STREET DOGS

From an NBER paper published in December by Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor, The rate of return on everything:

This paper answers fundamental questions that have preoccupied modern economic thought since the 18th century. What is the aggregate real rate of return in the economy? Is it higher than the growth rate of the economy and, if so, by how much? Is there a tendency for returns to fall in the long run? Which particular assets have the highest long-run returns? We answer these questions on the basis of a new and comprehensive data set for all major asset classes, including — for the first time — total returns to the largest, but oft-ignored, component of household wealth, housing. The annual data on total returns for equity, housing, bonds, and bills cover 16 advanced economies from 1870 to 2015, and our new evidence reveals many insights and puzzles, among others:

Risky assets such as equities and residential real estate average about 7% gain a year in real terms. Housing outperformed equity before the First World War, vice versa after the second. In any case it is a puzzle that housing returns are less volatile but about at the same level as equity returns over a broader time span;

Equity and housing gains have a low covariance [buy both!];

Equity returns across countries have become increasingly correlated, housing returns not;

The return on real safe assets is much more volatile than you might think; The equity premium is volatile; The authors find support for Piketty’s r > g [meaning that the rate of return on capital is generally higher than the rate of economic growth], except near periods of war. Furthermore, the gap between r and g does not seem to be correlated with the growth rate of the economy.