TCS Daily

My Stalker

By James K. Glassman - August 9, 2005 12:00 AM

A stalker is after me.

His name is Paul Krugman, formerly a respected economist, with whom I frequently agreed, but now a polemicist on the op-ed page of the New York Times, assiduously and boringly toeing the Party line.

Krugman is obsessed with Kevin Hassett and me. Why? I have not the slightest idea. At least a dozen times, Krugman has excoriated "Dow 36,000", a book that I wrote six years ago with Hassett, a former senior economist at the Fed who is now director of economic policy studies at the American Enterprise Institute.

Krugman has consistently misrepresented (i.e., lied about) the basic argument of the book -- the notion that investors are solving what economists have long called the "equity premium puzzle" -- the mystery of why stocks return so much more than bonds even though both are roughly equal in risk over long periods of time.

By the way, none of the tumultuous events of the past six years has changed our minds about our thesis. In fact, despite terrorist attacks and a recession, price-to-earnings ratios have remained high, in historic terms, just as we predicted.

I've gotten used to the misrepresentations of "Dow 36,000." It was, I admit, a flamboyant title for a book with a fairly conservative proposition, and perhaps Kevin and I invited criticism from folks who either read no more than the title and formed their own conclusions or who read the whole book but decided to willfully ignore what it said. (Kevin once jokingly suggested that we call the book, "A Treatise on the Declining Equity Risk Premium." Not a bad idea, perhaps.)

Now Krugman has carried his usual clownishness one step further.

In Monday's column in the Times, he writes about how the housing boom is going bust. Fine. He's entitled to that opinion. Why does he hold the view? Here is his very first reason:

"One piece of evidence is the sense of frenzy about real estate, which irresistibly brings to mind the stock frenzy of 1999. Even some of the players are the same. The authors of the 1999 best seller 'Dow 36,000' are now among the most vocal proponents of the view that there is no housing bubble."

In fact, Kevin Hassett has never written about real estate in recent months. I have written about it twice, in my Scripps Howard News Service op-ed column and in my monthly column for Kiplinger's Personal Finance. In neither case did I say there was "no housing bubble."

What I wrote, instead, was that I was not particularly concerned about rising average national housing prices but that I was worried about specific markets. In the Scripps piece, I endorsed the position held by the Fed chairman, Alan Greenspan, who said that there were "signs of froth in some local markets."

In the Kiplinger's piece, I approvingly quoted Marc Louargand of Babson Capital, who wrote that, "If people are paying a realistic portion of their income for housing, it is hard to see conditions as a bubble. Louargand found only 29 markets out of 318 where buyers appeared overstretched. In the average market, "the median family can qualify for nearly twice the median home value."

Indeed, that there are merely isolated markets where bubbles are occurring seems to be Krugman's own take as well, as far as I can tell from Monday's confusing column. He says that while home prices have risen at about the same rate as nominal Gross Domestic Product over the past five years in much of the "Flatland" -- that is, area between the coasts -- prices have roughly doubled in markets like San Diego and Miami, where there tend to be severe zoning restrictions. I agree. Such restrictions, often enacted by people who control government institutions with Krugman's own interventionist bent, unfairly lock lower- and middle-income Americans out of the housing market while the rich pull up the ladder behind them.

Krugman also makes the same case that I made about the nature of housing markets, as opposed to stock markets -- that we won't see "plunging prices" or a popping bubble but rather a "hissing sound," that is, a gradual deflation of home prices.

The reason, as I wrote in my Kiplinger's column, is that "the housing market has characteristics that tend to dampen volatility: for example, sales commissions and transfer taxes. Skipping in and out of a house in a day or two isn't particularly feasible, and the vast majority of homebuyers, unlike stock buyers, are in for the long haul." To sell your house is an uprooting experience that typically requires another purchase. To sell your stock involves an electronic financial transaction -- no moving truck.

Krugman's modus operandi is to force confrontation, creating controversy (usually political) where it does not exist. Perhaps this is why this stalker follows Kevin and me around -- to pick a fight, to force a confrontation. I feel a little embarrassed, frankly, for taking the bait. I long ago gave up reading Krugman for edification -- or for anything else.

I warned in my Scripps piece that, "while financial bubbles do occur, it's highly risky -- often an act of hubris -- to claim that market prices are somehow too high or too low. Home prices, like stock prices, are set by thousands of buyers and sellers with real-live money in the game."

Yes, markets can be wrong, but a good starting point is that they know more than professors and bureaucrats and journalists.

Hubris, however, is Krugman's specialty. He rarely engages himself intellectually with the arguments of the straw men he bashes. His style can be summed up in a section of his website called, "How I Work.". The section heading: "Dare to Be Silly."

As for the issue at hand:

I wrote in my Kiplinger's piece back in March that, even though the likelihood of a national real estate bubble is small, "if you buy a house expecting to get rich, you're a fool." The nature of most real estate is that it increases slowly in value over time, but with less volatility than stocks -- about 1 percent annually, on average, after inflation since 1950, according to Freddie Mac. But in no year since then has real estate fallen in value, again in the national aggregate.

Don't expect to get rich buying residential real estate. Consider yourself lucky if you do.

As for Krugman: Consider yourself lucky if you can ignore him. I manage to do so much of the time -- though with a stalker, it's not easy.



TCS Daily Archives