such as non-profits, charities, etc. do a slightly better job than the US govrnmt at allocating large amounts of capital.I would personally prefer a person passionate about cancer research to allocate \$1B rather than short sighted, sometimes pork-barreling, legislators.
 I used be really interested in historica returns (especially Dimson, Marsh, and Staunton) until I learned that profits have as much to do with squeezing labor as anything else. If you want to predict future returns you need to know how badly working people will be treated in the future.
 If you want to predict the future...Well, you can't.Case in point: the concept of "human employment" that you base your precition on may or may not exist in the future... Because: the singularity is near.
 Can you elaborate with specific examples?
 It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour. It is not, accordingly, in the richest countries, but in ... those which are growing rich the fastest, that the wages of labour are highest....But though North America is not yet so rich as England, it is much more thriving, and advancing with much greater rapidity to the further acquisition of riches....Though the wealth of a country should be very great, yet if it has been long stationary, we must not expect to find the wages of labour very high in it. ... There could seldom be any scarcity of hands, nor could the masters be obliged to bid against one another in order to get them. The hands, on the contrary, would, in this case, naturally multiply beyond their employment. There would be a constant scarcity of employment, and the labourers would be obliged to bid against one another in order to get it....But it would be otherwise in a country where the funds destined for the maintenance of labour were sensibly decaying. Every year the demand for servants and labourers would, in all the different classes of employments, be less than it had been the year before. Many who had been bred in the superior classes, not being able to find employment in their own business, would be glad to seek it in the lowest. The lowest class being not only overstocked with its own workmen, but with the overflowings of all the other classes, the competition for employment would be so great in it, as to reduce the wages of labour to the most miserable and scanty subsistence of the labourer. Many would not be able to find employment even upon these hard terms, but would either starve, or be driven to seek a subsistence either by begging, or by the perpetration perhaps of the greatest enormities. Want, famine, and mortality would immediately prevail in that class, and from thence extend themselves to all the superior classes, till the number of inhabitants in the country was reduced to what could easily be maintained by the revenue and stock which remained in it, and which had escaped either the tyranny or calamity which had destroyed the rest....The liberal reward of labour, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth. The scanty maintenance of the labouring poor, on the other hand, is the natural symptom that things are at a stand, and their starving condition that they are going fast backwards.-- Adam Smith, Wealth of Nations
 Does anyone else think equal weighting of the 16 countries used despite different size and periods of data availability for the different countries could result in misleading results? The housing returns seemed surprisingly high to me.
 I think the "geometric mean" row weights by country-gdp.
 I see, I was going by the note under table 2 that said 'annual global returns in 16 countries, equal weighted'.I did find another reason that reported housing returns are too high though. This is their key input 'net rental yields [which] use rental income net of maintenance costs, ground rent, and other irrecoverable expenditure'That neglects to factor in that after say 50 years most houses need to be replaced or massively renovated. Factor in that expenditure and the real returns should be somewhere between 1 and 2 percent lower.
 Does the housing data include the cost of maintainence and additions to homes? I vageuly remember reading somewhere that if you include the total cost of himeownsrhip the returns aren’t very noteworthy.
 > globally, and across most countries, the weighted rate of return on capital was twice as high as the growth rate in the past 150 years.
 Does anyone know if they're publishing the database indicated in Section II? Would be interesting to try and visualize the data.
 Warren Buffet (a man who knows a thing or two about good returns) urges people to invest in themselves first.Seems like good advice.
 Hellz yeah! I invested a bunch of my time learning Android development and I made, like, thirty two hundred dollars.
 This is a fair point IMO."Don't do as succesful people say. Instead do as successful people do."
 Yeah but he also says that you're better off investing in productive assets, whereas this seems to suggest that, leaving outliers aside, investing in a house is a better investment than a company.
 > Yeah but he also says that you're better off investing in productive assets,I would regard anything that generates cash flow as a productive asset (and that's probably what Buffet's thinking, too). Unlike gold, for example, which just lies around.> this seems to suggest that, leaving outliers aside, investing in a house is a better investment than a company. A good investment is about risk as well as return, and it is not easy for the average Joe to build a well diversified real estate portfolio.
 On the other hand, the average Joe has much more control investing in real estate than investing in public companies. As a minority shareholder of a public company you are completely at the mercy of management. You just have to hope there's something left over for the minority shareholders after management is done enriching themselves. As a landlord you don't get to decide market rents, but you do get to decide who you rent to, how you maintain and improve the property, etc.
 As a minority shareholder, you still have voting rights. And it's much easier to build a diverse share portfolio to hedge against mismanagement from any particular company.And shares tend to not require maintenance unlike real estate. But unlike real estate, shares can disappear if many companies tank. But land you own won't ever disappear unless war or catastrophic natural disasters happen.
 > you still have voting rightsYour share of General Electric is 1 in 8.7 billion. For reference the odds of winning the Powerball jackpot is 1 in 292 million.And that's not even considering the companies where management issues themselves a different class of stock with 10x the voting rights.
 if you indeed own such a small amount, then yes, you vote is as proportionally impactful as your share. I don't see what's wrong.As for management giving themselves 10x voting rights - that doesn't just happen out of the blue. If a large portion of the shareholders decide that it's the right thing to do (by voting), then yes, it can happen. But i highly doubt that a majority shareholder would vote themselves out of control. It's quite likely that the founder is doing this to retain control despite offering to create more shares. The new buyers of said share knows this, and tacitly agree as indicated by their purchase of said share.
 Voting rights in corporations for the most part are a sham. I would love it to be different, but I just toss out those silly proxy voting things, just like they want me to. I don't know any of the people and they're all assholes and the the issue they vote on are either esoteric or some kind of asinine corporate virtue signaling bs.Real estate sucks. Well, being a landlord sucks. Land can drop in value, sometimes remarkably--look at Detroit, Northern Indiana, Baltimore. Lots of places.
 Also, one is naturally short real estate (as one needs to live somewhere), so maybe buy one house to be flat, and then distribute remaining savings across other investments.
 I would consider buying a house being long only if they bought the house cash only. And it has a negative carry (maintenance costs/tax). Probably better off being long a REIT and renting if you wanna play the investment game with housing at this point. Most people are leveraged long with that negative carry (plus interest rate payments), and on the hook for the downside risk. At this point in time, I prefer to rent somewhere cheap (at least until global housing prices comeback down from low earth orbit and wipe out most of the leveraged long negative carries like a dinosaur extinction event), and be long equity volatility and short corporate bonds.
 Not many other assets give you direct bank 20:1 leveraged loans to buy them. And they didn't before, you can only really introduce that dynamic one time.
 This is good advice ... if you are a house.
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