More Junk Science for Luskin
Now that Brad DeLong shows us that Donald Luskin is inconsistent, let’s provide Luskin with a few relevant samples of “junk science”.
My favorite quick reference for financial economics is the webpage of Aswath Damodaran. Under Research and Papers is his working paper entitled Estimating Risk Premiums, which uses the same Gordon growth model that Baker-DeLong-Krugman used. It is true that Andrew Samwick and Greg Mankiw challenged the original Dean Baker formulation suggesting payout ratios might rise if growth slowed down with Mankiw appealing to the Miller-Modigliani 1961 proposition. But as we noted here, the endogenous payout ratio does not fully answer Dean’s original question for reasons that Damodaran’s writings about growth, payout ratios, and the valuation of the firm demonstrate. As I suggested in a comment to Andrew, I need to work on exactly how this works.
Luskin’s main argument seems to be there is some free lunch based on the ability to transform the modest returns from bonds into higher expected returns from stocks – all the time ignoring the extra risk from such portfolio reallocation. Neither Robert Barro nor Gary Becker buy into this proposition. If they are Marxists, that’s news to me. Then again, both of these conservative economists are familiar with Harry Markowitz’s “Portfolio Selection” (1952) and James Tobin’s “Liquidity Preference as Behavior Towards Risk”, which explain the basis for the Barro-Becker argument.
I have often wondered if Mr. Luskin has read any of the great works in financial economics from the last half century. But rather than attacking Brad as a supposedly being a Marxist, maybe Luskin might notice that Brad has suggested potential reasons why the Barro-Becker-PGL argument might not be all there is to this issue. Then again – I suspect Luskin would consider all of the innovations in financial economics over the past half century “junk science”. After all, the lessons from modern financial economics do not quite square with supporting Bush’s proposal to kill Social Security.