Re: The Truly Abominable Kevin Hassett: Steve Durlauf Does the Work of the LORD: LIFE IN THE 2000s
How a bad book, a bogus formula, and a hunger for favor led Kevin Hassett to discover that he could lie his way up the ladder as a career, and it would pay. Republican politicians and journalists call it “economic advising”. But that really is the wrong phrase, isn’t it?
Going over to X-Twitter is, from one perspective, always a bad idea. It always darkens my day by what it leads me to focus on. But at least I can give Steve Durlauf a little bit of assistance as he does the Work of the LORD.
And the LORD Has a Lot of Work.
We have:
Maria Bartiromo: ‘Consumer sentiment is a record low. What's the most important messaging you can put out there to help sentiment?
Kevin Hassett: ‘They call it “consumer sentiment'“ but I don't think those words mean what they think they mean anymore. The correlation between what independents and Democrats say is almost perfectly correlated. So they've devised a political survey that tells us how Democrats are feeling about things… <[twitter.com/atrupar/s...](https://twitter.com/atrupar/status/2059247974606074346)>
Steve Durlauf, doing the Work of the LORD:
Steve Durlauf: <[twitter.com/sndurlauf...](https://twitter.com/sndurlauf/status/2059269369578885541)>: ‘The University of Michigan Consumer Sentiment Index was started in 1946 by George Katona. It is a standard source of information on the state of the economy and the product of decades of scholarly effort.
Kevin Hassett's statement "they've devised a political survey that tells us how Democrats are feeling about things" is one more lie from someone who long ago forfeited any claim to be an economist.
"For Wales? Why, Richard, it profits a man nothing to give his soul for the whole world... but for Wales?" A Man for All Seasons…
I am surprised how few people know what a bad person and bad economist Kevin Hassett is.
Back in the late 1990s, his mentors and advisors and employers (I’m looking at you, AEI) should have seriously smacked him down over Dow 36000: The New Strategy for Profiting from the Coming Rise in the Stock Market, that he claimed was about to quadruple over the next three to five years. Maybe if they had smacked him down seriously, something could have been salvaged.
But they didn’t.
And so he learned the lesson that telling lies, as long as the lies were to the tastes of plutocrats wanting lower taxes, Republican politicians wanting validation for policies they were proposing without caring whether they were actually in the national interest or not, and scattered kleptocrats, got him promotions. And money. And power. And influence. The office of Justiciar for Wales, for example.
Let’s reroll the videotape:
Back before 2000, Kevin Hassett and James Glassman spent their days telling lies.
Back then, they spent their days telling lies about what bog-standard present-value finance calculations said was then the “fundamental” value of the stock market.
They claimed that:
IF—if, which nobody does—you believed the appropriate equity risk premium vis-à-vis US Treasury bonds was zero,
THEN the fundamental-value price-earning ratio for stocks should be 100,
and the “fundamental” value of the Dow-Jones Index was not its then-current 9000,
but four times as much: 36000.
HENCE you should be happy going all-in on stocks at anything up to four times their then-current price.
And in fact you should go all-in, or mortgage your house and buy even more, in order not to miss the near-term 300% profit from being all-in the DJIA as it imminently converged to what they claimed was its fundamental value over the next three to five years after 1998.
That was the message of their book.
That was the title: Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market <https://www.amazon.com/Dow-36-000-Strategy-Profiting/dp/0609806998>.
That was the bottom line: “our analysis justifies a Dow of about 36,000—not in five or 10 years, but right now.”
Of course it did not happen.
If you had bought the Dow at 9000, and if you were forced by liquidity to sell at the trough over the next half-decade, you did not quadruple but instead lost 20% of your money.
If you had been unlucky enough to buy at the peak and be forced by liquidity to sell at the trough, you lost 40%.
When challenged by people who said that their math seemed, wrong, Glassman attempted a partial walk-back:
I never made such a claim [of a quadrupling]. I said that dividends are probably a lower bound for cash flow to investors and that official earnings are probably an upper bound…. Accept[ing] your definition of cash flow as dividends… the market is not overvalued…. The market should be roughly 50 percent to 100 percent higher [than he currently is]. Using the outer bound (reported earnings), the market should be 300 percent higher…
Which partial walk-back, of course, involved a big bold-faced lie.
Glassman (and Hassett) had not claimed that the fundamental value of the Dow then at 9000 should be in the range of 13500 to 36000—“roughly 50 percent… higher… [to] 300 percent higher”. Glassman and Hassett had claimed that their fundamental analysis: “justifies a Dow of about 36,000--not in five or 10 years, but right now.”
Hassett, to my knowledge, did not at the time attempt even a partial walk-back when challenged.
The extremely sharp Clive Crook <https://web.archive.org/web/19991231025452/http://www.slate.com/Dialogues/98-04-29/Dialogues.asp?iMsg=1> called Glassman and Hassett on this at the time:
You’re wrong, plain wrong…. Your reasons for believing that the Dow should be at 36,000 are wrong in the same way that it’s wrong to say two plus two equals five. That, in fact, is almost literally what you are saying. According to you… the fact that earnings have grown faster than inflation for decades is “little understood”…. Can you seriously believe that this has been going on decade after decade without the market’s noticing? Doesn’t that strike you as just a little unlikely? Of course it’s been noticed, very much noticed—so adequately noticed, in fact, that the prospect of real growth in both earnings and dividends is already fully priced into the market….
You haven’t understood your “simple finance formula.” To get your estimate of 36,000… where your formula says “payout,” you have taken this to mean earnings…. [But] if companies pay out every cent of their profits to shareholders… how will they… grow?… Growth requires investment, and that must be paid for by stockholders…. The right measure of value is the sum of discounted dividends. This fully captures the effect of capital appreciation because dividends are themselves growing along with the worth of the company…
Crook was and is entirely correct, except in one thing.
That one thing? I know that in Hassett’s case it was not “because [he had] not understood [his] ‘simple finance formula’…” There is no “not understood”. Hassett understood and understands the Gordon fundamental-valuation finance equation very well. (Glassman, I am not so sure.)
The “payouts” Gordon fundamental-valuation equation (a) takes current dividends D as payouts and divides them by the difference between the required rate of return r and the growth rate of dividends g to get the warranted price P:
If you want to use earnings rather than dividends, there is an alternative “resources” equation you can use (b) which takes earnings E as resources and divides them by the required rate of return r:
Resources can either be paid out now, or used to produce growth and so higher profits that can be paid out in the future. Add the value of (a) current payouts to the value of (b) growth produced by investment, which is (c) the difference between resources and payouts. When you do that addition “payouts” cancel, and you are left with the value of resources. (And you then have to add on a term capturing the company’s ability, if it has one, to make investments with above-market returns.)
Glassman and Hassett took the “resources” from (b) and pretended they were the “payouts} from (a).
They thus double-counted retained and reinvested earnings both as a source of current cash flow and as a driver of profit growth. A given dollar of earnings can be either cash-flow paid out to investors or reinvested to drive profit growth, but not both.
THIS IS NOT SUBJECT TO DEBATE.
THIS IS 2+2=5.
IT IS A LIE TO CLAIM THAT THE TOTAL RESOURCES A COMPANY HAS TO DEPLOY FOR PAYOUTS AND FOR INVESTMENT ARE PAYOUTS, AND SHOULD BE VALUED AS PAYOUTS, PLUS ASSUMING GROWTH WILL CONTINUE.
IT IS A LIE TO CLAIM THAT THIS IS AN ISSUE ABOUT WHICH THERE CAN BE DEBATE.
In Hassett’s case, at least, this is a deliberate, conscious, malevolent lie.
Plus—plus!—to get to their Dow 36000 number then, they had to make the highly counterfactual assumption that the equity risk premium really ought to be not smaller but zero. And, to justify the prediction that the DJIA would go to 36000 over the next three to five years, that whatever factors had been causing the actually-existing risk premium were about to completely stop.
Why did Glassman and Hassett tell these lies back then?
Nobody could ever advance an explanation other than that they wanted to get noticed and sell books.
And Hassett, at least, has not changed his MO in the past three decades.
Back before 2000, I thought that Kevin Hassett had close to destroyed his career by showing that he was a person who was willing to tell bald-faced lies about his analysis, double-down when challenged, and then double-double-down again when challenged more, for no reason other than to sell books.
I might have said some things to people who had been on the faculty of the University of Pennsylvania when Hassett went to graduate school there about unprofessional behavior of some of their Ph.D.’s, and how this might reflect some deficiencies in the “moral education” part of the curriculum. I might have said to Allan Meltzer that it was unprofessional of him to have given the book a blurb, even though Allan claimed that his “every stock owner should read this book” blurb had been intended as snark. (Which, I must say, they might have taken with very good graces.)
But it did not matter for his career as a hewer of wood and a drawer of water for Republican politicans.
Professional Republican politicians seem to have been attracted to an “economist” with a demonstrated reputation for being willing to say absolutely anything for some short-term benefit he perceived. Various Presidents and Boards of the American Enterprise Institute similarly had no problem with Hassett. He had a career. His willingness to say whatever he thought he was incentivized to say was a thing people on the other side of the aisle found very pleasing.
Never mind that his elders and peers in academia would always shake their heads and sigh when his name came up. Never mind that in the circles in which I moved and move, the principal reaction to Hassett is a kind of pity—a waste of talent, and someone who cannot but look back at his life and see a life wasted. The general reaction seemed to be to judge Hassett more-or-less as Platon had his character Sokrates argue in the Politeia <https://www.perseus.tufts.edu/hopper/text?doc=Perseus%3Atext%3A1999.01.0168%3Abook%3D9%3Apage%3D577> that we should judge a tyrant: as a person who was actually in the condition of the most wretched slave. And we should lament the waste of it all. Why? Because for Kevin, as for the tyrant:
His soul [must] be filled with relentless groveling and no choice. The best and most reasonable parts of his mind are slaves to a small part of it. And that small part of his mind, which is the worst and the most frenzied, ruthlessly bosses him around… You [have to] say that that is the lot of a slave…. That is the mind that, least of all, does what it truly wishes. Rather, always yanked around by the relentless itch of neediness, it ends up tangled in chaos and regret…. He is doomed to be perpetually hungry, tormented by cravings he can never satisfy…. more than half-mad by the internal yelling of his own urges…. Such a person is far and away the most wretched one possible…
And if the mental imbalance of such a person is such that he does not recognized how pitiable his situation is?
Then that only makes him more pitiable still, and it all even more of a waste. One is driven to give him the advice given by Dean Wurmer in Animal House: “that is no way to go though life, son…”
Here a quarter of the way through the 2000s, the work is arduous and the time to do it is short. In the 1990s I coul believe not just that a better world than this was possible, but that it was overwhelmingly probable. But that we can no longer believe that is not a reason to give in to despair and depression. Despair, after all, is a grave sin. And depression—well, it is certainly true that it is deeply wired into our brains. After all, the first set of circuits that a proto-brain constructs are those for greed: as you swim along, turn towards food. The second set of circuits a proto-brain constructs are those for fear: as you swim along, turn away from danger. And the third set of circuits a proto-brain constructs are those for depression: if there is no food in smell and if all directions appear equally dangerous, then stop swimming, for husbanding your energy and doing nothing in the hope that things may change is your best strategy.
Depression is a tool to be used when, in fact, husbanding energy is the best strategy. And not otherwise.
So kudos to Steve Durlauf here, for having the moral strength and energy to camp out on X-Twitter, for dawn may come again.