Is it possible to have high stock market returns even though slower workforce growth means lower economic growth?
[Now, there is a standards issue here - when a mathematician says that he can "prove" something, it means one thing; when a social scientist says, for example, that his latest work "proves" that abortion has gone up under Bush, it may simply be an attempt to gull the gullible. Mathematicians look down on other disciplines as lacking rigor; because they use the high priced math, economists like to look down on the social scientists, and feel quite pleased with themselves when they prove, for example, that a country can not export capital while running a trade deficit.
But of course, if Krugman does not bring the conventional standards of economics to his popular writing, then when he says "mathematically impossible", he is not writing as an economist, but simply using pundit-type rhetoric to say "my fervently held opinion". And I suppose the case can be made that Krugman's columns are written to a lower standard.] [Added for emphasis for the non-mathematically inclined].
Now, let's be fair - Drum has shown admirable intellectual flexibility on this point - in earlier waffles, he has said that a forecast of high returns with low growth is "hard", and "You can probably do this if you're willing to fiddle with a spreadsheet long enough, but you'd have to twist your brain into a pretzel in the process."
We don't choke on pretzels here! Our position has been clear - higher corporate profitability (as a share of GDP) can lead to a higher return on capital. Could it happen in a slow growth environment? Could workers, whose labor protections have been gutted by Republicans since Reagan, lose a bit of their wage share of the GDP pie to Benedict Arnold CEOs threatening them with outsourcing? Could tax-slashing Republicans protect their corporate cronies from paying their fair share of taxes?
I say it is possible (so does Paul Krugman, and I suspect other Dems have muttered these points from time to time.)
Now Brad DeLong has joined in with a post and paper saying that I am right, at least conceptually [and he is quite explicit about that in this follow-up]. The devil is in the details, of course, and it would be nice if the Social Security Trustees would trouble themselves to produce a forecast consistent with their asserted 6.5% return on capital so we could assess its plausibility.
But all this back and forth (and, I suppose, being wrong) has triggered a temper tantrum from Drum.
POST HOC BULLSHIT....Tom Maguire has been pestering me for several days to comment on his theory that — contra Paul Krugman and others — it's quite possible to have both a low-growth economy (meaning that Social Security finances are in bad shape) and high stock market returns (meaning private accounts would be great). I'm not an economist and therefore couldn't offer him a detailed response, but my approximate answer was, sure, it's possible for that to be true (up to a point, anyway), but hardly probable.
"Pestering?". I prefer "dialoguing" myself, but if attempting to rouse Drum from his intellectual torpor is "pestering", well, guilty as charged. And as to his "approximate" answer being "possible but hardly probable", even that much of a modification from his (most recent) position may come as a surprise to his readership, who may interpret "only feasible if long-term economic growth is also very strong" somewhat differently.
But the Drumbeat continues:
...the problem with Tom's argument is that it's just a random post-hoc effort to explain away a problem the privatizers hadn't thought of before (or had been able to ignore). In other words, it's part of the genus bullshit.
Ahh! He puts up a post encouraging a response; Krugman issues a public challenge; and then anyone who responds is engaged in "post hoc bullshit". Is this the new blogosphere, or the "Reality Based" Version thereof? Puts a bit of a damper on the exchange of viewpoints.
Of course, Drum can also assume that non-respondents are ducking the question, or stonewalling. Actually, I ignored this for months, because it seemed to be an argument from the genus "strawman".
And what is so unrealistic about my scenario? Increased profitability and reduced taxes for the corporate sector are "bullshit"? Odd to hear Drum say so - what is the standard Dem position on that?
Throw in mobile, global capital, and one wonders just why Krugman and Drum are so wedded to their notion that the equity risk premium is an increasing function of projected workforce growth. Drum might want to pester someone and find out how that theory works - we are all curious.
But why do I bother? In Drum's version of a discussion, any response will just be post hoc bullshit. Having failed to anticipate every possible question he might ask, any answer he doesn't like will be subject to a similar dismissal.
Which is fine, since I am feeling a bit dismissive myself. I actually had a different question of my own. Let's go to Drum:
...intellectual honesty requires that you be consistently gloomy or rosy. Unfortunately, there's been precious little of that in the privatization debate.
I didn't think he needed to be lecturing anyone on intellectual honesty then, and I am quite sure of it now.
MORE: If Drum would care to read Brad DeLong's paper (sorry, no, not the summary), and these two posts by me, perhaps he could explain to us just how it is that I am engaging in "post hoc bullshit" while Brad DeLong is advancing the intellectual ball.
Folks who take the trouble to follow the arguments might notice the occasional parallel in our thought processes, which Prof. DeLong was kind enough to acknowledge.
UPDATE: One more wack at the pinata - if we accept the emerging consensus, based on the DeLong paper, that Krugman's "mathematically impossible" meant something a bit different, then I suppose we might also note that, in my post that Drum went off on, I included this caveat, cleverly labeled as such:
Now, obvious caveats - these numbers and examples do not, and can not, *prove* that the US stock market is correctly valued, or that the dividend yield must remain at 1.5%, or that foreign investment by US corporations *must* grow to some number by some date.
However, what these numbers *do* prove is that a perfectly coherent, mathematically consistent explanation of current share prices, earnings yields, and dividends yields is available. Toss in foreign investment, and we offer this in refutation of the various "HAIRy" models that attempt to "prove" that stocks must fall.
Maybe on the po-mo Left, standards of mathematical proof have taken a bit of a drubbing, but I am holding the line. As is Brad DeLong, I see.
And in an earlier post, I did make this Not So Bold Prediction:
My impression of this debate is that sometime soon, Krugman's supporters (if they can be coaxed forward - they stood up and cheered when he wrote this) will explain to me that "mathematically impossible" means "Not, in Krugman's opinion, very likely". C'mon - even on sports talk radio, no one says that it is mathematically impossible for the Orioles to win the pennant.
Standards, people, what are the standards to which we hold Paul Krugman?