Krugman: The Free Lunch Bunch

[Strelnikov_]

By PAUL KRUGMAN
Published: January 21, 2005

http://www.nytimes.com/2005/01/21/opinion/21krugman.html?hp

. . .
"There are several ways to explain why this particular lunch isn't free, but the clearest comes from Michael Kinsley, editorial and opinion editor of The Los Angeles Times. He points out that the math of Bush-style privatization works only if you assume both that stocks are a much better investment than government bonds and that somebody out there in the private sector will nonetheless sell those private accounts lots of stocks while buying lots of government bonds."

"So privatizers are in effect asserting that politicians are smart - they know that stocks are a much better investment than bonds - while private investors are stupid, and will swap their valuable stocks for much less valuable government bonds. Isn't such an assertion very peculiar coming from people who claim to trust markets?"

. . .

"Fifty years ago most people, remembering 1929, were afraid of the stock market. As a result, those who did buy stocks got to buy them cheap: on average, the value of a company's stock was only about 13 times that company's profits. Because stocks were cheap, they yielded high returns in dividends and capital gains."

"But high returns always get competed away, once people know about them: stocks are no longer cheap. Today, the value of a typical company's stock is more than 20 times its profits. The more you pay for an asset, the lower the rate of return you can expect to earn. That's why even Jeremy Siegel, whose "Stocks for the Long Run" is often cited by those who favor stocks over bonds, has conceded that "returns on stocks over bonds won't be as large as in the past."

. . .

[SharonAnn]

1. Great article. i've already clipped it for my daily email letter

to Democrats and supporters.

They wonder where I get all these great articles that I send and I tell them the truth. I get most of the pointers to them from posters in Democratic Underground.

Sigh, but I do miss Kephra. He really made this the place to come to for real news.

[priller]

2. Krugman, as always, makes it simple

-- nt

[idlisambar]

3. Keep hammering away Krugman

I think Bush is going to lose this one.