July 24, 2012
Andrew Biggs, an economist at the American Enterprise Institute, is one of the more serious and careful people arguing conservative positions on policy issues. Nonetheless, he strikes out badly in trying to catch me in a contradiction. (Excuse the self-indulgence, consider this a carryover from my birthday boasts.)
Andrew has a blog post where he apparently believes that he has really got me [thanks gov wonk]. I have authored or co-authored several items recently on public pensions in which I argued that it is almost impossible to imagine scenarios in which pensions get returns on their stock holdings that are markedly worse than what they are assuming in their projections (e.g. here and here).
Andrew has my projected returns as averaging 8.9 percent in the current decade and 8.2 percent in the next two decades. (That’s not quite right, but close enough.) He then pulls out his gotcha, a paper from 2000 in which I projected stock returns of 3.4 percent for the first two decades and 3.5 percent for the 2030s. (In a note he points out that he forgot to add 2.8 percent for the inflation rate assumed by the Social Security trustees, whose assumptions provided the basis for my projections.)
So Andrew has me projected 8.9 percent returns and 8.2 percent returns when I was making projections of 6.4 percent and 6.5 percent back in 2000. Should I be wearing a paper bag over my head for the next year in shame?
Perhaps I should, but not because of Andrew’s discovery. In that 2000 paper I wrote:
“It is reasonable to believe … that stocks are temporarily over-valued, and that price-to-earnings ratios will soon fall back to more normal levels [this is the ratio of stock prices to trend earnings]. However, if this is the basis for assuming that stocks will provide their historic rates of return in the future, it would be necessary to include a large decline in stock prices in the projections.”
Andrew probably missed it, but we did in fact have a large decline in stock prices (two actually) between 2000 and the present. That is why I am now confident that we can expect higher rates of return in the future. In other words, I have been 100 percent consistent in my projections of returns, what has changed is the market itself.
I appreciate Andrew’s efforts to remind everyone that I called the stock bubble back in 2000 (actually first in 1997).
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