David R. Henderson  

Henderson on the Three Nobels

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"Today, Apple announced a bigger dividend than stock market analysts predicted. So I should buy Apple stock, right?" I sometimes get this kind of question from people who know I'm an economist. My answer: "No, you should have bought Apple stock." Why? Because of basic economic reasoning combined with decades of empirical evidence, much of it provided by or inspired by one man: financial economist Eugene Fama of the University of Chicago.
This is my intro to a longer piece, published by the Hoover Institution this morning, on the three Nobel prize winners. It's how I started my Wall Street Journal piece, but the Journal made some pretty large changes. Getting rid of this paragraph was one of them.

The piece is "Three Cheers for Three Nobels."

One other highlight:

Whereas my political free-market views differ from Shiller's, one thing I appreciated in my one interaction with him was his complete unwillingness to take cheap shots. I remember the day well. I was at the Hoover Institution when I got a call inviting me to be interviewed on "On Point," a Boston radio show that is syndicated to a large number of National Public Radio affiliates. The topic was the 2003 Bush tax cut on capital gains and dividends. I thought, and still think, those cuts to be much better, from an economic efficiency standpoint, than the more-famous 2001 Bush tax cut. So I was eager to defend them.

The show's host, Tom Ashbrook, was quite critical of the cuts, and his choice of the two other guests reflected that. One was a left-wing labor union official whose name I cannot remember. I do remember that he ranted a lot. The other was Robert Shiller. Unlike the union official, Shiller did not attack my motives. A number of times, I argued that high marginal tax rates and taxes on capital gains and dividends reduce the incentive to invest and that this hurts workers in the long run. When I made those points, Ashbrook asked Shiller his view. By Ashbrook's tone--he was one angry dude that day--I could tell that he wanted Shiller to refute me.

Shiller did disagree but, invariably, he prefaced his disagreement, not by marginalizing me, but by doing the opposite. "David is stating the mainstream economist view," said Shiller, and he, by his own admission, was stating a minority viewpoint. I was so impressed by Shiller's gentlemanly behavior that I e-mailed him afterwards to thank him.


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CATEGORIES: Finance , Taxation



COMMENTS (1 to date)
Jack PQ writes:

Speaking as a novice finance professor, I can say that Shiller despite his eminence voices a minority viewpoint in finance as well.

But the importance of his work is immense. Thanks to him finance has taken some anomalies seriously, and rejected others as artifacts of the data.

Disagreement is not in the stylized facts or regressions but in their interpretation. What Shiller attributes to fads, market psychology or irrational exuberance most others would link to risk factors that are not yet well understood.


As Fama famously wrote, rejecting the null of market efficiency is really a joint test of M.E. and the model you specified. Parsimony is desirable, but we need more complete models.

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