How People *Don't* Get Rich Now
Paul Graham observes that in 1982, when Forbes started publishing a list of the richest Americans, the main sources of new wealth were oil and real estate development, and today the main source of new wealth is venture capital-backed technology companies.
A list of the richest people at any point in time reflects shifts in technology and the creative destruction that ensues. New technology enables people to build new productive assets, and those who capitalize get rich.
Today, the list is packed with fortunes directly and indirectly derived from semiconductors, but in 1982, the list was made up of fortunes directly and indirectly derived from the automobile, which was still in the process of reshaping the country.
Prominent on the 1982 list are the heirs to Ford and du Pont (which helped build and supply General Motors), and the Rockefellers, heirs to Standard Oil. Also on the list were a lot of Texas oilmen who temporarily benefited from the OPEC-induced oil crisis at the time, and whose fortunes would collapse with OPEC a few years later.
The larger impact of the automobile on the 1982 list can be seen in those who rebuilt the country around its possibilities. The list contains a lot of real estate developers building along the new freeways; Eddie DeBartolo, Alfred Taubman, and Melvin Simon, who built shopping malls, and Sam Walton and Ray Kroc, who built Wal-Mart and McDonalds, respectively.
There are a lot of hotel and office developers as well. There are the Tisches, who built hotels and apartments, the Pritzkers, who built Hyatt, and you also have the people who built Hilton and Marriott and office parks and New York skyscrapers.
Most of all, though, you have a lot of residential real estate developers on the 1982 list. Sam LeFrak and Fred Trump, who built middle income housing in Brooklyn and Queens, and William Levitt of Levittown fame, all feature. So too do real estate developers in other parts of the country; Will Carruth and Trammell Crow of Dallas, Miles Collier of Florida, Joan Irvine and Donald Bren of Orange County, and Sydney Taper of Los Angeles are just a small sampling of those on the list who built fortunes building residential housing, much of it made possible by the car. The richest person on the 1982 list is a shipping magnate who also happens to have built Westlake Village, a city in Southern California, on the side.1
It is natural that new technology will render some old assets obsolete. There are a lot of publishing fortunes on the 1982 list - the fortunes represented include several local newspaper empires as well as the National Enquirer, Penthouse, Forbes, Reader’s Digest, TV Guide, and Conde Nast, today all largely swept away by the internet.
It is not clear, however, that we should celebrate the apparent demise of real estate development as a major source of new wealth, as no technology has come along to make it cheap and plentiful. If housing is a solved problem, we should expect it to be reflected in lower prices, which has not been the recent trend.
Back in 1982, housing prices were in check; here we can see that housing prices grew significantly less than the overall consumer price index between 1950 and 1982:
The relationship flips after that; since 1983, despite lower population growth, housing prices have grown much faster than the broader consumption basket:
These graphs understate the gap because housing is such a major component of the CPI itself. The Bureau of Labor Statistics, keeper of the Consumer Price Index, says that shelter grew from 22% of the CPI in 1984 to 33% of the CPI by 2015, as it grew to consume more of the household budgets it is constructed to reflect.
New residential construction has declined over the years, and today housing starts relative to the total population stand at a third of the 1959 level:
As we discussed previously, the reason we have low investment in housing today despite high prices that cry out for more investment, is the government regulation that was passed a generation ago that restricts it, largely at the behest of homeowners seeking to create scarcity and capture a bigger piece of the economic pie. For example, San Francisco passed a major zoning act to restrict new building in 1978.
New technology can be characterized as the main weapon in society’s constant war against scarcity. As Buckminster Fuller said, “technology lets you do more and more with less and less until eventually you can do everything with nothing”. We spend billions of man-hours and trillions of dollars every year developing new technology that will later grow the economic pie for everybody.
How perverse it is, then, that today we enshrine artificial scarcity as a matter of public policy. Whatever our entrepreneurs and scientists toil to give us with one hand, we conspire to squander through regulatory capture with the other. Whatever technology that is developed to grow the economic pie can be counteracted by a special interest group willing to shrink it, if in the process they can grab a larger slice for themselves.
Marc Andreessen wrote last year that “It’s Time to Build”, in which he correctly diagnoses the issue:
The problem is desire. We need to *want* these things. The problem is inertia. We need to want these things more than we want to prevent these things. The problem is regulatory capture. We need to want new companies to build these things, even if incumbents don’t like it, even if only to force the incumbents to build these things. And the problem is will. We need to build these things.
Paul Graham dismisses the rich oilmen and real estate developers of 1982 as mostly mere dealmakers, not real builders like the technology entrepreneurs of today. He is correct that technology entrepreneurs better expand the frontier of how wealthy society could potentially be, but as a society we have regulated ourselves into being so far inside the potential frontier that it almost doesn’t matter.
The entrepreneurs of today build what they can within current legal and regulatory bounds, but it is a fraction of what was possible back then. It’s much easier to build a new software application in San Francisco than to construct a new apartment building there, even when there is much more demand for the latter.
The list from 1982 features the family behind the Bechtel Corporation, which at the time was known for building the Hoover Dam, BART and dozens of nuclear power plants, and would soon begin work on the Channel Tunnel. The largest active builder on the current list is Stephen Ross of Related Cos., whose signature new project is the heavily criticized Hudson Yards in New York, a tax incentive-fueled luxury mixed-use development that has been generously described as “hollow” and “antiseptic”. Nothing better describes the shift over the last forty years.
Technology is wonderful, but it has its limits. Bryan Caplan notes that an influential paper estimates the loss in GDP from 1964 to 2009 due to housing regulation in major cities to be 36%. On current levels of GDP, that would be $7 trillion per year lost simply because people are stuck in low productivity cities due to housing restrictions. As we have seen with the pandemic, we have the technology to solve many of our problems, but we have collectively chosen to withhold it.
Lost in the debate over whether higher capital gains taxes might discourage building of new companies is that we already have punitive taxes and regulations that effectively ban the building of new housing in the places that desperately need it. Households spend a third of their budget on housing, and all we have to do as a society to lighten the load is to deregulate housing development. Housing deregulation will almost certainly have a larger impact on the standard living for the average American than any tax cut for business.
It feels like it was as common back then for an ambitious young person to start developing real estate as it is to build a SaaS company today. Charlie Munger, in the 1950s, became a millionaire by developing apartments in Pasadena while starting a major law firm; it was only later that he became a famous investor.