Jonathan Chait

Dow 36,000 Author Questions His Thesis

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James K. Glassman, noted supply-sider and executive director of the George W. Bush institute, has an op-ed in today's Wall Street Journal conceding that his 1999 book "Dow 36,000" was wrong. With the Dow a mere 24,000 short of what he insisted it was worth in 12 years ago, the time for a concession just seemed right.

But why does Glassman think he was wrong? Well, he makes no mention of the basic mathematical and logical fallacies in the thesis that were obvious to others at the time. Instead he blames unforeseen events:

What happened? The world changed. While history is usually the best guide to the future, it is far from perfect. Judging strictly from history, at the start of 2008 it was hard for many to imagine that an African-American would be elected president (or that the New Orleans Saints would ever win the Super Bowl).

What are these unforeseen events that made Glassman's once-sensible thesis no longer correct? He explains:

The first major change is that the relative economic standing of the U.S. is declining. The Congressional Budget Office estimates that U.S. growth will average a little more than 2% over the next 70 years, compared to about 3.5% during the second half of the 20th century. This is a stunning decline.

The reasons? One is a demographic imbalance, with too few workers supporting too many retirees and other non-workers. Another is a growing preference for European-style security. Still others include inefficient investment in human capital, especially K-12 education, and an enormous buildup of debt partly meant to prevent financial catastrophe in 2008-09. Meanwhile, developing nations like China, India and Brazil are growing far faster than the U.S.

Okay, let's take these in order. Demographic imbalance? First of all, this has barely changed. Americans over 65 years old were 12.4% of the population in 2000, and 12.9% in 2009. Moreover, this slight change was totally predictable in 1999.

The inefficient education policies is an odd one. The only thing that's changed here between 1999 and now is the passage of Bush's No Child Left Behind Law, which education experts generally regard as flawed but mildly positive.

The "growing preference for European-style security" and buildup of debt in 2008-2009 are a way of blaming the Obama administration's policies. Of course, that omits the eight years of historically poor growth, which itself was built upon massive bubbles, that preceded Obama's tenure. It's not like the Dow 36,000 thesis looked good in January 2009, before those socialists took over. Indeed, the market has risen sharply since then.

Finally, Glassman cites the rise of India and China, which of course have had zero downward pull on the U.S. growth rate.

Glassman concludes his op-edon a bearish note:

 I've gotten tired of telling investors to buckle up and hang on. Instead, I am urging them to adopt a more cautious strategy than the conventional financial wisdomor "Dow 36,000"would dictate.

I think this means it's time to go heavy in stocks.

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