## Let's Talk About CEA-Chair Nominee-Designate Kevin Hassett!

Bring it on: let us talk about his 1999 book *Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market* http://amzn.to/2oaZZMU.

If he thinks that his late-1999 forecast that the Dow was about to triple in the next three-to-five years was a good forecast *ex ante*, he should be willing to defend it.

But he doesn't.

Because he can't.

The ten most major things wrong with the argument in *Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market* are:

Hassett did not understand the Gordon equation. The Gordon equation is P = D/(r - g)—the value of a stock index is its dividend divided by the difference between the real rate of discount and the expected growth rate of earnings and dividends. Hassett did not know that.

Because Hassett did not understand the Gordon equation, he wrote down the equation P = E/(r - g), where E is the earnings divided by the difference between the real rate of discount and the expected growth rate. That is simply wrong. Hassett's equation double-counts retained earnings: they show up once in the numerator, and they show up again in the denominator because it is the retained earnings that fuel the investments in plant and equipment that cause earnings and dividends to grow at the rate g.

If Hassett had been even vaguely competent

*on this particular issue*, his book would have been called not*Dow 36000*but rather*Dow 22000*Hassett did not understand the economics of the equity return premium—the spread ρ between the rate of discount r

^{f}on risk-free safe assets and the rate of discount r on the risky market: ρ = r - r^{f}. A larger equity return premium ρ operates on both terms on the other side of the equation.Because Hassett did not understand the economics of the equity return premium, he thought that if the equity return premium were to fall the consequence would be that the risk-free discount rate r

^{f}would remain constant and the rate of discount on the risky market r would fall by the entire amount of the fall in the equity return premium. I know of no economic model that can be written down in which this is the case. I know of no economic theory in which this is the case.If Hassett had understood that the presence of a large equity return premium means not just that the rate of discount on the risky market is high but that the rate of discount on risk-free assets is low, his book would have been called not

*Dow 22000*but rather*Dow 15000*.Hassett did not understand that while you can rationally argue that the equity return premium ought to be a lot smaller than it is, or that patient investors should work with an equity return premium smaller than the market's, or that the equity return premium might shrink someday, only a fool—and a grifter—argues that the equity return premium

*is*going away now and*will*be gone within three to five years after 1999.If Hassett had understood the historical variability and persistence of the equity return premium, his book would have been called not

*Dow 15000*but*Dow 15000?*Hassett did not understand that while only a fool—and a grifter—argues that the equity return premium

*will*substantially shrink over the next three to five years, only a double fool picks the moment when the stock market is in its largest bubble ever to make that argument and tell his readers that they must act now to "take advantage of the coming rise in the stock market" to "Dow 36000".And he never came clean.

And now let's turn the mike over to Kevin Hassett himself:

The Dow should [i.e., ought logically to] rise to 36000 immediately [that is, in October, 1999]...

[In fact] the rise will take some time, perhaps three to five years...

[S]eize the opportunity now [i.e., in late 1999] to profit from the rise in the Dow to 36000...

The case is compelling.... 36000 is a fair value for the Dow today... stocks should rise to such heights very quickly. As you read on, you will... learn to invest in ways that take advantage of a remarkable time in financial history...

Thus I disagree with Noah Smith when he writes "Hassett did make a math blooper in Dow 36,000, but I absolutely disagree that this should discredit him for life!!" It's not one math error, Noah. It's not putting your thumb on a statistical or analytical scale, Noah. It's taking your fist, and hammering your fist down on the scale as hard as you can eight times in rapid succession. And it's doing so when you know better: when your point is not to educate or inform your readers, but rather to grift them in the standard right-wing way we see all the time in the financial advertisements on Fox News.

Kevin Hassett has no business at CEA.