Up and Dow
Right in Practice,
Right in Theory
Once again,
Slate
writers are
attacking our book even though they haven't read it. The book, Dow
36,000 , which will be out in early September, explains the reasons for the
stock market's rise between August 1982, when the Dow Jones industrial average
stood at 777, and today, when it's over 10,000. During nearly this entire
ascent, financial journalists, academic economists, and Wall Street analysts
have claimed the market was heading for a fall. After all, just look at
price-to-earnings ratios and other measurements of valuation, goes the
conventional wisdom. They're too high!
What my co-author--Kevin Hassett, a former Federal
Reserve economist whose work has been widely published in scholarly
journals--and I offer in our book is a new model for pricing stocks, one that
is consistent with the market's performance and with the basic principles of
finance. Our starting point is that the value of a stock, like that of any
other asset (a rental condo, a bond), is determined by the amount of cash it
puts into your pockets over time. With stocks, that amount has been
sky-high--and will continue to be, we believe, until shares are bid up by
investors to where they should be. That proper level is about 36,000 on the
Dow.
This argument is laid out at length in an annotated
300-page book, which also includes extensive advice on how to implement an
investing strategy based on the theory.
In
Slate
on June 9 (""), Paul Krugman
rehashed the criticisms made in
Slate
by and before him. Our
response to Krugman is the same as our response to Gottlieb and Crook: You're
accusing us of making an assertion we don't make.
Krugman wrote that our theory is based "on a simple
misunderstanding of corporate accounting"--that "businesses can eat their seed
corn and plant it too." What he means is that, while we rely on the growth in
cash flowing to investors as justification for higher stock prices, that cash
is needed by corporations themselves. In other words, we "double-count"
by using reported corporate earnings for our calculations. But we don't.
Nowhere in the book do we claim that free cash flow is equal to earnings. In
fact, we say that it would be an "egregious error" to make such a statement or
to use it in calculations of stock values. Instead, what we have written from
our first March 1998 piece in the Wall Street Journal to our book--and
have repeated, without provoking objection, at academic conferences from
Princeton to Tokyo--is that the measure of cash is somewhere between the lower
bound of dividends and the upper bound of earnings. In the book, we discuss
simple ways to determine cash flow as a percentage of earnings. (Hint: The
answer is far from 100 percent.)
The thrust of Krugman's piece is the irony that
stocks have kept rising, just as Glassman predicted, so that "the guy who had
no idea what he was talking about gave what turned out to be good advice." This
twisted argument--that we are right in practice but wrong in theory--has become
the last refuge of people who simply do not understand what has been happening
in the stock market over the past two decades and who cling to an old paradigm
that recent history has clearly repudiated.
We have written a
serious book--one that will launch a debate over discovering a new and useful
model for determining the true value of stocks. But see for yourself. Don't
read premature reviews of a book that the reviewers haven't read. Just hang on.
Dow 36,000 will be out in 10 weeks.
-- James K.
Glassman
Washington
Al Gore, Chemical
Brother
Timothy Noah writes in Chatterbox ("") that the
fuss over the poisoning deaths of 800,000 animals at a cost of $15 million in
taxpayer funds in the Environmental Protection Agency and the Chemical
Manufacturers Association high production volume (HPV) chemical testing program
is about "a whole lot of nothing." Every national animal protection
organization in the country--representing more than 10 million Americans, and
all of which have asked Vice President Al Gore to re-examine the program--would
beg to differ.
So might the environmental, consumer, and public
interest group members of the EPA's food quality advisory panel who recently
resigned in protest, stating that the agency "dithered in endless, fruitless
debate" rather than "doing anything about toxic chemicals that have been around
since World War II" (the Washington Post , April, 28, 1999). So might any
number of public policy right-to-know organizations for whom the design and
goals of the HPV program are "obscure" ( Right-to-Know News , Jan. 8,
1999).
What they would tell Noah is this: The EPA has the
knowledge and the ability right now to prioritize the high production
volume chemicals and protect us from the most hazardous ones. But the agency
has launched unthinkingly into this nation's most massive animal testing
program, rather than make the effort to collect the substantial amount of
existing data on these chemicals, centralize it, and make it accessible.
Spurred on by Gore's
rushed schedule for the testing program, even EPA officials admit they are not
able to develop a scientifically defensible testing strategy. According to
whistleblower calls PETA has received from EPA employees, the HPV program is
taking much needed resources from important, effective (and authorized) EPA
programs. In fact, after all the money is spent and all the animals have been
killed, what the public, the environment, and the workers will be left with is:
a whole lot of nothing .
-- Jessica
Sandler
People for the Ethical
Treatment of Animals
Norfolk, Va.
Over and Under the
Line in Oregon
Almost everyone misunderstands the Oregon Health
Plan, and Cyrus Sanai ("") is no exception.
Oregon led the way with an attempt at
explicit rationing--treating only the diseases that were most likely
to benefit from treatment and increasing the coverage as money allowed. Most
everyone else in the world rations implicitly through a process known
as "queuing" in England by progressively increasing the length of time needed
to obtain services until the least hardy either get better, get discouraged, or
die. It is debatable which is the better procedure; it is not
debatable that resources are limited, that some form of rationing is
inevitable, and that virtually every scheme for financing medical care has run
aground on the shoals of excess demand in an ocean of insufficient
resources.
People actually do get treatment for many of the
"noncovered services" in Oregon, and specifically, they get treated for anal
fissures. It's just that the doctor usually doesn't get paid for treating them.
Many "below the line" procedures actually are covered on a case-by-case basis,
but it depends on the insurance company's policy (there are many private
companies administering the Oregon Health Plan).
To my knowledge, there has been little or no
movement of "the line" since the scheme was first written down. The federal
government has been very reluctant to grant the necessary waivers to allow the
Oregon experiment to operate that way, so in reality, the number of diseases
covered has not changed very much. But the eligibility requirements change with
changing resource levels so that more or fewer people are covered by the plan
depending on how much money is available. People pretty much expect to be taken
care of no matter what is wrong with them, and once they get their "insurance"
card the hemorrhoid sufferers generally will not defer to congestive heart
failure, for example, so the Oregon plan has a fatal flaw; the most basic flaw
of all--human nature.
Most people are uncomfortable with the idea of a
tax-supported planned suicide--but it is, among other things, an unintended
consequence of the Americans with Disabilities Act. How can a publicly funded
program discriminate against persons with disabilities? If it is legal, then
the law requires that it be funded. For what it is worth, there has been no
rush to exterminate a lot of unwanted Oregon Health Plan recipients. For one
thing, there is something called Tort Law (malpractice) that discourages even
the most dyed-in-the-wool supporters of "death with dignity" from actually
prescribing any suicide cocktail.
-- Thomas S.
Duncan
, M.D.
Astoria, Ore.
Cyrus Sanai
replies: Dr. Duncan is correct that the HMOs administering the Oregon
Health Plan may elect to cover conditions below the funding line, and no doubt
many physicians do treat such conditions at no charge or by combining treatment
with a condition falling above the line. But they don't have to provide such
treatment under the Oregon system; that's the whole point of having the
prioritization list.
Dr. Duncan's information on the status Medicaid
demonstration waiver is outdated; the Oregon Health Plan received its Section
1115a Medicaid demonstration waiver from the federal government in 1994 after
being required to reorder the prioritization list.
The Americans with
Disabilities Act has a lot of strange things to answer for, but publicly
supported assisted suicide is not one of them. After the Death with Dignity Act
survived a repeal attempt and court challenges, the Oregon governor's office
concluded (correctly, I think) that physician-assisted suicide was a medical
procedure eligible for inclusion in the prioritization list. However, it was
the commission that decided that the "Rx of No Return" merited position 263.
That there has not been a rush to fill these prescriptions, let alone publicize
the availability of this option, does not lessen the significance of Oregon's
move as the logical intersection of health-care rationing and assisted
suicide.
Chihuly
Hoop
In general I agree with Eric Scigliano's "Letter
From Washington" ("") on Dale Chihuly; however, I think he's being unfair in a
few places.
First, I think he makes far too big a deal over the
fact that Chihuly doesn't blow his own glass. Many sculptors run workshop
studios where assistants do the actual casting and assembling of the large
works. I'm not sure how many of the Burghers of Calais were actually
cast by Rodin, and I don't think it particularly affects how I should regard
the statues. If Scigliano thinks that Chihuly's real crime is to imply that he
still blows glass, then he should say so directly.
I'm also not sure it's
fair to lay all of the Northwest's sins at the feet of Microsoft, Amazon.com,
and Starbucks. While making his case that the nouveau riche are responsible for
Chihuly-mania, Scigliano also cites Tacoma as ground-zero for the phenomenon.
Last time I checked, there weren't too many stock-option millionaires living in
Tacoma.
-- Tom
Williams
Seattle
