Who wants to be a millionaire?


My landlord and her husband moved to the United States from the former Yugoslavia a few decades ago. They bought an apartment building in north Brooklyn, back when buying a building (not just an apartment unit) in Brooklyn was something that an ordinary middle-class couple could afford. When I first met her after signing the lease, she told me that she preferred to get a text each month confirming I had paid the rent. She scrolled through her phone indiscreetly, and as I glanced in her direction, I saw message after message from tenants with pictures of checks. I later learned that the building has 10 units, and each rents for, on average, $2000/month. She collects roughly $20000/month, or $240000/year, simply in passive income.

The building is old and rickety. There is a skylight above my toilet that drips slightly when it rains hard; roaches in the roof that occasionally deign to visit my floor; a mouse that semiannually pokes its head out of the hole where the radiator attaches to the wall; a kitchen sink that drains more and more slowly each month; and a bedroom power outlet that recently burned out after powering my AC unit during the height of summer. (In New York, you pay for location first and everything else second.) I’ve told my landlord about the roaches and mice and sink and outlet. She gave me a can of bleach to pour down the sink. She sent her son to fix the outlet (who, by the way, did not know where the breaker box was and also did not seem to care; he somehow avoided getting electrocuted). And she provided traps for the mice and poison for the roaches. But she has never expressed any interest in fixing the underlying problems with the building: plugging the holes and replacing the wiring and tearing down the old walls, a la Reagan, to build grander walls in their place, a la Trump. The only time I’ve seen her doing work on the building is when she repainted the railing outside, which I suppose is emblematic of the issue.

I have, and will continue to, come across as incredibly elitist, but that’s ok, because I am unapologetically an elitist. My landlord is not a very bright woman and does not do much to deserve her quarter million. Well after vaccines were available to everyone in New York, we had the following conversation:

Her: Are you vaccinated?

Me: Yeah, I got both doses in April, how about you?

Her: No, I haven’t gotten it. [lowers voice]. My cousin died of it, blood clots, from the Johnson and Johnson one.

Me: [thinking that only happened in young women] How old was your cousin?

Her: 69

Me: [struggling not to laugh] Alright

She also seems to forget what she’s doing or why she is at my apartment door, and the only thing she regularly remembers is to ask me whether the rent will be on time this month. (I have it on AutoPay, which also seems to be beyond her grasp.) I feel somewhat bad, in that I am probably dealing with a woman in the early throes of dementia, but, at the same time, is it too much to ask that a person to whom I pay $25000/year reinvest some of that in her own damn building?

I get irrationally angry when I even think about landlords. Here is Piketty’s discussion of the rate of return on capital, r, in Capital in the Twenty-First Century:

For the sake of concreteness, let us note, too, that the average rate of return on land in rural societies is typically on the order of 4-5%. In the novels of Jane Austen and Honore de Balzac, the fact that land (like government bonds) yields roughly 5% of the amount of capital invested (or, equivalently, that the value of capital corresponds to roughly twenty years of annual rent) is so taken for granted that it often goes unmentioned. Contemporary readers were well aware that it took capital on the order of 1 million francs to produce an annual rent of 50,000 francs. For nineteenth-century novelists and their readers, the relation between capital and annual rent was self-evident, and the two measuring scales were used interchangeably, as if rent and capital were synonymous, or perfect equivalents in two different languages.

Now, at the beginning of the twenty-first century, we find roughly the same return on real estate, 4-5 percent, sometimes a little less, especially when prices have risen rapidly without dragging rents upward at the same rate. For example, in 2010, a large apartment in Paris, valued at 1 million euros, typically rents for slightly more than 2500 euros per month, or an annual rent of 30,000 euros which corresponds to a return on capital of only 3 percent per year from the landlord’s point of view. Such a rent is nevertheless quite high for a tenant living solely on income from labor (one hopes he or she is paid well) while it represents a significant income for the landlord. The bad news (or good news, depending on your point of view) is that it has always been like this.

Piketty, of course, does not necessarily view this state of affairs as desirable or moral, but simply as natural and historical. It has always been like this. If you are an individual who owns property, you collect some percentage of that property’s value each year. The same for stocks (returns being somewhat higher), and bonds (returns being somewhat lower). The overall story is consistent regardless of the type of capital. Wealth begets wealth; money makes more of itself. Those who start with more will earn more, through no virtue of their own, and those who start with more than enough will earn so much that they will never have to work. Indeed, Piketty devotes his nearly 800 page tome to exploring the consequences of the seeming law that capital has a fixed rate of return. He writes,

The inequality r>g, combined with the inequality of returns on capital as a function of initial wealth, can lead to excessive and lasting concentration of capital: no matter how justified inequalities of wealth may be initially, fortunes can grow and perpetuate themselves beyond all reasonable limits and beyond any possible rational justification in terms of social utility.

Entrepreneurs thus tend to turn into rentiers, not only with the passing of generations but even within a single lifetime, especially as the life expectancy increases: a person who has had good ideas at the age of forty will not necessarily still be having them at ninety, nor are his children sure to have any. Yet the wealth remains, in some cases multiplied by more than tenfold in twenty years, as in the case of Bill Gates or Liliane Bettencourt.

Our economy is not designed to reward the skilled or hard-working or those with “good ideas”. The concept of a meritocracy in commerce is, and always has been, a lie. My landlord had absolutely no idea that she would become a millionaire, several times over, when she bought her building over 30 years ago. (If one uses Piketty’s figure of 5%, then, assuming a yearly rent of $240,000, the building is valued at nearly $5 million). She could not conceive of the renaissance of New York after the debt crisis of the 70s and crime wave of the 80s and 90s; the waves of gentrification spilling over the East River into Brooklyn; the massive influx of Americans and immigrants to make their fortunes in the city, the ones who formed the pool of the prospective renters that drove skyward the demand for housing. Nor could she have anticipated the government policies that redounded to her benefit. For instance, the money that taxpayers contributed to fixing the East River tunnel after the flooding caused by Hurricane Sandy, without which living on the L would not be nearly as desirable. Or, the woeful lack of new housing in a city that gained over 600,000 people over the last decade. (“Despite perceptions that New York City experienced a building boom in recent years, New York City issued fewer permits for new housing units this decade (206,000) than in the 2000s. In fact, the annualized growth rate of the city’s housing stock has remained relatively constant since the 1990s despite accelerating job and population growth. In addition, New York City issued fewer housing unit permits on a per capita basis than nearly every other large city.”)

This is, I think, an underappreciated but by no means novel point. The value of capital is, to a large extent, societally determined. The Atlantic wrote an article about the ideas of political economist Henry George, who advocated for a land tax nearly 150 years ago:

Unlike other assets, George observed in his 1879 book Progress and Poverty, land—separate from any buildings constructed on it—generates wealth not through individual effort or ingenuity, but instead as a result of societal change. Communities engineered developments that prompted economic growth—building up commercial districts, for instance, or constructing railroads—and already well-off landowners reaped the benefits in the form of rising land values. George prescribed the land-value tax as a way of putting some of that collectively produced wealth back toward the commonweal. His supporters, often referred to as “Single Taxers,” advocated eliminating all other taxes and raising revenue solely through this tax, which they viewed as the most equitable and just way of funding the state.

The situation we have now, in large swathes of America, is that landowners are propping up the values of their homes by denying everyone else the opportunity to build new homes. They have commandeered the political process to enrich themselves: they understand that the laws of supply and demand can turn against them as easily as they have, so far, worked for them, and they have exercised their mighty political power to deny that from happening. This is wealth creation, to be sure, but not of the same kind as in the stories capitalists like to tell.

But where George was wrong, I think, is in drawing a special distinction between land and “other assets”. It is not just in housing that obscene fortunes are made “not through individual effort or ingenuity”.

I have a friend who took a job at Square in late 2019, a few months before the pandemic. (Square is a company that provides a point of sale system for processing credit card payments for small businesses, and, like all companies in this space, takes a percentage fee on each transaction. They are also known for their money transfer app, Cash app.) He got the interview, in part, because the hiring manager was someone he knew personally. Square was a publicly traded company at that time, and his offer included an RSU (stock) grant of some fraction of his salary. In the intervening period, Square’s stock has more than quadrupled (from ~$60-$65/share to $270/share, at the time of this writing). His annual RSU compensation now exceeds his salary, probably by at least 100%. He told me, somewhat sheepishly, that it does not make sense for him to change jobs at this point, as he is locked in by his “golden handcuffs”. And, to his credit, he admits that he was incredibly lucky. He did not have any premonition of the pandemic or the low interest rates that have propped up the stock market. He did not foresee that the tech sector would remain relatively unscathed while other parts of the economy cratered, or that investors would pile into the NASDAQ while the thousands were dying. I genuinely like him, and I view him as at least slightly more deserving of his millions than my landlord. But still: is this any reasonable or rational way to allocate the proceeds of growth? If I happen to pick the right area of the country to buy a house in, or the right sector of the economy to get a job in; if I am rich enough or in rarefied enough air that I have the money to invest, or be compensated in capital, not just salary; if I am surrounded by enough NIMBYs, or bolstered by a well-timed government intervention — then I (and, by Piketty’s iron law, all of my descendants) will be rewarded with outlandish riches that I will be somewhat ashamed even to mention? And if I do not possess the LinkedIn network, family inheritance, fancy education, or sheer dumb luck to land in Brooklyn instead of Boise — then I will be forever behind?


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s