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Comment by roenxi | Hacker News Reader

There is - humans have a finite horizon for their investments to pay back on for it to be useful to them in this lifetime and we have reason to believe it is, in practice, around 10-20 years.

In theory maybe we could have enough capital to get it arbitrarily high but that isn't remotely the situation we're in right now. Globally we have a couple of billion people who need more stuff and in the Western economies we are facing a concerning prosperity problem (the political situation seems to be flashing bright red lights at us and we're being out-competed by Asia). Nothing here is screaming excess capital. If anything we seem to have some serious capital misallocations playing out (my slogan for the month has been China seems to have built >1 US real economy in the time it took the US to build 0 new US economies - you can't tell me the US is efficiently allocating capital with results that bad).

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Can you explain your slogan more? What time frame are you talking about with respect to China and the US? If you benchmark say the 1940s, the US economy has expanded about 4.5 times, and the Chinese economy has increased about three US economies in that same frame.

Questions of capital allocation of course depend on what variables you consider available for change. To me it's not at all clear that there are excellent investment opportunities available in the West which are being overlooked

I look first and foremost at energy [0] and would typically measure from 1970 since that seems to be the last time we had a major change in economic regime [1]. Although admittedly the US has grown since the 70s, stagnation didn't set in until around the 2000s. So as far as sloganing it'd have to be sometime around then.

And I don't think the US is growing at all. The energy picture and GDP/M2 [2] both suggest it is treading water at best although the situation is hopefully a little better than those timeseries suggest since there should be some efficiencies from better tech.

But the political situation to me is the most telling. We shouldn't be seeing the sort of slow-motion collapse of the polity that we are in the US unless there was also serious slow-burn economic pressure.

EDIT I can't decide which follow up comment to respond to so I'll just put it here: The energy efficiency argument isn't really valid - improvements in energy efficiency tend to cause usage to increase; it is a textbook case of Jevons' paradox [3].

[0] https://ourworldindata.org/grapher/primary-energy-cons?tab=c...

[1] I have actual arguments, but I don't think it is controversial so https://wtfhappenedin1971.com/ gets the point across.

[2] https://fred.stlouisfed.org/graph/?g=eTtE

[3] https://en.wikipedia.org/wiki/Jevons_paradox

Energy usage seems like a pretty bad indicator to start with, given vast efficiency improvements in nearly every aspect of industry?

As a contrary example, we might well see energy usage massively surge here in the short run due to generative AI. And at this point there’s not much evidence there’s actually much real GDP value creation yet in any of that at all.

Primary energy consumption would matter if energy efficiency did not exist. Generally speaking all sorts of industries use electricity way more efficiently in the US, which is why that number has not really budged; it is not really providing economic output to replace all our LEDs to inefficient incandescents, for example.

China's graph looks substantially different because it started from an extremely low base living standard.

I don't necessarily want to disagree with the you on your no growth claim. what I want to know is why you think that is evidence of for poor Capital allocation, and not evidence of poor opportunities for Capital allocation. It seems like the evidence supports both (no growth). The main difference is that the poor allocation hypothesis requires the additional assumption that investors are too stupid to figure it out or dont want to make a return.

The first result I get when I search for "us homeless tent city" is https://www.latimes.com/california/story/2024-08-03/as-san-f... . That looks to me like a population who could make use of a bit more allocated capital. I don't buy the idea that capitalism is done in any country that still has substantial homeless populations; there is obviously a need for more something.

And I don't think the investors are confused by the situation; I mean, I know about it. I'm an investor and I'm claiming the trend is so big I can spot it from more than a continent away. ~40% of the US economy is government spending and there is a central planning committee that was publicly committed to keeping interest rates at 0% up until about 2 years ago which, funnily enough, makes it damn hard for rational people to make their voices heard on where money should go. The structurally important thing since '07 is positioning to be in the path of government largess and to be near the front of the queue for bailouts when the losses are realised. That isn't an environment where efficient capital allocation is possible.

Since efficient capital allocation is probably impossible, I don't expect it to be happening. It doesn't seem to be happening either, there are obviously opportunities, there is a huge and increasingly upset political constituency in the US who are screaming that the current situation isn't working for them.

I just dont see the global capitalist conspiracy to not make money in what you are saying.

What is the investor ROI for a typical homeless person?

Are you claiming they hate homeless more than they like making money?

>Since efficient capital allocation is probably impossible, I don't expect it to be happening. It doesn't seem to be happening either, there are obviously opportunities, there is a huge and increasingly upset political constituency in the US who are screaming that the current situation isn't working for them.

I think you are conflating efficiency of allocation and the availability of opportunities and rules of the system. Investors are allocating as efficiently as they can given the investment opportunities available.

There are are huge policy problems preventing the better opportunities. Central planning of the interest rate and 40% government spending is not an allocation selected or determined by the market, it is a policy choice.

Markets operation within the rules and incentive established by policy. What you are calling market failure is policy failure.

I don't think there is a point of disagreement on any of those matters; I never said it was a market failure. I'm complaining about the US's persistent decades-long policy failures. It seems self-evident to me that if investors are being corralled into P/E ratios up near 30 it is policy driven. Left to their own devices investors don't choose to invest in things with 30-year payback periods, they invest in things with 15-20 year paybacks.

> What is the investor ROI for a typical homeless person?

High? They're in a terrible negotiating position so anyone who can get them a better job & lifestyle can probably extract usurious profits. Finding and mobilising pools of cheap labour is one of the more reliable paths to prosperity. Market-driven capitalism is a heartless, brutal and effective machine for taking people like that and pushing their living standards up.

I doubt it'd be easy to do, but California's housing market happens to be a very obvious example of capital allocation failure right on the doorstep of the likes of Google.

If I'm an investor with 1million, how do I make money by helping a homeless person in California given the current laws and policies?

There is no option to allocate the capital to make money. That's why I think the problem is lack of options,not allocation. Allocation failure means a failure of investors to select an available option.

There seems to be a disagreement on terminology here. Would you agree that a hypothetical extremely communist society is automatically allocating capital correctly? Because under the definition you seem to be arguing for there is only one investor (the state), that investor has exactly one option under existing regulatory policy (the state's choice [0]) and therefore cannot misallocate capital.

That seems to be a weird understanding of capital allocation to me and my follow up if I'm reading you right is how would you describe a failure of central planning? They have capital, they misallocate it and get terrible results relative to the free market. Assuming that isn't capital misallocaiton to you, what is it?

It is hard for me to see how you'd even have a concept of capital misallocation that isn't implicitly "relative to a free market". Otherwise it'd be extremely challenging to even detect it even if capital was being deployed in a horribly stupid way.

[0] Noting that there are only administrative differences between the tax office taking $1 and spending it on something vs. the legislature telling someone that they have to spend $1 on the thing and that line of logic means that the state could implement its policies by directing investors.

>Would you agree that a hypothetical extremely communist society is automatically allocating capital correctly?

no, and I dont see how that follows at all. I think the opposite is more likely true due to the lack of markets. End stage communism is stateless (but that is a tangent).

If you have a single investor/state and law says exactly where the money goes, I would say that low capital efficiency is a policy failure, not a failure of the market to allocate.

I think this comes down to confusion of what a market is. A market has private buyers and sellers making exchange.

I grant that you could have a poor capital allocation by a government. I think the part that I vehemently disagree with is calling that a "market misallocation".

I suppose we're done here then, we don't agree on the terminology and there isn't much to be done.

It isn't important but if you can point at large community who uses capital allocation in that sense I'd be interested to know it. It seems like a weird usage to me because it would seem to imply that a fully (or even heavily) planned economy either doesn't have capital or don't allocate it; both flawed implications.

> I think the part that I vehemently disagree with is calling that a "market misallocation".

I didn't. I've been quite specifically talking about US government policy causing capital misallocations. The US bankers are generally very keen on the idea of getting richer and the US wouldn't have the sort of real metric stagnation it has if the policy settings weren't visibly stupid. Indeed, even then the market has attempted to reset the situation multiple times (politically interesting examples are '07, introducing Bitcoin and SVB's failure) and generally been stymied by active interventions to keep incompetent investors wealthy.

OK, I have been operating under the assumption that the capital allocation under debate was with respect to private markets because we started with the pricing of publicly traded stock pricing. Looking through the sequencing, I do note that you didn't specifically call out markets in your comments, and it was others invoking the idea of market failure of some sort.

It seems like I do agree with your assessment of government policy, but I still dont get where you were going with the communist thing.

Why do you expect efficient capital allocation? Market economic theory predicts efficient capital allocation but only under the assumption of relatively even distributed buying power. On a national level that assumption might or might not hold, but globally it just doesn't.

I don't think either of the things you said are true. Economists have understood that markets are not perfectly efficient for more than 100 years, even Friedman. Similarly, buying power is not a prerequisite for the efficiency they do have. I have no idea where you got those ideas.

> Economists have understood that markets are not perfectly efficient for more than 100 years

Of course. Never said they don't? What I'm saying is not new it's perfectly ordinary.

Widely distributed buying power/equality is a prerequisite for market efficiency. Proof: If all buying power is concentrated in a fraction of the population, the market will not consider the needs of the rest, regardless of how cheap their needs would be to satisfy and how grave their needs are. That's not efficient.

In practice there's an empirical question how much equality you need to have a market that's efficient enough.

What does the needs of the rest have to do with market efficiency?

They could all be die and it might not impact market efficiency. Market efficiency is a technical term, and I think you are using it for something completely different. It has nothing to do with equality, or satisfying the masses.

In my book market efficiency is utility produced / utility that could have been produced.

What is your definition?

I agree with that definition, but I think a big part of it comes down to two factors.

1) What you can change in the "could have" hypothetical alternative. Are the laws different in the hypothetical? Is human nature different? The way I see it, criticism of market efficiency is measured using the existing rules. If you must change the laws and policy, in your hypothetical, that means your Policy is what is driving the inefficiency.

2) How you measure utility. Are you measuring dollars changing hands? are you measuring national GDP? Are you measuring some sort of national happiness index?

It sounds like Im speaking in financial terms, and you are measuring utility using more on the happiness scale

What is changed in the "could have" scenario is how capital is allocated. For example, the public sector could allocate a larger fraction of the capital than they do currently, maybe by spending more to prevent homelessness and build infrastructure. This would require changing policy, and you are right that I think the policy of letting the market determine such a large fraction of our capital allocations is driving the inefficiency.

It's a "know it when I see it" kind of utility measurement. Probably closer to a "happiness index" than GDP. It's fuzzy but I don't think that makes it meaningless. I think most people have a similar idea of "better utility" (not exactly the same, similar). For example, what's most utility: New boat for Bezos or dental care for 1000 kids?

In any case, some kind of utility measure is necessary to determine when markets are efficient or not. If the measure excludes people just because they have limited means then few would call that a good utility measure. If the utility measure doesn't exclude people with limited means then markets can only be efficient when means are relatively well distributed.

Can you point me to any discussion of it being 10 to 20 years?

I'd like to read more about that because it feels like that could provide insight into politics/policy more broadly. For example, if someone came up with a solution for the housing crisis but it would take more than 10 to 20 years, would people view that as effectively no solution at all?

> if someone came up with a solution for the housing crisis but it would take more than 10 to 20 years, would people view that as effectively no solution at all?

If it made things worse short term, absolutely! Rent control is the opposite, it makes things worse long term but better short term, and people love to vote for that, so we already know the answer.

> Rent control is the opposite, it makes things worse long term but better short term...

In general, rent control regulation is SUPER, SUPER BAD and absolutely will turn everything to shit.

However, local conditions and the particulars of what is being called rent control matter A LOT.

The only rent control laws I'm intimately familiar with are those in San Francisco. I'm also somewhat familiar with the history that caused such regulations to be enacted in major cities in the state.

About the regs in SF:

* The rent control regulation in SF is more-correctly called "rent stabilization". Once all original tenants (termed "master tenants" in the regs) on the lease move out, the covered unit can be rented at any price. Until all master tenants move out, the base rent for the unit may only be increased by 60% of the Urban CPI in the Bay Area. Many other costs may be passed through at 100%.

* SF's Rent Stabilization only applies to residential buildings built BEFORE 1979. [0] Construction NEWER THAN 1979 IS NOT COVERED by Rent Stabilization, unless the owner of the building chooses to be covered by it. [1] Commercial non-residential buildings are NOT COVERED by SF's Rent Stabilization.

* It is super duper not permitted for a particular human to be a "master tenant" in more than one apartment. If you do this, are discovered, and someone complains to the Rent Board, you will quickly find yourself paying whatever the landlord cares to charge for all of those apartments.

About the history of Rent Control in California:

Two words: "Proposition Thirteen".

Wind back to the mid-to-late 1970s in California. Rents are spiraling upwards, out of control, and have been for years. Folks are getting extremely worried about being able to pay the rent. Proposition 13 is proposed as a solution... landlords SWEAR that they can't do anything BUT increase the rents because property valuations are SOARING. If only Californians could vote to limit annual property tax increases to no more than 2% per year (unless that property changes hands... except for a "few" exceptions), then landlords would finally be able to keep rents in control. Mix those promises in with a few commercials and full-page ads about "How will granny keep her house if she can't pay the tax man??" and Prop 13 passes.

Well, some time passes and rents keep spiraling out of control. Turns out the landlords were full of shit. So, to match landlords' new, shiny "Property Tax Control", major cities enacted various Rent Control and Rent stabilization ordinances.

Two things I super want to point out here: Prop 13 applies to ALL property in the state, residential, non-residential, commercial, and non-commercial built at ANY time. SF's Rent Stabilization regs ONLY apply to residential property that's being rented to tenants, and ONLY buildings built before 1979. SF's rent control regs are absolutely NOT why SF has been failing and continues to utterly fail to build even a tiny fraction of the housing required to meet local demand.

[0] Nor does it apply to buildings being used as single-family homes, nor to many-to-most condominiums.

[1] It's my understanding that this has happened exactly once. Trinity Place is a very large apartment complex. In order to build it, a much smaller motel-style pre-1979 apartment building with like ten or twenty apartments needed to be demolished. The owner of the land and the building reached an agreement with the city to forever subject ten or twenty units in his new building to the Rent Stabilization regs so as to provide the residents of the motel-style building (and any and all future tenants of those units) with 1:1 replacements for the Rent Stabilized apartments. All other apartments in the big-ass complex are "market rate" apartments.

> Well, some time passes and rents keep spiraling out of control. Turns out the landlords were full of shit. So, to match landlords' new, shiny "Property Tax Control", major cities enacted various Rent Control and Rent stabilization ordinances.

Prop 13 wasn't driven by landlords, it was driven by higher housing prices forcing out retirees. The two aren't really connected. Prop 13, enacted in 1978, actually set property value at 1976 levels, so property taxes didn't just stop going up a lot, they went down.

And the timing doesn't really work out. Prop 13 was passed in 1978 and rent control was enacted in SF in 1979. If anything, Prop 13 helped drive rent control as landlord's no longer could claim that property tax increases would bankrupt them.

> ...it was driven by higher housing prices forcing out retirees.

That's part of it, yes.

As I mentioned:

> Mix those promises in with a few commercials and full-page ads about "How will granny keep her house if she can't pay the tax man??" and Prop 13 passes.

> And the timing doesn't really work out. Prop 13 was passed in 1978 and rent control was enacted in SF in 1979.

What? A ~year is very reasonable amount of time to discover whether landlords' promises of reining in rents because of the property-tax-payment-control they just got gifted were genuine. That's not something you're going to find out in a month or a quarter.

Read the news papers from that time. They were in parallel.

The legislature doesn’t move that fast.

How would you view it if you were 30 years old, unable to buy a house, and if it was affecting you directly ?

Would you rationnaly evaluate the situation and say 'yeah, that's fine, it will be better for my kids' or rather feel a very justified anger that bad politics effectively cost you ... the ability to buy a place to live during your, checking notes, only life you have on this earth ?

Why am I entitled to buy a house I isn’t understand

A big part of the social contract behind society is something like "the working class agrees to respect the private property rights of the capital class, in exchange society ensures that they are able to maintain a decent standard of living". Many people consider owning a home part of "a decent standard of living" both due to the economic stability it provides and due to the autonomy it provides.

Another way to look at it is that a home is the primary large piece of property that most people own. Therefore, owning a home gives people a stake in a capitalist society.

What both of these are getting at is that if common people are unable to buy a house then they are less likely to feel obligated to support the rules that society is built upon.

I wonder how Japan's 46% Buddhist population, which believes in reincarnation, checks religious texts, meaning they get another life on Earth, factors in here.

This seems to be a seperate issue than ROI.

If you need can afford a house but it take 30 years for a return, then most people are still happy.

Inversely, If it is a 10 year ROI, but you cant afford it, they are unhappy.

If you look at the US housing market of the last decade or two, the issue is closer to the 2nd case than the first. Base price is out of reach for most, but those that get have a excellent returns.

I was extremely jealous when I couldn't by a first house but my friend who could pay 1 million did so, only to sell it 2 years later for 2 million. He did it again and now his current house is in the 6-8 million range, and I'm just getting in the market.

Not really discussion, but if you look at long-run low-risk investments like bonds, people invest in things that pay back in <50 years. As the risk profile increases and you get to high-risk investments like stock that tend to pay back in <25 years. A company like Google is 25 years old, expecting it to even exist in another 25 years involves a certain level of optimism - companies have lifespans just like everything else. But ultimately any preference is implied, it isn't the sort of thing people can be surveyed on (revealed economic preferences and all that).

> For example, if someone came up with a solution for the housing crisis but it would take more than 10 to 20 years, would people view that as effectively no solution at all?

That does sound like it'd be a politically hard sell. People generally expect governments to implement their solutions inside a decade. Not an entirely rational expectation, but nonetheless.

To flip the burden of proof, 30 year ROIs imply that people are routinely sitting down and having serious conversations where they expect to make their money back over 30 years assuming literally nothing goes wrong. Any bankruptcies and they are in the negatives. Any stock price drops and they are probably in the negatives. If you believe that is the norm where people are comfortable, I hope to see you in the conversation next time people on HN attack stock market investors for being too focused on the next quarter!

> we seem to have some serious capital misallocations

People are too zealous about the virtues of market economy to see plain truths staring them in the face. The China example is excellent. There's no lack of investment opportunities with huge roi (industrializing, infrastructure, etc parts of the world not having western living standards) but the market is unable to prioritize them above hype and incremental improvements for already well off populations.

I dont think there is a conspiracy where all capitalists refuse obvious profits that can be made in the 3rd world, and not one of them is greedy enough to go for it.

Instead, I think there are some very real barriers to returns in these locations making them much less profitable and worse investments.

Yes, there are barriers that can not be overcome by rational actors in market. That's a systemic problem.

It's not a conspiracy, just bad economics.

Economics is just economics.

It is bad policy which leads to bad market incentives and undesirable equilibrium.

> The China example is excellent

How to mismanage your real estate sectors even to a higher extent than Western countries were ever able to?

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