A correspondent emails and reminds me that there are people who have even less of a grip on economic reality than Ludwig von Mises appeared to. It is genuinely hard to know where to begin. There are so many truly scary things here:
From Donald Luskin, I Am John Galt: In late February 2000, two weeks before the peak of the dot-com stock bubble at Nasdaq 5,000, Krugman wrote in his Times column that the Dow Jones Industrial Average was overvalued, saying, “Let the blue chips fall where they may.” As for the Nasdaq — which at that point had almost doubled over the prior year, and more than tripled over the prior three years — Krugman said soothingly, “I’m not sure that the current value of the Nasdaq is justified, but I’m not sure that it isn’t.” We all know what happened. As of this writing, the Dow is about 20 percent higher than when Krugman wrote those words — and that’s not including a decade of dividends…
Two genuinely scary things:
First, Paul Krugman's declaration that he did not know what the current justified value of the NASDAQ was was not said "soothingly" but rather "scarily".
Krugman's point was that we were radically uncertain about how far the tech boom would extend and how large it would be. Thus people holding the NASDAQ were accepting enormous risks. That's not "soothing".
That Luskin thinks it is soothing is scary.
Second, Paul Krugman's declaration that he was sure that the DJIA was overvalued--that here we had not uncertainty but rather mispricing--was then correct. The DJIA companies were not companies that were in the process of transforming their markets. We had a pretty good handle on what their profits were and what the growth rate of their profits would be. Simple back-of-the-envelope calculations strongly suggested that it was highly overvalued: that you would do much better in the long run putting your money into some alternative asset class, no matter how long and how important the information-technology revolution turned out to be.
Indeed, invest your money in 30-year Treasury bonds in February of 2000 and your real return to date has averaged 5% per year--compared to a real return of zero for the DJIA, for even with dividends your wealth has not quite kept up with inflation.
And, of course, if you did not have a long horizon but were planning to sell your DJIA holdings in 2002, or 2003, or 2004, or 2005, or 2009, you were in a world of hurt.
Then comes the most truly scary thing:
As best as I can figure out, Donald Luskin actually and genuinely believes what he says.
He genuinely believes that a real return on the DJIA of 0 since 2001 demonstrates that the DJIA in early 2001 was not then overvalued.
There are other scary things as well in his past. For example, he appears to genuinely believe that Bill Clinton and John Kennedy were really (good) Republicans and that George H.W. Bush and Richard Nixon were really (bad) Democrats:
Donald Luskin: But it's not so simple when you study that "study." First, not all Democrats act like Democrats, and not all Republicans act like Republicans. John F. Kennedy, for example, was an enthusiastic supply-side tax cutter, and George H.W. Bush raised taxes. Bill Clinton promoted free trade, and Richard Nixon imposed wage and price controls. If you assign those four presidents to the opposite party based on that -- make the two Democrats into Republicans and the two Republicans into Democrats -- the numbers completely reverse...
And he genuinely believed in September 2008--nine months after the recession had begun and just when every real economist's fear and terror level was rising into the red zone--that the economic outlook was sunny:
Quit Doling Out That Bad-Economy Line: In the last reported quarter, the U.S. economy grew at an annual rate of 3.3 percent, adjusted for inflation. That's virtually the same as the 3.4 percent average growth rate since -- yes -- the Great Depression…. The Mortgage Bankers Association (MBA) database… shows that today's [mortgage] delinquency rate is only a little higher than the level seen in 1985. As to the foreclosure rate, it was setting records for the day -- the highest since the Great Depression, one supposes -- in 1999, at the peak of the Clinton-era prosperity…. [T]oday's foreclosures are concentrated in that small fraction of U.S. homes financed by subprime mortgages…. [T]oday's mortgage difficulties are probably a side effect of the otherwise happy fact that, over the past several years, millions of Americans of modest means have come to own their own homes for the first time….
A housing "slump," a housing "crisis"? A "severe" price decline? According to the latest report from the National Association of Realtors, the median price of an existing home is up 8.5 percent from the low of last February…. So why keep proclaiming a "crisis" after it's over? "Turmoil" in the debt markets? Sure, but we've seen plenty worse…. [B]ank equity capital -- the best measure of core financial strength -- is now $1.35 trillion, more than the $1.28 trillion level of mid-2007, before the "turmoil" even began….
Yes, from all-time highs last October, the S&P 500 has fallen 20 percent. But that's nothing by historical standards…. Some economic indicators -- export growth and non-defense capital goods orders such as industrial machinery, for example -- are running at levels associated with brisk expansion. Others are running at middling levels, such as the closely followed Institute for Supply Management manufacturing index. But it's actually difficult to find many that are running at truly recessionary levels.
There have been 11 recessions since the Great Depression. And we're nowhere close to being in the 12th one now. This isn't just a matter of opinion. Words -- even words as seemingly subjective as "recession" -- have meaning….
[A]nyone who says we're in a recession, or heading into one -- especially the worst one since the Great Depression -- is making up his own private definition of "recession." And probably for his own political purposes. McCain campaign adviser and former U.S. senator Phil Gramm was right in July when he said that our current state "is a mental recession." Maybe he was out of line when he added that the United States has become "a nation of whiners." But when it comes to the economy, we have surely become a nation of exaggerators….
The sentiment of the majority is always wrong at key turning points…. [W]e're on the brink not of recession, but of accelerating prosperity.
That is really scary.