Don’t fear perpetuities

In The magic of compound interest?, Tyler Cowen discusses his thoughts on perpetual trusts:

“The real rate of compound interest may or may not in the long run exceed the rate of economic growth, so the size of the trust could be enormous in the 29th century but still small or mid-sized relative to the size of the economy.

The problem becomes especially acute when existential or catastrophic risk is significant. Long-term savers then earn a higher risk premium and the compounding is more intense. It is possible that the rate of return on these investments — if the world survives — is quite high relative to the rate of economic growth. In effect, existential risk means the long-term savers will rule the world, if there is a world to rule of course.”

This came up in regards to a article on perpetuities in Lapham’s Quarterly, (an interesting publication I’ve been considering subscribing to)  Trust Issues by Paul Collins. One omission in the article I found glaring was any mention of the Catholic church. The Catholic church is one of the world’s oldest continually operating and successful institutions,   and it was also a popular institution to whom to donate assets after death. This has often led to massive accumulation of wealth by the church, and  revolution and theft have been the primary mechanisms for undoing that relentless accrual.

There are two reasons I’m not particularly afraid of  perpetuities. The first is that it isn’t remotely clear that the long run real rate of return  is positive. The last few centuries have been extremely productive and peaceful, but chaos and disorder are always possible, and the future may be full of serious risk of expropriation, disorder, and general property rights abridgement. If we achieve the singularity, property rights may be unrespected or ignored, and  perpetuities will be nullified. Even democracies have their moments of madness and expropriation. But that’s just brainstorming. The historical record isn’t particularly kind either. RARE DISASTERS AND ASSET MARKETS IN THE TWENTIETH CENTURY by Barro shows that even in the relatively prosperous and peaceful 20th century, there were lots of ways to lose your shirt in safe investments. Others have pointed out that an ounce of gold in ancient Rome would buy one nice, handmade garment, just as it does today, suggesting that it is difficult to successively move large amounts through long distances of time.

Also, I’m not convinced that the orginizations that run perpetuities are trustworthy enough to leave their spoils untouched when they get large. For example, the Catholic church notoriously used its endowment on lavish art and construction. And agency problems are not ancient history. I mentioned the other day  a piece (Outsmarting Albert Barnes: In assembling his art collection, Barnes outsmarted the world. In crafting his foundation, Barnes outsmarted himself. By James Panero) about how the trustees, outsiders and poor design to did in a perpetual foundation when the value of its spoils became to large.  It was only a hundred years old, worth a few tens of billions of dollars, and the process done with a full legal veneer. A thousand years and a trillion dollars of assets might encourage even greater shenanigans.

Therefore, I’m not worried about perpetuities.  I say we let them happen, and recognize that when they get large it won’t matter. I also think that focusing on the growing power of limited controllers of capital is actually misleading in several ways. First, if you have a trillion dollars to invest, you are going to have a very hard time being picky about what you invest in. By necessity you are going to need to passive and index investing, because you cannot maneuver money like that quickly.   A quick survey of China’s foreign reserve fund, the social security trust fund, the Pimco Total return fund, and the Vanguard Magellan fund shows you how hard it is to do something active with that much money.   As Scott Sumner has pointed out, the proper measure of inequality is not wealth  but consumption. Allowing the vanity of  perpetuities reduces current consumption among the rich who found them, and ensures that their decedents don’t get it either.  Resources invested are not consumed.  Instead that capital is put to work, which raises worker productivity and therefore wages.  In that sense, perpetuities are a very specific sort of death / estate tax, with all the work disincentive and anti-capital formation / lower productivity growth associated with those taxes.

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