In 1999, the journalist James K. Glassman co-authored a book called Dow 36,000. The eponymous prediction did not pan out. A couple of days ago, Glassman popped up in the Wall Street Journal, trying to explain where he went wrong. “The world changed”, explains Glassman. The relative economic standing of the U.S. is declining. Plus terrorists and economic instability made the world a riskier place.
But there’s a better explanation. Glassman’s story never made sense in the first place, for reasons Paul Krugman explained when the book first came out.
Glassman has a substantial history of confusion about how financial markets work. Ten years before he wrote Dow 36,000, he was explaining in The New Republic that stocks are better investments than real estate:
if you bought a $200,000 home in Foggy Bottom [a neighborhood in Washington, D.C.] in 1979, it would have been worth $316,000 [ten years later]. But if you’d bought $200,000 worth of stock in 1979, it would be worth $556,000 [ten years later]—and you’d have another $68,000 in dividend income.
Edit: I’d left a few key words out of this quote; it’s fixed now.
This is a wondrous example because it goes so far beyond being simply wrong all the way to the exact opposite of the truth. Here’s how I exploited that example in my book The Armchair Economist:
Well, yes, but if you’d bought the house you would have had a place to live for those ten years, whereas if you’d bought the stock you’d have been making rental payments to a landlord. This renders Glassman’s comparison meaningless. All he shows is that if you compare some of the benefits of owning stock to some of the benefits of owning real estate, then the stock comes out ahead. Big deal.
Glassman’s … conclusion is exactly the opposite of the truth. He explains that “stocks appreciate faster than real estate; they always have and they always will. The reason is that a share of stock is a piece of a company in which minds are producing value. Real estate just sits there.” The truth is that stocks appreciate faster than houses precisely because a house does not just sit there; it provides shelter, warmth, and closet space every single day that you own it. Stocks need to appreciate faster to compensate for the fact that they don’t provide any comparable stream of services. If stocks and real estate appreciated at the same rate (counting the dividends as part of the appreciation, as Glassman does), nobody would own stocks.