The concept of "passive income" is almost a scissor concept. Or maybe only if you couple it with the categorical imperitive.
On the one hand, it's so obviously true that it would be great to have passive income. Draw the salary you're drawing now, with some growth, and not have to work.
On the other hand, if everyone had access to this capability then society and civilization would grind to a halt. People make things; if people don't make things, then we don't eat, we don't drink. If the goal is to have a system where everyone can have passive income, then achieving that goal is the end of the world.
The categorical imperative roughly says that something is moral only if its universal adoption would benefit society. So there is a break there. The idea of passive income is isomorphic to rent seeking, which we generally agree is a bad thing.
"passive income", in it's original iteration, wasn't the idea that you could make money by doing nothing. The idea was that you made something or did something that you were uniquely able to make or do, and then the result of your labour would make money for you while you put in minimal continued effort.
the version of passive income where you don't do anything productive at all, ever, and just put up some initial capital in exchange for even more money back, is always a scam. some people might come out ahead sometimes, but more people will lose than win.
> the version of passive income where you don't do anything productive at all, ever, and just put up some initial capital in exchange for even more money back, is always a scam
No, that's just investing.
This is how savings accounts work, this is how CDs work, this is how treasury bonds work, this is how passive investing (e.g. via ETFs on index funds) works, and there are many, many more examples.
If you're keeping your retirement savings in an IRA / other local equivalent, whether owned privately or by your government, the same processes happen behind the scenes.
You put in capital, you lock that capital away for a while, you get back more capital later.
The differences here are in terms of possible returns. Bonds have (relatively) low returns but almost 0 risk, index funds have significantly higher returns but are also higher risk, though it's still pretty low if your time horizon is multiple decades, and there are crazy investments (think Bitcoin) with possibly eye-watering returns, but also an enormous amount of risk.
Now investments with "guaranteed" eye-watering returns (think >10% per year) and apparently 0 risk? Yeah, definitely a scam.
Yes. Investing is passive income. If you have $20M and your lifestyle requires no more than $800K/yr of income taxed a waaaaay lower rates than the working stiffs pay on the same, then a 4% return more than suffices to live off of income that is waaaaay more passive than most passive income frauds even come close to promising.
The difference between "investing" and "passive income" is mostly just the difference between blue blood and the new rich. A tale as old as time.
Working men of the world uniting would be an utter disaster, so instead they're persuaded at any cost to choose sides in this absurd dichotomy between two sets of do-nothings.
Why would working men of the world uniting be a disaster for my ETF? Don't the working men need machines and capital to work?
> If you have $20M and your lifestyle requires no more than $800K/yr of income taxed a waaaaay lower rates than the working stiffs pay on the same, then a 4% return more than suffices to live off of income that is waaaaay more passive than most passive income frauds even come close to promising.
Assuming you are in eg the US than a 4% nominal return is actually taxed quite severely in real terms, ie after you adjust for inflation.
That's because capital gains taxes and taxes on interest don't account for inflation.
My comment is very specific about the ultra rich who use tax sheltering to reduce taxable burden on passive income from bonds: In the US, there is (was?) a special class of municipal (state/local) bonds call "triple tax-free"/TTF, where the owner can receive interest, but pay no federal, state, or local taxes. Of course, there are limits, but it is a big business, and the buyers are almost always ultra rich. To be clear, under the Alternative Minimum Tax (AMT) rules in the US, I doubt you can pay zero taxes, but you can certainly greatly reduce your taxable burden using TTF muni bonds.
Well, you can also use the buy-borrow-die strategy in the US to avoid capital gains taxes.
Here in my adopted home of Singapore we don't have such silly things as capital gains taxes. Makes things a lot simpler for the average person who doesn't want to pay for the lawyers and accountants.
The average person doesn't pay capital gains tax - at least in the UK; there is a 12 3000 GBP allowance per year of gains which means that you need to have significant assets (think top 10% of the country) before it becomes an issue.
Sure, there’s no free lunch, but there is the beat-you-up-and-take-your-lunch-money of not investing.
Bonds may have gone down, but they still paid out. Unless people sold at a loss for liquidity or could’ve timed the market and bought low, they were better off than people stashing money in a mattress or most bank accounts.
That's not really my point. I think one thing that gets lost in the "everything has different levels of risk" discussion is that many risk/reward profiles are bad. Calling everything a tradeoff is misleading. Banks are more than happy to capitalize on laziness and lack of knowledge (an American is more likely to change their spouse than their bank), so the balance between risk and reward gets thrown out of whack.
If you want to get really deep into investment theory, Beta implies basically everything is a good investment in small enough amounts https://en.wikipedia.org/wiki/Beta_(finance)
> I think one thing that gets lost in the "everything has different levels of risk" discussion is that many risk/reward profiles are bad.
Yes, not everything is on the efficiency frontier for risk/reward. Eg cash is convenient to spend, so it can 'get away with' offering a worse risk/reward profile.
Yes, the Sharpe ratio is one of many ways to measure risk adjusted returns.
> If you want to get really deep into investment theory, Beta implies basically everything is a good investment in small enough amounts https://en.wikipedia.org/wiki/Beta_(finance)
Well, that assumes no fees, transaction costs and taxes, I think. And even without transaction costs etc, the theoretically optimal amount can be so low that it's not worth bothering with.
What really happens: if everyone tries to acquire a particular income producing asset, the asset gets so expensive that the return is not worth the risk plus the time value of the money it could generate. Stocks in the 1920's, Tokyo real estate in the 1990s, US housing the mid 2000's...
This is also true of being a doctor, practicing law, growing fruit, programming computers, driving a cab, creating art, making music, running a car wash, and crab fishing.
Passive income usually requires a burst of highly-productive time at the beginning.
If you invent a machine which does farming with no human labor, and I invent a factory which makes your machines with no human labor, and so on down the line:
1) Human productivity jumps to infinity
2) No one needs to work
3) We all collect passive income, growing exponentially*
Most passive income is some subset of that. If you write a book read by millions, or invent something saving lives, that's continuing to generate real value for the world. Even if you work very, very hard, while scrimping and saving, so you don't have to work later, everything works out okay (so long as there are kids willing to work hard).
* With different exponents, until we have a class of ultrarich and ultrapoor, until the revolution, with either the poor masses being killed by high tech, or the rich by the human masses
>just put up some initial capital in exchange for even more money back, is always a scam. some people might come out ahead sometimes, but more people will lose than win.
How so? My all-world index funds are doing pretty well. For more risk averse, almost every buyer of USA governmental bonds gets "even more money back" in exchange for the initial capital. I don't think that's a scam either.
The problem for some of those banks wasn't the 30 year treasuries, it was that they bought those treasuries with other peoples money, and other people did not commit to 30 years, so now when the other people come to get their money, the bank doesn't have it.
The 30 year treasuries are still doing just fine, in accordance to the terms of the treasury when it was bought.
Every time you pay a profit margin, or pay taxes that cover bond interest, or pay inflated asset prices (real estate), you put money into the system. Every time your stocks, bonds, and real estate holdings go up, you receive money from the system. How good of a deal this is depends on how rich you are and how good you are at picking assets. And your luck at timing, of course.
The Fundamental Theorem of Capitalism -- on expectation, rich people get paid for being rich in proportion to how rich they are and how good they are at capital allocation -- is both great and terrible.
It's great in that it gets you skin-in-the-game capital allocation decisions. Everyone gains 50 IQ points when they have skin in the game and capitalism is how you leverage that to run a society. It's terrible in that it does tend to establish, reinforce, and perpetuate a class hierarchy where the people on the bottom must constantly pay to exist while the people on top constantly get paid to exist. It's great in that it maximizes the money available to accountably chase exciting new prospects. It's terrible in that it creates extraordinary incentives to enshrine old prospects whose time should have passed long ago. It's great in that it can democratize wealth and power away from a King or Party, but it's terrible in that it tends to concentrate wealth and power around the Wealthy. It's great in that damage of capital misallocation can generally be contained to the balance sheets of those most capable of bearing it, but it's terrible in that the wealthy and powerful have the means, motive, and opportunity to bend the entire system towards bailouts, monopolies, and asset-pumping.
It sucks, except for everything else we have tried. Shrug.
It's not a scam for you but rather a scam for society at large. Making money purely by owning some revenue generating asset, while not providing any service yourself is doesn't work if every single person does it. Many people who work at companies on the S&P500 aren't paid enough to having savings to invest. The money the company saves on employee salaries are shown as profits which result in the "passive income" that you're making.
I don't 100% agree with the logic because it doesn't account for improvements in productivity but I think it roughly translates especially in some late stage capitalism cases where company profits grow despite lower productivity (eg. layoffs).
Perhaps those who aren’t the investors benefit by being invested in, indirectly. They are benefitting from a government running on money from bonds, and possibly employed by a business fueled by some form of debt.
Why does the evil conspiracy that's exploiting those poor workers let nobodies like me (and presumably you) buy shares that let us participate on equal terms in their profits?
The aristocrats of old never felt the need to share the wealth like that, did they?
It's not guaranteed that you get more money back from an index fund (unless you've found an arbitrage, but that's a corner case). Even the bigger and stabler indexes like the S&P500 have their ups and downs, both on a daily level but also over longer time spans. The long-term trend has been positive for these types of indexes, but remember that past performance doesn't guarantee future profits :)
People believe in index funds because of multi-decades of globalization and (in general) cheaper money, which has been less and less true since 10 years ago.
Even if you bought some during the 90s, you still need a tremendous belief in yourself and the market to hold them for 30 years. It's not that easy. I know many people put the fund into a retirement fund, but 1) is every body consistently doing that for 30 years? and 2) what if the market sucks when you retire?
I still think that's not a bad idea, maybe one of the best for lay persons.
You don’t have to liquidate all of your investments on your retirement date.
If the market sucks so much for 5+ years and your government can’t get it pumped back up, you probably have a bigger problem than your retirement savings, such as food and energy and security shortages.
It would be bold to bet against a government not constantly decreasing the purchasing power of its currency to prop up asset prices, especially with declining proportions of young people. The political apparatus will want to maintain old people’s position at the top of the social hierarchy, and if their purchasing power isn’t maintained so they can keep buying the fruits of others’ labor, it means the country is dissolving.
> If the market sucks so much for 5+ years and your government can’t get it pumped back up, you probably have a bigger problem than your retirement savings, such as food and energy and security shortages.
The S&P500 was flat or negative from 2000 to 2012. And this isn't unusual.
> It would be bold to bet against a government not constantly decreasing the purchasing power of its currency to prop up asset prices, especially with declining proportions of young people. The political apparatus will want to maintain old people’s position at the top of the social hierarchy, and if their purchasing power isn’t maintained so they can keep buying the fruits of others’ labor, it means the country is dissolving.
How does the government decreasing the purchasing power help old people?
This is quite the opposite, retirees survive off of a fixed income (mainly from welfare and pensions but also fixed income investments since they shouldn't risk the stock market) and are the most hurt by inflation.
> The S&P500 was flat or negative from 2000 to 2012. And this isn't unusual.
At its worst, 1999 to 2009, SP500 total annual return was only -0.2%, per dqdyj. Thats really good considering the upside (which has since been realized), and it shows that the government is willing to pull out all the stops if the market is down just -0.2%.
> How does the government decreasing the purchasing power help old people?
Old people are likelier to have assets and/or fixed income from assets (such as defined benefit pension funds). The government can also increase Social Security benefits quicker than wages in the market. The government also can maintain current benefits and reduce them for younger people by increasing the retirement age and adjusting the “bend points” in the benefit formula.
Of course, the poorest old people won’t benefit as much, but there’s a solid contingent of old people who do have at least real estate in their home, if not investments in the broader market that are very politically active.
> mainly from welfare and pensions but also fixed income investments since they shouldn't risk the stock market) and are the most hurt by inflation.
They shouldn’t be in fixed income for expenses needed beyond 10 years. I’d even be so bullish as to say 5 years. The demographic changes of the population pyramid flattening and turning down just started hitting economies in the 2000s. I don’t see any other way out for governments, so your goal is to tread water, you at least want to be invested in whatever the politicians are going to backstop (which is evidently not USD or fixed income, but rather equities).
>At its worst, 1999 to 2009, SP500 total annual return was only -0.2%, per dqdyj.
That might not be adjusting for inflation. According to the calculator on moneychimp, with adjusting for inflation, the cagr for the S&P 500 over that time period was -3.42%. (i.e. $1.00 shrank to 71 cents if invested in S&P 500 Jan 1, 2000 to Dec 31, 2009.
>...and it shows that the government is willing to pull out all the stops if the market is down just -0.2%.
I imagine the potential collapse of the financial markets, was maybe a more important cause of monetary and fiscal policy around that time.
We don’t need to adjust for inflation since we are comparing nominal returns across the board.
What other investment options were there from 1999 to 2009 that had a similar risk profile (implicit backstop by government), but also unbounded upside (unlike fixed income options)?
> I imagine the potential collapse of the financial markets, was maybe a more important cause of monetary and fiscal policy around that time.
Because the businesses are so big ABs interconnected now. If a mom and pop family business goes out of business, that’s a few people who need to scramble, they’re not politically influential enough for a bailout.
If multiple SP500 companies are at risk, then I am going to bet Congress is going to shift into high gear to find a solution.
>We don’t need to adjust for inflation since we are comparing nominal returns across the board.
Well there are things like TIPS, so comparing real returns across the board might be more helpful. Some of the returns from S&P investing will be in the form of dividends, so ideally the amount of taxable gains would also be included to get a better comparison.
I agree that even with the history of long slumps that stocks are still one of the best investments out there.
>If multiple SP500 companies are at risk, then I am going to bet Congress is going to shift into high gear to find a solution.
I think we might be in agreement that bailouts come down to systemic risk and political pull. Silicon Valley bank fails and people got all their money bank even if the accounts were far above the FDIC limits. Other banks fail at about the same time and account holders get only up to the FDIC limit. Maybe there was systemic risk there, but it feels like political pull was at least involved.
When the dot com bubble burst, many large companies failed but there was no concentrated action by Congress or the Fed to bail them out. Hence the lost decade for S&P 500 investors.
Your average retiree should not hold stocks as they usually can't survive a 10+ year drawdown (which, as I just showed you, happens a lot more than people think, even in the survivor biased S&P500 example). This is why target retirement funds transition to safer fixed income assets as the target date approaches.
You're also forgetting that inflation doesn't just affect assets, it also affects living necessities (and that's how it's defined in fact), so it's unclear how this is a net gain for asset holders.
TL;DR: Inflation doesn't magically make asset holders richer and retirees would be some of the worst affected people anyways.
You're wrong on both fronts and your whole idea that the stock market is politically propped up by old people doesn't pass the sniff test.
> Your average retiree should not hold stocks as they usually can't survive a 10+ year drawdown (which, as I just showed you, happens a lot more than people think, even in the survivor biased S&P500 example). This is why target retirement funds transition to safer fixed income assets as the target date approaches.
Target retirement funds transition to a safer mix of bonds and stocks as the target date approaches.
Even VTINX has a conservative mix of 30% stocks.
I'd say if you cannot afford to hold any stocks you're probably not yet ready to retire.
> Even VTINX has a conservative mix of 30% stocks.
Your average retiree does not live off of VTINX.
> I'd say if you cannot afford to hold any stocks you're probably not yet ready to retire.
There's so many variables here that it's really not worth discussing.
I'll just say that investing in stocks for retirement is a pretty recent fascination that is far less common outside of the US and in poorer regions in the US.
Plenty of American retirees (maybe even a majority) own little to no stocks and live on a fixed income, making them very vulnerable to inflation (which was the whole basis of OP's idea that old people are holding up the stock market).
> There's so many variables here that it's really not worth discussing.
Fair enough. I only want to clarify what you wrote: "the average retiree should not hold stocks." To be crystal clear:
1. don't go out and buy individual stocks on a lark (good advice)
2. get all worried because your 401k is a conservative mix of mutual funds (hopefully index funds, probably managed mutual funds) and bonds (bad advice)
> Plenty of American retirees (maybe even a majority) own little to no stocks and live on a fixed income
The logically necessary flip-side is all I'm addressing: plenty of American retirees hold stocks in a 401k. To them I reiterate: don't fuss around with your target retirement fund.
>You're also forgetting that inflation doesn't just affect assets, it also affects living necessities (and that's how it's defined in fact), so it's unclear how this is a net gain for asset holders.
Because the rate of increase of asset prices is quicker than that of other prices, namely labor. Hence the griping by young people about wages not keeping up with costs over the past many decades.
Again, it’s not all old people, but a significant proportion are going to be pissed if their 401k show declines or even stagnation at this point. You can even include soon to be old people here, the 50+ year olds that are invested.
> Because the rate of increase of asset prices is quicker than that of other prices, namely labor.
This totally depends on the asset and is nowhere near as straightforward as you make it seem.
For example, companies who mainly sell to consumers and require constant capex will generally be negatively impacted by inflation.
Your idea that the government will hold up the stock market just doesn't up to historical data.
2020 was the big exception (and the most recent in memory, hence why you and others are so focused on it) but the inflation that caused has lead to economic hardship across the board.
I agree with you that there's a political force trying to prop up the US stock market, but I'm not sure it's as simple as "old people and their 401k's!"
Push comes to shove, the only question about whether or not a bailout will happen (since there is no technical hurdle to issuing more money, just changing numbers in a database) is are the parties receiving a bailout sufficiently influential.
And I argue that people exposed to SP500, whether it be by holding it directly or facing the prospects of higher taxes because the government pension fund holding SP500 is not meeting its returns, are now sufficiently influential that it is a given that leaders won’t allow the broad market to be negative for more than a couple years.
2020 isn’t even the most recent one. Here’s a multi employer pension fund bailout from Mar 2021:
> The S&P500 was flat or negative from 2000 to 2012. And this isn't unusual.
Be careful not to mix up the S&P500 index numbers with the total return you get from holding the portfolio and re-invest dividends. (However, even with the total return you can find some longer stretches that are flat or negative.)
> It would be bold to bet against a government not constantly decreasing the purchasing power of its currency to prop up asset prices, [...]
That would only prop up assets prices in nominal terms, but doesn't have much to do with your retirement planning. (Unless your only alternative to index funds is sticking local money under your mattress; and you can't even think of sticking gold coins or foreign currencies under your mattress, or buy real estate etc.)
Correct, but that accomplishes the goal of having a hidden tax (although more people are aware of it now) on earning income (since labor price increases lag asset prices increases).
Just look at who the biggest winners pre and post Covid are. If you owned assets pre Covid, you are golden. The more you owned, the more guilded you became. Pretty much all government policy I see starts with the basis of how do we ensure existing asset owners stay ahead of the rest.
It’s a mechanism to ensure the social order/hierarchy persists (which is a combination of wealthier/older/soon to be older/beneficiaries of older at the top and labor sellers/young/poor at the bottom). Because that is what is politically possible (until a catalyst prompts revolution).
Reducing purchasing power of currency is one way, but another is also replacing goods and services in defined benefits with inferior goods and services. For example, Medicare/Medicaid used to provide for seeing a doctor, whereas now and in the future, you are likely to have to see a Nurse Practitioner or Physician Assistant, unless you cough up more money for concierge care or direct primary care.!
ideally, direct care is saving more than it costs - $50 for unlimited visits, free telemedicine, no copays, all office procedures free, wholesale meds and labs for up to 95% less. Then you can lower your ins premiums by 30-60%.
if it's been good (on average) for 30y but then sucks when you're about to retire, you still probably accumulated a lot of money from these 30y of interest
I wonder what the longest duration has been, in the history of let's just say S&P500 or similar, between [a low so bad that people would say "sucks that I'm retiring now"] and [the point in time prior to that, where it had the same exact value but as an all-time high]. A decade maybe? So basically one would conclude that they could've begun taking withdrawals a decade ago with the same size of retirement account (well, except for all the contributions throughout that decade, and except for the extra decade of remaining life expectancy, and prevailing wisdom to reduce risk as retirement approaches, each extremely significant, but the point remains to some extent).
There was a study (https://en.wikipedia.org/wiki/Trinity_study) showing that you could count on a 4% withdrawal rate for retirement income over any 30-year retirement period, including periods spanning the Great Depression and other market lows. Most of the time you can count on more; that was the lowest across the entire study. And with compounding, the difference between "30-year retirement period" and "indefinite retirement period" is not much; withdraw a bit less, or be able to adapt to prevailing conditions, and your retirement portfolio will last indefinitely.
I guess nominal, because not having kept up with inflation would be the main source of it sucking badly. I think of it like this:
You lose to inflation badly with uninvested cash. You get close to keeping up with inflation with near zero risk vehicles (CD or high yield savings account). You hope to at least keep up with inflation with medium-low risk vehicles (S&P500 or similar funds). You roll the decide after that (leverage, timing, stock picking, etc.).
I don't think you need tremendous belief. What else are you going to do with your money? I can't think of any other proposition that compares with investing in the US economy.
Yes, though it's important to note that the economic notion of value is weighted according to wealth and therefore more than a bit weird. Feeding an orphan creates no "value" because they have no money to pay you with, while merging companies into a mega-monopoly that can shake down the rest of the economy creates loads of "value" because it pays rich investors huge dividends. Of course, there are plenty of honest ways to create value and get paid for it, and that's pretty cool. Both extremes exist, most things are in the messy middle, and reasonable minds can differ about which way the system leans and what should be done about it, if anything.
Another piece of important context is that the US is a developed economy, not a growth economy. If the pie is growing at 2% and the capital slice of the pie is growing at 10%, anyone who lives in the remainder and argues that their slice is being grown is a fool.
I appreciate your point in general, but I doubt the specific one you made. At least for the US.
The US ever larger amounts of money per pupil (around $17,280 per pupil annually these days according to the Internet), but educational outcomes haven't really changed much over the decades. Whether you measure that in absolute terms or by international comparison.
About your second paragraph, to be fair, most passive income schemes involve starting capital (a large amount). Then, this capital is invested into _relatively_ safe or low-vol assets (investment property, gov't bonds, utility stocks for divs), and passive income is received. Alternatively, you could buy something like a stable, middle-aged oil or natural gas rig. Or managed, commercial forest. Or rights to media to receive royalties. Yes, scams can exist in any investment scheme, but the previously mentioned ones are accessible, and safe for 1-5% of people with sufficient capital.
What bothers me the most about the endless YouTube videos and "financial advice" blog posts about passive income: They fail to explain how you acquire the initial capital! Frequently, they saved millions from a previous job, like a Wall Street trader/salesperson or a senior FAANG engineer.
> put up some initial capital in exchange for even more money back
The "even more money back" part is, in principle, compensation for you gathering the capital together and taking on the risk of losing. Not that it works out that way in practice.
Yeah, nowadays "passive income" is basically debt interests (like bonds) or rental income, both of which actually need a lot of work.
I rarely traded financial instruments so cannot say for that, but as a small landlord I wish I never entered the business. Like, all businesses need initial investment AND a lot of continuous effort and learning, and are probably boring (or VERY barricaded) because otherwise people are going to swarm in. I need to know the market, the laws and regulations, and some other stuffs, most of which are extremely boring and not really "hackable" (as for hackers) because accountants and governments already sorted everything up to make sure it's hard for small businesses to evade tax -- You can learn which parts are expenses in an afternoon, and then you have to deal with a lot of headaches.
I know some people who own gas stations and large depanneurs (in QC they are independent convenient shops), which are luxurious on face, but they either have to pick a remote one (away from competition from supermarkets) or/and work 7 days without hiring an extra hand. They grind for 10 years and sell the business when time is good.
Rental income doesn't need any work if you are just an investor though.
I don't do a single thing. The people who are managing the deal are the ones who do the work and hire the workers to work on site and such. They of course get an even better return during the sale, but I am happy with what I get for doing nothing.
My rental properties are paying me a decent passive income of about 6%, and additionally the total investment about doubles in roughly 5 years. Also the tax advantages are pretty huge with the depreciation and the ability to take the money from a sale and put it into a new property with no tax.
So say you start with an initial $100K investment. That pays back about 6K a year for 5 years and then turns into about 200K after 5 years which you then put into a new property and make 12K a year, and so on and so on.
So if you start with 100K when you are say 25, then when you are 50, you will have around 1.6M in property assets making you about 96K a year in passive income, where the depreciation on the property value and the assets in the property outweigh the tax on the income, so that income is all tax free. And that calculation is assuming you don't put even more capital in from some other source. Of course it's a roughly average return assumption. Some properties will do better and others will do worse, but it's been my experience that it's about right.
Of course this is only one of my investment baskets. I allocate roughly half of the income that I can invest into real-estate like this and the other half into low cost index funds.
> and additionally the total investment about doubles in roughly 5 years
That is a big assumption. What happens during the next real estate bust and your real estate value goes down to 1/4 of its prior worth? You are now set back 10 years.
I think residential real estate is a bad bet long term. As real estate gets more expensive and more and more young people cannot afford to buy there is going to be more political capital to change the situation. You are basically betting that the next generations are going to be fine with being priced out.
I don’t believe we have seen the full repercussions of the housing affordability crisis, it hasn’t even been going on for that long. As gen Z comes to house buying age I think there are going to be changes.
They have insurances for downturns built into the cost of the deal.
Even if the value of the property doesn't increase as much as expected, you are still making a decent amount in income from the rent being paid. 6% maybe doesn't sound like much, but it's tax free income due to being able to deduct from that income the depreciation from the property and appliances and such which in my experience always is more than enough. It makes it pretty competitive with alternatives such as index funds long term IMO and again in my experience so far over the last 11 years.
The worst case scenario is basically you hold onto that property longer and make about nothing on the sale which is more than can be said about the stock market in my experience. At least you still have what you made passively in the meantime.
Sure, I can't predict the farther future, but I still make decisions to continue this or change my holdings based on policy changes like that.
I'm not claiming this is some magic get rich quick scheme, but so far it has been working out well and definitely has given me income without me doing anything, which fits the definition of passive income here, so I just thought I'd share it.
I believe your account, and agree that this investment has turned out well for you. The last 11 years are not normal in my opinion, and I believe the time will come where policy changes will make this investment strategy much less desirable.
Have you looked at the return from S&P 500 in the last 10 years? 1,964 -> 5,823 is about 11.5% per annum, compounded. It is one of the biggest bull markets in 100 years. And you are telling us that your investment properties are sustaining the same returns? Unbelievable. Neither is sustainable.
Yes. I feel like you are not understanding anything about what these investments entail.
A struggling apartment complex property in an up an coming area is purchased and I put money into that deal. I am only say 100 or 200K of an otherwise ~10 million investment. The complex is massively overhauled, new facilities are built, units are completely refurbished, the on-site staff are replaced, bad tenants not paying are evicted, and new vetted tenants are found. The whole place is re-branded and then after all this is complete is sold for a substantial profit. All while making income from rents during the time the property is held.
It's a LOT of work. Not by me as I am just an investor, but by the managing partners who spent months or longer searching or and analyzing the area and working with the bank for the loan and then doing all that work to completely overhaul the place.
When you find and invest with a management partner who has been doing this awhile and has a proven track record yes the returns are as good as I am saying.
Real estate is special because of multiple federal government and state government policies limiting (subsidizing) borrowers’ risk, allowing borrowers to lever without commensurate increases in risk.
The federal government taxpayers (especially future ones) provide enormous subsidies in the way of 30 year fixed rate loans with no prepayment penalty, and no risk of having the loan be called. Many state governments make home mortgages non recourse as well. And then there’s the federal 1031 tax exchange benefit. And there are county/state limits on property tax increases, like California’s famous prop 13.
When I learned how a lot of the government policies worked it just kinda blew my mind. Yes you are effectively 4x leveraging your investment with a way lower risk than doing something like that in the stock market. You are certainly leveraging other people's money in a way. Plus the tax deductions on asset depreciation are wild.
Maybe it won't last forever, but I'll pursue it while it works.
If the social program was designed to keep a roof over people’s head, then it would simply give people cash, or a roof.
The fact that the social program involves extending lines of credit means that the design was not to keep a roof over people’s head, but rather enrich existing asset owners and indebt future ones to get them chained to the treadmill. Similar to cutting funding for higher education and replacing it with student loans.
> If the social program was designed to keep a roof over people’s head, then it would simply give people cash, or a roof.
Except it wouldn't happen, because it would get killed by even louder whining about giving free money to the lazy do-littles. Every social program has to have a layer of appeasing the people who only feel they're part of a society when it benefits them.
I see betting on residential real estate as a bet that power structures have ossified and the CURRENT (not future - that was 20 years ago!) generation will not be able to gain any significant power.
>additionally the total investment about doubles in roughly 5 years
According to data at FRED (https://fred.stlouisfed.org/series/MSPUS), the median US home price has gone from $320k to $420k in the past 5 years (an increase of around 30%).
So, I guess good for you that you happen to have done so much better than the median, but your results are atypical at best, and misleading at worst.
This is not home prices, this is apartment complexes that I am talking about. They are tens of million dollar investment deals and you can join in with usually as little as 75K in what I am referring to.
My results are not atypical for this sector from everything I have seen and all the other investors I know doing similar deals.
You aren't just waiting for the value to go up... They buy sort of struggling properties that are otherwise in good areas and show potential and using the investment capital they improve the property. A ton of research and market analysis goes into picking the right place etc. Like installing a pool, gym, basketball courts, security gates, renovating and refurbishing all the units etc. Renaming and completely rebranding the property. Hiring whole new management team for the on-site stuff to better handle tenant needs.
And yes you raise the rents and also get occupancy up. After all this then you sell the property for significantly more.
Thank you to share this data. 320->240 in 5 years is 5.6% compounded. It is hard for home prices to outpace a combination of inflation and real economic growth rates for very long. As some point, home prices stall out because buyers cannot get enough leverage from mortgages.
This is buying multi-million dollar struggling apartment complexes and completely overhauling them and then selling them, and then repeating at a whole new location.
100K after 5 years became about 230K. 30K of passive income that was essentially tax free because of the offset from the depreciation of the property and the assets within the property that depreciate at a significantly faster rate than the rental property.
And then with all the improvements made to the property and the increase in rent that the substantial improvement could garner, selling the revamped property nets roughly double the initial investment, which if put into a new property within 90 days also incurs no tax for the transaction.
But I am also not even accounting for investing any of that income. Just with the roughly doubling every roughly 5 years, 100K in ownership stake can become 1.6M after 25 years. I started with 100K and already had a property that sold, and then did it again, and it's currently invested as a roughly $400K stake 11 years after I started with a yearly income of around 24K on the 3rd property that I am now invested in and so far things seem on track as normal.
Multi-family, so apartment complexes. The deals are for tens of millions of dollars, and you can usually join in for as little as 75K.
But you either need to be an accredited investor, or know one of the managers of the deal before the deal is set and they let you join. They are typically allowed to bring in a certain percentage of the deal from non-accredited investors that they know.
What's nice is once you go through a full deal cycle usually 5-6 years, and they sell, you become an accredited investor for having gone through that and that makes it much easier to find and join another deal without having to know the managing partners personally beforehand.
Like one of the deals I am in is primarily managed by this guy. And he has a very large personal stake of several million.
He's got way more money on the line than me in the deal, and so he cares very much about making the property successful for himself and selling at the right time etc and I am really just along for the ride essentially.
Here is one of the other main managing partners of another deal I am invested with.
> the total investment about doubles in roughly 5 years
And:
> start with an initial $100K investment. That pays back about 6K a year for 5 years and then turns into about 200K after 5 years
5 years * 6K/year is 30K profit rental income. That leaves 70k in capital gains. ROI calculator tells me that is 11+% per year: 100K->170K in 5 years. Jesus, what market? And, how sustainable is that level of return? And, will this continue for 25+ years. You make it sound so simple. If any of this were true, then (I guess) a miniscule number of people could afford to buy homes after 25+ years!
There are no capital gains taxes, or well any taxes are offset by the depreciation.
For example on a 100K investment in the first year you get about 40-50K of depreciation on your K-1. This is possible because the investment deal managers bring in a firm to account for all the "stuff" in the units like appliances and things and these things depreciate quickly as is coded into laws.
These deprecations offset any taxes that would normally be incurred.
Also when the property is sold, if the money from the sale is invested into a new property within 90 says there is also no tax incurred on that large transaction.
The single deal roughly doubles the return, plus the passive income each year. You are taking that doubled profit and putting that money into a completely new deal and different property and they are doing the same ~5 year complete revamp and sale.
Here are one of the managers of one of the deals I am invested in. I am only 100K out of several million invested, and the mangers have a much larger stake, so they have way more on the line to do well in turning the property around and did their due diligence to find a place to buy that was undervalued.
The original iteration of passive income was feudalism. It itself was a set of interconnecting passive income schemes[0], ultimately derived from your ability to own the most economically valuable land. This scheme hinges upon your ability to enclose and exclude access to that land by force - not prior labor paying off over time.
Of course, the only passive income schemes that work today are the "prior labor" type. But that's because of copyright and patent law, which exist specifically with the idea that you can make something valuable now and charge the public for it later. A creative work or an invention is itself land being excluded by force, but this is a magical abstract land of nearly infinite size[1]. It's enclosers are empowered not through direct force, but through the blessing of a legal priesthood.
Ok, I suppose if we're including force and feudalism, we probably should also include, say, organized crime. But in that case the labor isn't stored, it's slaved: you find suckers and scam them into doing crimes to your benefit, then get them to continue working for you, because if they ever leave you can just kill them, or sick the Feds on them.
Y'know, I'm starting to think passive income is actually just a funny way to say theft...
[0] The two schemes I'm thinking of are manorialism, and something akin to modern rent extraction or "chokepoint capitalism" in which you own a road or river and can charge money to people passing through your land. I forget the name of the latter, and there's probably additional relationships I'm not counting. I know the Holy Roman Empire was lousy with the latter kind.
[1] Since there's far more of this creativity land than there is land on Earth, it's far harder to find land that people want or have to pay for. That's why entertainment is such a ridiculously hit-driven business and why entertainment companies hate rights reversion so much.
> On the other hand, if everyone had access to this capability then society and civilization would grind to a halt.
On the contrary, everyone does use this capability. It is what makes the concept of "retirement" possible.
You borrow money when you are young and do not have much of value to contribute to society (for education, for purchasing a home, maybe for starting other ventures), you earn money during your productive years to pay those loans back and accumulate wealth (in personal or government retirement accounts, in Social Security or other government plans, in a pension), and at some point you are able to invest or lend or that money to others (or have others do so for you in the case of things like pension funds) and live off of the return, hopefully before you become so infirm you are no longer able to work.
I hope we can agree that allowing people to retire before they die is a net benefit to society. Claiming anyone can do that while they are still young with no risk is where you should start to get suspicious. Why should it be easy to get rich?
> It is what makes the concept of "retirement" possible.
Sorry, I disagree. What makes retirement possible in highly advanced economies is a national pension. In the US and many other rich countries, a huge portion of elderly, retired people only live from national pension. It is scary how many poor, elderly people exist when you look closely. The vast majority of Americans will retire with zero or "peanuts" in their 401K, or spend it down very quickly, then become 100% dependent upon national pension ("Social Security") or their family/children/charity.
On a personal note, each time one of my co-workers shares about their retirement savings, I am shocked by the tiny amounts. They will retire into "virtual" poverty compared to their current compensation. They are living for today, not tomorrow.
With respect, I think you have it entirely backwards.
(First, "passive income" means "almost hands off, but not entirely")
Progress in technology is making things - better quality, less effort. Amazon Warehouses for example. Just a few years ago they took at least a few dozen people in rotation, now takes a man and a dog - the man to feed the dog and the dog to bite the man if he falls asleep.
Since so much can be done with so little effort it seems natural that if wealth doesn't concentrate at the top then most people would have essentially passive income streams.
It's funny how often you hear "put your money to work". Money doesn't work, people do! If you receive a monthly income by doing nothing, you're taking from someone else's work.
While technically true, this could still be a great trade for all involved.
If you invest in shares in a company, you are a link in the chain to that company existing at all, employing people, serving customers, and paying a dividend to shareholders. Employees have a job and income without the need to come up with the initial capital to start the venture and the associated risk of no income for a while.
If you invest in real estate, you are providing the capital that allows someone to have shelter (and maybe allowing a property management firm to also employ people). Tenants have shelter without the need to buy an entire lifetime of a house that they only want to live in for a few years and without the hassles of being tied down to a specific address (in the event their relationship status or family size evolves or a job improvement arrives 50 or 200 miles away) or buying and selling houses frequently as these changes tend to happen frequently early in adult life.
Neither is something that you had to wipe sweat off your brow this particular month, but it is a deployment of foregone consumption in the past that allowed you to make those investments. Now that previously foregone consumption is being returned to you.
Another tangible example is renting a tractor to a farmer that couldn’t otherwise afford one. Their income from crop production goes up (even after tractor rental expenses) and society also gets more food.
But wouldn't it be even better if the farmer bought the tractor on a loan? Now the farmer keeps the entirety of his production and the guy that would have rented the tractor also has to work, further improving society.
The farmer is either renting the tractor or renting the money to buy the tractor. Which is better depends on details like the rate of the loan/rental and the expected utilization of the tractor.
How is that different. In either case the farmer is paying someone (interest/rent) more for the use of the tractor than just outright buying it (which he does not have the capital to do).
That's the decision to be made by the farmer either selling equity or taking a loan.
From the perspective of the banker/lender, they're still living off someone else's labor (which is fine for me since it's the result of a voluntary exchange for something else of value, but it seems like it's not for some upthread posters).
- Investing provides benefits for society at large
- Investors are exploiting the labour of others for their own gain
(but also your examples only work in a very weird worldview where everything is privatised, but I don't want to bother discussing that on this website)
Not really true at all. Production is almost always a combination of labor and capital. Consider a restaurant. People are working there but so is a stove, aka capital aka money.
I think you misunderstood what capital is. See, one does not become a Capitalist without taking advantage of others. Most people don't have the initial capital to build the stove and sell it to other Capitalists, so they end up, as in your example, just another piece of equipment doing the actual work in the restaurant alongside the stove. The Capitalist and their money do no actual work, but finance the work being done then profit from it with stolen wages and artificial inflation, which is why your steak costs you, the customer, $15 USD to enjoy when the reality is it took a collective $5 to actually produce.
So the original reply is correct; money does not work, people do.
> While money itself may be construed as capital, capital is more often associated with cash that is being put to work for productive or investment purposes. In general, capital is a critical component of running a business from day to day and financing its future growth.
What you're espousing is the outdated view of the Labour Theory of Value. To see why this is wrong, imagine a bottle of grape juice that gets forgotten, which turns into wine and gains value. Yet no work was put into it.
Please, please stop repeating century-old outdated theories that has been disproven.
No one is giving up anything voluntarily. Do you think workers in the global South are willingly working for meager wages (i.e. giving away most of the wealth they generate) or do you think they are somehow constrained into it?
When market crashes (march 2020) they created trillions in debt. Who works for that amount? They literally gave away some small part of it. Try to learn how debt based MMT works.
>If the goal is to have a system where everyone can have passive income, then achieving that goal is the end of the world.
If AI and robotics continue to be developed, then eventually most human labor becomes uneconomical by comparison. At that point, the system provides passive income on a mass scale (UBI) to prevent its own violent destruction. At least, that's the good ending.
To clarify, the "human labor no longer exists in a meaningful way" thing depends (as far as I can tell) on "robots are able to perform all human labor", so their yacht would be cleaned by robots. Though I imagine they might hire humans anyway, as some kind of status symbol! (Artisanal, like hand-crafted items today.)
Yes. But I’d be afraid we might reach mass unemployment before we get to robots performing well on infinite variations of what would otherwise be simple tasks, but in wide arrays of utterly unpredictable environments and situations.
Technology is quickly helping to eliminate the "pitchfork" option. By the time we are in a world where human labor is unnecessary or worth nearly nothing, the elite will have all the automated surveillance and robo-policing technology they need to prevent rioting and pitchforks, and more secure ways to remain safely isolated from the rabble. When it comes to "what Sci-Fi future we're headed towards" I would bet on something like Elysium.
It might indeed be easier to develop automated surveillance, reinforce police states, and isolate themselves, than create working robot-plumbers, automated 3 star worthy kitchens, and self-cleaning boat decks.
Existing welfare schemes do a lot to approximate a UBI scheme, just with a lot more overhead, paperwork, moral grandstanding, various other inefficiencies that lower the useful amounts, and stress for all involved. Still, if a UBI scheme were implemented today instead, I don't think much would change from the current status quo. It would probably provide for living comfortably enough, but not enough to buy whatever desired luxury or experience at any given moment. That's sufficient for a market to form. Whether labor activities like fixing toilets or cleaning yachts survive depends on the market price for such labor. Some activities will go away (like a well-swept shop) because the price floor is too high and automation hasn't caught up or been made cheap enough, some will just become more expensive, more and more will get automated over time.
> It would probably provide for living comfortably
Not if we increase the amount of money compared to what's currently spent on welfare by several times. Or if we don't and just replace current targeted welfare schemes with UBI the people who can't actually work will just be reduced to extreme poverty.
e.g. US Federal revenue is ~$13k and spending $18k per capita and that includes everything. Even if it were somehow possible to double tax revenue with no negative outcomes it would hardly be sufficient.
My good ending would be to redistribute equitably the wealth generated by the machines labor, and maybe even abolish currency, once (if) we reach such a point.
Or, what has already happened through the massive technological advances of the past thousand years, AI and robots replace human labor, and humans spend their time doing something else, whether being the person in charge of the robots, or breaking into an entirely new area of work that never existed before.
It’s the same argument that was made back before printing presses, the cotton Ginny, tractors, cars, etc, etc.
Basically every sentence I read in this comment has an enormous hole in the logic or premise.
> On the other hand, if everyone had access to this capability then society and civilization would grind to a halt.
This is a non-sequitur. The world isn't binary. Whether this happens depends entirely on how much passive income people can generate, and a whole host of other factors that are unaccounted for.
> People make things; if people don't make things, then we don't eat, we don't drink.
Again, your premise is flawed. Giving everyone (say) a dollar a month doesn't mean people will stop making things. It depends how much they earn, and a ton of other factors.
> The categorical imperative roughly says that something is moral only if its universal adoption would benefit society.
No, that's not what it says. What is says is that the rules you live by should be universally applicable. Positive or negative effects on society are beside the point.
> So there is a break there.
This is a giant leap in your logic. You have neither shown that this wouldn't benefit society, nor that there would be a break if it didn't.
I agree with your parallel to rent seeking. Rent seeking is indeed both (a) arguably immoral and (b) seemingly inescapable in a society which respects property rights.
The theory of Georgism [1] suggests a way that we could eliminate rent seeking: by taxing ownership of all common resources at the value of the rent they would demand. That way, property owners, telephone operators, etc. would be rewarded for their labor in development and upkeep of the property, but would not be rewarded for ownership of the property itself.
Rent seeking is not immoral. You own something. You choose to let others use it for a fee per month or per day. Some other person voluntarily thinks your deal is good and agrees to pay to use your something.
Sure, you can come up with some obscure examples of rent seeking being immoral, like charging a dehydrated dying person $1000 per glass of water, but that's not what we're discussing here.
If you disagree, let's make a deal where I get to use all of your stuff for free forever.
I’d argue rent seeking, whether moral or not, leads to a bad system with a class of people with vast wealth and no need to work, and a class of people largely without access to the same manner of income who have to labor for a living.
Bad comparison. I am not seeking rent on any of my stuff.
Now, if I hoarded a bunch of stuff that other people needed and then charged them for access to it, that'd be rent seeking.
> Sure, you can come up with some obscure examples of rent seeking being immoral, like charging a dehydrated dying person $1000 per glass of water, but that's not what we're discussing here.
This is in fact what we're discussing, and your strawman example is ironically very on the nose. Except it's not water, it's housing. People are being forced to move away from my city or sleep on the street because the average unit rent is $3400 a month. The beneficiaries of this system are property owners who spend some money on development and upkeep (which they deserve to profit from) but largely just rake in passive income from having been lucky enough to buy when prices were low.
You're misinformed. You're describing rental, it's an understandable mistake, but despite the shared etymology, rent seeking is something entirely different.
It is by definition any scheme which extracts wealth without providing value. Renting apartments, or equipment, is not rent seeking. Putting a barrier in a river and refusing to allow passage of cargo without a tax, that, is rent seeking.
If you agree with me that a scheme to extract the wealth of others, while providing no value in return, is immoral, then rent seeking is, in fact, immoral.
With this narrow definition nearly any income is “immoral”. If everyone became a heart surgeon society would grind to a halt as well.
The amount of labor, active or passive, isn’t really relevant in an absolute sense. It’s about meeting society’s demands.
I happily pay for electricity that is fully generated by machines. Yet if everyone built solar or wind we’d be fucked.
Your argument is really trying to push the “income without direct labor is immoral” narrative. But there is nothing there to really support it other than an example of a massive imbalance wiping out society, which is not specific to labor.
I would agree with you, but you seem to forget the concept of "cohorts" applied to this.
You could have people from age 20 to 40 working for everyone else; and people from 40 onwards to live on passive income. You would still have ~60% of the current workforce. Not impossible.
> The categorical imperative roughly says that something is moral only if its universal adoption would benefit society.
Really? I actually don’t think that’s right at all. For example: nobody should be a philosopher, because if I everyone were, society would collapse. Surely, Kant did not believe that.
My understanding is that the categorical imperative is more like: it’s only moral if you would accept a random roll of the dice into any of society’s roles. In this case, I’m not sure society would be better off if passive income did not exist, but perhaps it should be “earned” passive income, in the entrepreneurial sense, rather than just pure rents for high status people.
Your definition is much closer to Rawls’s vision of a just society and the “veil of ignorance.” While heavily influenced by Kant, Rawls comes much later.
Kant’s Categorical Imperative was an attempt to define moral laws (without resorting to a deity). The article has it right, though I might change the wording slightly to say that a “rule” or “law” that I use to guide my behavior is only moral if its universal adoption would make the world better.
Choosing to be a philosopher is not a rule. Something like, “I should never lie” is a rule which one could evaluate with Kant’s approach, by asking whether if everyone followed that rule, society be better off or not.
Kant's moral system is by no means perfect. His own definition is: "Act only according to that maxim whereby you can at the same time will that it should become a universal law."
Obviously we'd all starve to death if everyone became full time philosophers, but wouldn't the world be a better place if everyone took some time to ponder the big questions?
As others have stated I don’t believe this is a good faith definition of passive income. What do you do with your time now that you don’t have to work? If you decided to sleep all day and spend money on consumption, I would call you ill. At some point you’ll probably want to do something productive, not because you want to get paid but because that’s just what people tend to do at some point.
I do think a society where this is the only type of work being done is possible. It’s not free money or perpetual motion, just efficient at matching people’s natural inclinations to demand (and automation could fill in the gaps).
Most "passive income" schemes are really just front loading all of the work. Producing way more than you consume in return, and then collecting the benefit later.
but, how about growing a fruit tree. An apple tree for example can produce 200 lbs of apples per year about 500$ a year and all you have to do is pick them off the tree and water them if you don't get enough rain.
> if everyone had access to this capability then society and civilization would grind to a halt
No it wouldn't. The scenario is not an actual one.
Passive income comes from someone benefiting from something you own and paying for it. It must still be benefiting for them to pay for it. If things had ground to a halt, no one would be getting anything, so they wouldn't pay for it.
It's like if I said that people running faster and faster would eventually result in them running faster than the speed of light. No it wouldn't: I'm just extrapolating a model out of its domain of applicability.
> Or maybe only if you couple it with the categorical imperitive.
It also requires taking 'collecting passive income' as a moral act. If I took 'being a car mechanic' as a moral act, I could explain how awful it would be if everyone became car mechanics: there would be no farmers or nurses. But that's a poor analysis of the morality of occupation. This application is absurd and your application is not, but there is a decision on your part that wasn't among your premises.
That's only true if things like you know, automation, don't exist.
The payphone example isn't that bad honestly. What people are paying for is sending around information. You could pay a person to run around and tell it in person, or you could build a network of telephones and charge for their usage. The latter is faster, easier, cheaper, more convenient, and doesn't take any people to run despite being a major boon to society. Yet it's completely passive outside occasional maintenance.
I suppose the question is if it's ethically correct to pay the maintainer vastly more than it actually takes to maintain the public good just because they "own" it. At least currently in our society it seems we've collectively decided it's worth overpaying for the benefit since the rewards tend to be good enough (otherwise everything would be nationalized).
I don't think passive income requires the abolishment of non-passive reward structures.
You'll never hit a point where people will starve before working even if they're pulling in some amount of presumably useless currency. It's hard for me to imagine a scenario you're talking about.
I suspect the appeal of this in its present state is that passive income confers a sense of security to millennials. Our jobs are inherently temporary, and at some point in tech fields - it is likely that you won't have an easy time finding the next one.
Given that loss of income would lead to massive penalties in lifestyle up to expulsion from life's basics... It's obvious why the winning strategy would be to acquire a secure income stream within your control.
I think the categorical imperative stops you from harming others, but not from profiting. It is based on free will, after all, so it's not against the individual per se.
But to continue your other line of reasoning: there's always someone who profits, and obviously not everybody can profit. There is always a difference. Therefor it cannot be immoral, because it is unavoidable. It is however right to strive for minimal consequences of this difference (in wealth).
Don't let this make you shy away from the idea of investing though! Remember that fiat currency as a general concept ensures that your base unit of value is constantly depreciating.
Even if there was zero growth in the overall economy, because of how we've structured our financial system, asset prices as a whole will always go up because they are pegged to a depreciating unit of value.
Reinvesting money from stocks and shares is passive income, right? It's hard to say investing is immoral.
It benefits society if universally adopted, albeit only as a part of an individuals economic activity.
Passive income as the only economic activity doesn't pass the categorical imperative test though: it just creates a stratified hierarchy of owners and workers.
It’s pretty easy for me to envision a world where nobody makes anything and nothing comes to a halt. It’s just a matter of adding automation in places where we didn’t previously have it.
there are two broad categories of "passive income" that people often talk about, with differing effects on society.
1. You have a product that takes little effort for you to maintain, but people find it valuable and pay for its use. In HN terms, this might be a small software project that can be maintained with just a couple hours each month. This is not bad for society- you are offering something that people find valuable, and you get lucky because it's easy for you! A key point is that you are not exploiting people to make this income. We all have varying skills and we make gains from trade. If you are good at programming and I am not, I can pay you to do something that is easy for you but would have been hard for me. This is how we increase our productivity as a society- let each person focus on the things they are good at and avoid the things that are hard. So this type of passive income is okay. We'll probably never see a society where every need is met through people's low effort projects (nobody has a side project that builds major roads or infrastructure), but you aren't harming society by doing it.
2. You have a product that you charge for and you add no value, but for some reason people have to buy from you. In economic terms, we are talking about rent-seeking. Imagine if, right before a hurricane came through, you bought every single 2x4 from all the Home Depots and Lowes' stores in the local area, and sold them to people at twice the original price trying to repair their houses after the hurricane. You did not improve the value of the 2x4s and if not for you, people could have bought them for less money. You exploited the limited local supply of 2x4s and added nothing, but extracted money from people who had no other choice. This is bad for society.
I like your point. When I see the term "passive income", I immediately convert it to "rent seeking". _Some_ amount of rent seeking will always exist in any capitalist system, but there is a limit where it becomes inefficient. However, most capitalist systems are self-adapting enough, such that when too much of one type of rent seeking appears, eventually new joiners are priced out with zero or negative returns. A simple example to understand is rental property: In many big cities, the ROE on rental cashflow can be nearly zero. (However, there is still a good chance for capital appreciation.)
The original definition that's been hopelessly muddied (language evolves, so eh; I find the etymology interesting) of rent-seeking was that of powerful business men using politics to get benefits. Like a subsidy for their product or some regulation passed that favors them.
Imagine a future where every person owns a personal robot who does their current job for them, and the person gets paid.
That’s not inherently evil is it? It sounds pretty nice.
The evil comes in people squeezing others. Whoever make the robots obviously have a lot of power, corporations would quickly find ways to cut out the “parasitic” humans and get the robot labor, etc.
On the one hand, it's so obviously true that it would be great to have passive income. Draw the salary you're drawing now, with some growth, and not have to work.
On the other hand, if everyone had access to this capability then society and civilization would grind to a halt. People make things; if people don't make things, then we don't eat, we don't drink. If the goal is to have a system where everyone can have passive income, then achieving that goal is the end of the world.
The categorical imperative roughly says that something is moral only if its universal adoption would benefit society. So there is a break there. The idea of passive income is isomorphic to rent seeking, which we generally agree is a bad thing.