Comment of the Day: Robert Waldmann: “Two things One catches more flies with honey that with vinegar…
…I don’t think that ‘extremely sharp’ is enough.
That said, Lawrence Meyer is delusional: “Rational expectations also appears to be important in explaining the effect of a productivity acceleration, specifically in terms of capturing the effect on equity valuations of forward-looking expectations of earnings growth and the effect on consumer spending of forward-looking expectations of the growth of wage income.’”
Consumption has nothing to do with future income growth — this is a point estimate of mine. Here: http://angrybearblog.com/2014/05/a-bit-more-on-consumption.html
Similarly, equity valuations have almost nothing to do with the optimal forecast of earnings growth — Shiller has proven this again and again. The claim is either unfalsifiable (as argued by Barsky and DeLong in ‘Why has the stock market fluctuated’ or false.
My guess is that both delusional claims might have something to do with work by Cochrane (red flag) on consumption and something to do with future stock market returns. The claim is that consumption and stock prices both are influenced by future growth (of dividends and labor income respectively and the two growth rates are positively correlated). The actual calculation notes the positive correlation of two variables which have stock market valuation in the denominator — the ratio of consumption to financial wealth is positively correlated with future stock market returns.
Variance of the the price of shares is a major component of the variance of financial wealth — high valuation is strongly correlated with low future returns. The key point is that the information in consumption (which shows how it is forward looking) is also found in an exponential trend — when the ratio of the trend to financial wealth is high, stock market returns are high. The information we learn from looking at consumption is equal to the information we learn from a trend — that is no information.
Comment of the Day Robert Waldmann: “Here is much much more on the uselessness of the idea of rational expectations…
…for those attempting to understand aggregate consumption http://bit.ly/Q7rS54. I don’t have a link to the calculations regarding trend/wealth and stock returns — I remember doing something along those lines. I guess it is an open topic — a comment noting that the information in consumption is also in a trend is hard to reject.
I hope Paul Romer doesn’t read these comments. If I though he did, I’d ask him if he respects the scientific merits of the postmodern deconstruction of critical theory. Lucas certainly is a great leader of academic fashion and was an even more dominant one 30 years ago. However, that doesn’t mean Solow was wrong. A scientific debate should be settled by considering evidence. I don’t think Lucas had or has anything to teach Solow. What evidence is there that Solow missed anything?
I note Romer has fallen for the blatant falsehood that Solow claimed that the expectations unaugmented Phillips curve was a stable relationship. In fact, Samuelson and Solow wrote the exact opposite.