Monday, April 04, 2005

Dog Fights

Based on this cryptic note at Maxspeak:

P.S. The dog that didn't bark. Nothing on this from Vox, Baby.
And this generous comment at AngryBear:
Greg might have given a citation to Andrew Samwick for this:

If the dividend yield is approximately irrelevant, as Modigliani and Miller tell us, then it is easy to imagine that it could undergo a major change in the years to come. Looking ahead, it seems plausible to me that dividend payouts broadly construed could rise significantly. If we are about to experience a period of slower economic growth because of demographic change, then firms might well have fewer profitable investment opportunities and, as a result, may decide to pay out a larger percentage of their earnings.

It seems like PGL should take Max for a walk to the dog pound.

I'm sure that for those inside the beltway, the Baker-DeLong-Krugman presentation at Brookings, along with the Mankiw comments, was big news. The crux of the matter is simply that the projections of future stock returns can be reconciled with the low economic growth rate in some models only if U.S. corporations do something other than reinvest a large chunk of their earnings domestically. I posted about this issue about two months ago, and subject to minor adjustments, that original post still represents my basic viewpoint. In the absence of additional knowledge and insights, I offer no additional posts.

Elsewhere in the blogosphere, Scrivener raises some interesting points about what happens to bond returns as stock returns fall relative to their historical values. Dean offers some followup comments over at MaxSpeak, and Brad offers some brief comments on his blog. To quote the MinuteMan, "[T]he intellectual ball seems to be advancing."

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PGL said...

No, no, no. Read the part where I said I DON'T think this argument answers Dean's question. Watch out, my dog tends to bite the hand that feeds it. Where is that muzzle?

Andrew Samwick said...

I did read that part, and I think what you are saying is that higher dividends, by themselves, are not sufficient to reconcile the low economic growth rate with the higher stock returns in the BDK model. That's why it's interesting to also consider higher dividends in combination with the other factors BDK identified--any use for the cash other than reinvesting in domestic corporations.

Bibamus said...

I realize that you have already responded to much of the substance of the BDK paper, but I would be interested in hearing your thoughts about Mankiw's response, in particular this passage from the conclusion:

"The case for moving Social Security from a defined benefit to a defined contribution structure is that it gives individuals more choice and control over their retirement income and the government greater transparency in its finances."

I realize that there are economic arguments for private accounts that do not depend, in any essential sense, on the rate of return we expect for the accounts. But I think this is the first time I have heard an economist say that the case for privatization is the increased freedom of individual choice and control (the bit about transparency strikes me as extraneous). I would be interested to know the extent to which you share this view, or the extent to which you think it is common among pro-privatization economists.

(I think this is interesting because, while this sort of argument is associated with a particular group of economists, it is not, fundamentally, an economic argument, but rather a political philosophy argument.)

PGL said...

bibamus: Brad DeLong tore into Mankiw's last conclusion. My view was that Mankiw pulled a bait and switch. It's not the BDK crowd that is trying to sell a free lunch - it's the crowd that BDK are criticizing that trying to tell us higher returns are riskfree. Check out the latest from Luskin over at:

To be fair to Andrew: (1) he never has bought into the free lunch crowd; and (2) he saw a weakness in the early Baker position. Brad has tried to address this weakness, but alas gets lost IMHO in the math. One day I'll be better at articulating why my early endorsement of Andrew's challenge was simply wrong - it does NOT undermine the BDK position even if their articulation of their position leaves us hanging.

Bibamus said...

I am just interested in hearing Andrew's two cents on this. Maybe I wasn't clear in my earlier comment, so I'll try to elaborate:

Part of the problem with this whole debate is that so many different people are in it for so many different reasons. While there are a thousand different bad arguments for privatization (more than a few with Luskin's name to them), it seems to me that there are at least three good ones, where by 'good' I mean intellectually consistent - not necessarily convincing (to me):

(1) Arguments related to pay-as-you-go Social Security's depressing effect on saving.
(2) Arguments related to the inability of the government to pre-fund its Social Security liabilities.
(3) Arguments related to 'freedom to chose' type beliefs, such as the one that Mankiw makes in his response to BDK.

There may be more but these are the ones that occur to me at the moment.

What I found interesting about the Mankiw response was that I have been assuming that if you pressed academic economist pro-privatization advocates as to what the reason is that we should move to private accounts, you would hear either (1) or (2) or some combination of the two. I'm sure that many of these people also buy into (3), but I wouldn't have guessed they would put it forward as the fundamental, underlying justification for privatization, as Mankiw seems to do. And like I said, I think that is interesting.

Don't get me wrong; while I respect this Friedman-style libertarianism as a political belief system, I don't subscribe to it myself. In fact, I think it is deeply flawed. But that is a whole debate in itself. Here I am not so interested in arguing the merits of this position as simply trying to understand how prevalent and influential it is among the supporters of private accounts, relative to the other, more explicitly economic arguments.

OHenry said...
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