The Rate of Return on Everything, 1870–2015

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Abstract:

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 dataset for all major asset classes, including 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 new findings and puzzles.

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Conclusion:

The returns to risky assets and risk premiums have been high and stable over the past 150 years. Substantial diversification opportunities exist between risky asset classes, and across countries. Arguably the most surprising result of our study is that long run returns on housing and equity look remarkably similar. Yet while returns are comparable, residential real estate is less volatile on a national level, opening up new and interesting risk premium puzzles.

Our research speaks directly to the relationship between r, the rate of return on wealth, and g, the growth rate of the economy, that figures prominently in the current debate on inequality. One robust finding in this paper is that r » g: 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.

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