Luskin Says Krugman Can’t Add – But Can Don Read?
After Andrew Samwick noted an interesting query as to the Baker-Krugman logic, Luskin decides he has to hurl insults at Dr. Krugman:
Krugman states that the return on stocks from dividends and share repurchases is 3 percent. He states that “profits grow at the same rate as the economy,” and notes that “economic growth … averaged 3.4 percent per year over the last 75 years.”… That’s 3 percent per year in yield plus 3.4 percent in capital gains. Sounds like a 6.4 percent return, to me. Just a hair shy of the 6.5 percent Krugman and Baker asked for, but I am still going to declare victory. Even without the arithmetic, there’s nothing so unusual about thinking that stocks could return something like 6.5 percent, after inflation, over the next 75 years. After all, they’ve returned exactly that over the last 75 years.
Before anyone starts thinking Dr. Krugman can’t add 3.0 and 3.4 properly, take a look at what he really wrote, which Luskin misrepresents:
To get a 6.5 percent rate of return, you need capital gains: if dividends yield 3 percent, stock prices have to rise 3.5 percent per year after inflation. That doesn’t sound too unreasonable if you’re thinking only a few years ahead. But privatizers need that high rate of return for 75 years or more. And the economic assumptions underlying most projections for Social Security make that impossible. The Social Security projections that say the trust fund will be exhausted by 2042 assume that economic growth will slow as baby boomers leave the work force. The actuaries predict that economic growth, which averaged 3.4 percent per year over the last 75 years, will average only 1.9 percent over the next 75 years. In the long run, profits grow at the same rate as the economy. So to get that 6.5 percent rate of return, stock prices would have to keep rising faster than profits, decade after decade.
Simply put, Dr. Krugman is talking about the Trustee’s projections and not the past. Luskin gets around to sort of conceding my point later:
Today, once again, Krugman wants it both ways. He’s sure that stocks will perform poorly in the future, but he says, “if the economy grows fast enough to generate a rate of return that makes privatization work, it will also yield a bonanza of payroll tax revenue that will keep the current system sound for generations to come.” But that’s simply not true.
Now I would hate to accuse Don Luskin of flat out lying here, so maybe he really thinks this is what Krugman said. But then, it only proves the point – Don Luskin can’t read simple English.