Wednesday, September 24, 2008

McCain Economic Adviser Too Cowardly to Debate

This is pretty funny. McCain economic adviser Kevin "Bubbles" Hassett is hiding in his hotel room because he's too scared of Obama-supporter Brad DeLong to show up at their scheduled debate on the candidates' economic programs. Apparently, Brad strikes fear into his heart because in the past he has ridiculed Kevin's 1999 prediction that the Dow would hit 36,000 within 3-to-5 years.

1 comment:

Greg Hill said...

John McCain & “Dow 36,000”

John McCain's economic advisors have given him a series of headaches in recent weeks: Douglass Holtz-Eakin claimed that McCain invented the Blackberry; Carley Fiorina said neither Sarah Palin nor John McCain could run Hewlett-Packard (nor, she added, could their opponents, nor, it turns out, could she); and, of course, Phil Gramm called Americans who complain about their economic problems “whiners.”

The recent chaos on Wall Street, and McCain's unsteady response to it, may draw attention to yet another of McCain's problematic economic advisors - Kevin Hassett, co-author of the ill-conceived investment guide, “Dow 36,000,” which appeared in 1999, two years before the bubble burst.

How did Hassett and his co-author, James Glassman, react when their high-profile forecast turned out to be wildly off the mark? Instead of admitting their mistake, they dug their heels in, denying they said the Dow would reach 36,000 in the near future. Of course, if their book had been entitled “Dow 36,000 at Some Point in the Indeterminate Future,” it wouldn't have sold many copies. And if the authors really weren't thinking about Dow 36,000 in the short run, then why did Hassett and Glassman write that investors should “seize the opportunity now [i.e., in 1999] to profit from the rise in the Dow to 36000”?

This lame defense proved unconvincing, so Hassett shifted ground, insisting that “Dow 36,000” was not a forecast at all. Rather, Hassett had merely “calculated that 36,000 was the point at which the 30 stocks that comprise the Dow Industrials would be fully valued.” The trouble with this rhetorical strategy is that it collides with Hassett's view that investors form rational assessments of stock values.

If investors possess the requisite rationality, then why have stocks remained so undervalued for so long? Of course this “mystery” dissolves if most investors know something Hassett doesn't, namely that the stock market is a lot more risky than McCain's irrationally exuberant economic advisor thinks it is.

When Hassett discovered that his pleadings weren't paying dividends, he attempted to shift the argument away from his errant prediction and its underlying theory (which holds that, in the long run, stocks are no more risky than bonds) to an argument about ideology. Thus, Hassett insisted that “Dow 36,000 rests upon solid conservative foundations” and went on to assert that his misguided critics belonged to “the Left,” which believes that markets “are prone to manias,” and that these, in turn, can “drive economies into deep depressions,” thereby requiring a “large and intrusive government.” Got that? Critics of “Dow 36,000” really want a Soviet-style state to run the economy.

There are, in fact, many non-Leftist economists who believe that markets are “prone to manias,” that these “manias” can cause serious economic problems, but that the solution to these problems is not to be found in centralized planning. In fact, one such economist, Robert Shiller, has a much better forecasting record than Hassett and Glassman. Shiller's justly celebrated book, “Irrational Exuberance,” appeared shortly before the market meltdown of 2001, and his publicly expressed concerns about skyrocketing housing prices have now come home to roost.

How did the “Dow 36,000” authors account for Shiller's success? With characteristic generosity, Glassman said that “Shiller is one of the luckiest guys in show business,” whereas he and Hassett were simply victims of “bad timing.” If fact, Shiller's work is much deeper, his command of the empirical data much broader, and his recommendations much more well-reasoned than the bullish boosterism found in “Dow 36,000.” Does it matter? Imagine the kind of Social Security “reform” that might emerge from an economist who is convinced that stocks are no more risky than bonds and that the Dow is on the verge of reach 36,000?