Remora

Reader's mirage

Limited Inc was alerted to Bradford DeLong's weblog site today, when we came upon some comment about comment De Long had made about a recent William Greider article. Here are De Long's remarks about Greider:

"William Greider, writing in the Nation, hopes for a depression in the United States--for this would "deflate" the "smug triumphalism of Bush's unilateralist war policy" and be "a good thing for world affairs, since Washington couldn't run roughshod over others. He believes that such a depression could be triggered by "... financial scandals" which would lead "overseas investors... to take their money home... the declining dollar... [to] fall sharply... credit... [to] become suddenly scarce, since our debtor-nation economy relies heavily on capital borrowed from abroad, and... trigger an ugly downdraft in the U.S. economy." And then "the fashionable boastfulness about America... would implode."


Going to the article, however, one quickly finds that Greider is not "hoping" for a depression in the United States. He does, however, hope that the smug triumphalism of Bush's unilateralist war policy is deflated. His point is that economic policies that Greider thinks are taking us to the brink of depression will have the ironic effect of making America look inward, as so deflate the etc., etc. But noting that one expects an unexpected outcome from a bad thing isn't the same as hoping for the bad thing. In fact, Greider clearly describes his hopes, which are what they have been for some time: a populist economic policy that would strenghten the regulation of the financial industry, aim at ameliorating the inequality of incomes in the country, and would rid the private sector of its current problems with corrupt accounting and bloated CEO salaries.

Now, Limited Inc thinks that Greider's goals are good. We do think he is missing the boat on the effects of depression: the idea that nation's turn inward when their economies collapse isn't borne out by anything in recent history. But De Long's reading of Greider is so outrageous that we were tempted to dismiss the man completely. That, however, would be a mistake. De Long has an excellent analysis of stock valuations on his site, pointing out (as LI has pointed out long ago, somewhere -- was it a review? or one of these damn posts?) that the stock market, by traditional standards, is still overvalued.

"-Few people recognize how far out of whack the stock market still is today.
-There is still a large disconnect between current stock-market values and traditional valuation ratios relative to measures like earnings and dividends.
...
-Typically, over the last fifty years, stocks sell for about 30 times annual dividends and for about 18 times annual earnings.
-Today, however, stocks are selling for more than 30 times earnings, and more than 60 times dividends."

Usually, writers who notice this fact then become all alchemical about technical analysis, the bogus but influential school of analyzing stocks used by a certain truly reactionary species of contrarians. Actually, the traditional standard isn't the expression of natural law: it is rather the expression of accumulated expectations, given a history of productivity gains, inflation, competition with other investment instruments, etc. The New Economy model basically boiled down to the argument that current valuations are rational. The rationality goes something like this: the technologically abetted gains in productivity, and the instances of metastizing growth (for instance, among tech companies from the eighties to the late nineties) has made the 30 times earnings, and 60 times dividend metric more reasonable. This argument also includes, as a subargument, the sub voce dismissal of dividends as an archaic remnant of an earlier era of stock investment. This argument points to the increasing tendency of investors to buy stocks specifically to sell them in the short term, rather than benefit from splits and dividends in the long term.

While De long doesn't go into the ins and outs, here, I have to give him credit for laying out the issue. So -- I can't totally dismiss him as a reactionary slug. He's too smart a reactionary slug to really believe what he wrote about Greider -- it was, I think, an immediate reaction to his impression of the article. LI knows that situation: sometimes, the impression of what one reads is different than what one has really read. Call it: reader's mirage.