Should-Read: Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, Alan Taylor: The rate of return on everything

Should-Read: There are #actually two different issues that are labelled “r > g”. The first is the sustainability of government debt: when the safe interest rate at which the government borrows exceeds the growth rate of the economy, government deficits heavily burden the future—as was the case before the South African gold rush of the 1890s, during the deflation of the 1930s, and from the Volcker Disinflation to the coming of the Global Savings Glut. In other times, a (well-managed and not imprudent) government debt serves as a national blessing—a source of safety for investors, and a source of financing for the government at negative overall taxpayer utility cost. The second issue is the Piketty issue: is the economy tending on its own to increase the salience of inherited wealth because the risky rate of return on passive investments exceeds the economy’s growth rate—as has been the case save in periods of war, revolution, and the thirty glorious post-World War II years? But great work by: Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, Alan Taylor: The rate of return on everything: “Returns of major asset classes in the advanced economies over the last 150 years…

…Perhaps the most surprising finding is that total returns on residential real estate are on a par with the returns to equities–on average, about 7% per annum–but they are far less volatile…. The mystery deepens… equity returns have become increasingly correlated across countries over time, housing returns have remained globally uncorrelated…. Real returns on safe assets have been very volatile over the long run, surprisingly, more so than risky returns…. The puzzle may well be why the safe rate was so high in the mid-1980s, rather than why it has declined so much since then. Real safe returns have been low on average, in the 1%–3% range for peacetime periods. Although this combination of low returns and high volatility has offered a poor risk-return trade-off to investors, it has been a boon to government finances….

The bursts of the risk premium in the wartime and interwar years were mostly a phenomenon of collapsing safe rates rather than dramatic increases in risky returns. In fact, the risky rate has often been smoother and more stable than safe rates, averaging about 6%–8% across all eras….

Piketty (2014) argued that if the return to capital exceeded the rate of economic growth, rentiers would accumulate wealth at a faster rate than incomes grow…. In fact “r >> g” for more countries, more years, and more dramatically than Piketty himself reported…. The only exceptions to “r>>g” happen in very special periods: the years in or right around wartime. In the pre-WW2 period, r minus g was on average 5% per annum (excluding WW1). As of today, this gap is still quite large–in the range of 3%–4%–and it narrowed to 2% during the 1970s oil crises, before widening in the years leading up to the Global Crisis…. The “r minus g” gap does not fluctuate systematically with the growth rate of the economy…

Jorda_et_al__Risky_Returns Jorda_et_al__Safe_Rates Jorda_et_al__Risk_Premium Jorda_et_al__Piketty


Brad DeLong
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