Email To The Editors

Up and Dow

Right in Practice, Right in Theory

Once again, Slate writers are attacking our book even though they haven’t read it. The book, Dow 36,000, which will be out in early September, explains the reasons for the stock market’s rise between August 1982, when the Dow Jones industrial average stood at 777, and today, when it’s over 10,000. During nearly this entire ascent, financial journalists, academic economists, and Wall Street analysts have claimed the market was heading for a fall. After all, just look at price-to-earnings ratios and other measurements of valuation, goes the conventional wisdom. They’re too high!

What my co-author–Kevin Hassett, a former Federal Reserve economist whose work has been widely published in scholarly journals–and I offer in our book is a new model for pricing stocks, one that is consistent with the market’s performance and with the basic principles of finance. Our starting point is that the value of a stock, like that of any other asset (a rental condo, a bond), is determined by the amount of cash it puts into your pockets over time. With stocks, that amount has been sky-high–and will continue to be, we believe, until shares are bid up by investors to where they should be. That proper level is about 36,000 on the Dow.

This argument is laid out at length in an annotated 300-page book, which also includes extensive advice on how to implement an investing strategy based on the theory.

In Slate on June 9 (“When Good Things Happen to Bad Ideas“), Paul Krugman rehashed the criticisms made in Slate by Bruce Gottlieb and Clive Crook before him. Our response to Krugman is the same as our response to Gottlieb and Crook: You’re accusing us of making an assertion we don’t make.

Krugman wrote that our theory is based “on a simple misunderstanding of corporate accounting”–that “businesses can eat their seed corn and plant it too.” What he means is that, while we rely on the growth in cash flowing to investors as justification for higher stock prices, that cash is needed by corporations themselves. In other words, we “double-count” by using reported corporate earnings for our calculations. But we don’t. Nowhere in the book do we claim that free cash flow is equal to earnings. In fact, we say that it would be an “egregious error” to make such a statement or to use it in calculations of stock values. Instead, what we have written from our first March 1998 piece in the Wall Street Journal to our book–and have repeated, without provoking objection, at academic conferences from Princeton to Tokyo–is that the measure of cash is somewhere between the lower bound of dividends and the upper bound of earnings. In the book, we discuss simple ways to determine cash flow as a percentage of earnings. (Hint: The answer is far from 100 percent.)

The thrust of Krugman’s piece is the irony that stocks have kept rising, just as Glassman predicted, so that “the guy who had no idea what he was talking about gave what turned out to be good advice.” This twisted argument–that we are right in practice but wrong in theory–has become the last refuge of people who simply do not understand what has been happening in the stock market over the past two decades and who cling to an old paradigm that recent history has clearly repudiated.

We have written a serious book–one that will launch a debate over discovering a new and useful model for determining the true value of stocks. But see for yourself. Don’t read premature reviews of a book that the reviewers haven’t read. Just hang on. Dow 36,000 will be out in 10 weeks.

James K. Glassman


Al Gore, Chemical Brother

Timothy Noah writes in Chatterbox (“Al Gore Is No Bunny Killer“) that the fuss over the poisoning deaths of 800,000 animals at a cost of $15 million in taxpayer funds in the Environmental Protection Agency and the Chemical Manufacturers Association high production volume (HPV) chemical testing program is about “a whole lot of nothing.” Every national animal protection organization in the country–representing more than 10 million Americans, and all of which have asked Vice President Al Gore to re-examine the program–would beg to differ.

So might the environmental, consumer, and public interest group members of the EPA’s food quality advisory panel who recently resigned in protest, stating that the agency “dithered in endless, fruitless debate” rather than “doing anything about toxic chemicals that have been around since World War II” (the Washington Post, April, 28, 1999). So might any number of public policy right-to-know organizations for whom the design and goals of the HPV program are “obscure” (Right-to-Know News, Jan. 8, 1999).

What they would tell Noah is this: The EPA has the knowledge and the ability right now to prioritize the high production volume chemicals and protect us from the most hazardous ones. But the agency has launched unthinkingly into this nation’s most massive animal testing program, rather than make the effort to collect the substantial amount of existing data on these chemicals, centralize it, and make it accessible.

Spurred on by Gore’s rushed schedule for the testing program, even EPA officials admit they are not able to develop a scientifically defensible testing strategy. According to whistleblower calls PETA has received from EPA employees, the HPV program is taking much needed resources from important, effective (and authorized) EPA programs. In fact, after all the money is spent and all the animals have been killed, what the public, the environment, and the workers will be left with is: a whole lot of nothing.

Jessica Sandler

People for the Ethical Treatment of Animals

Norfolk, Va.

Over and Under the Line in Oregon

Almost everyone misunderstands the Oregon Health Plan, and Cyrus Sanai (“Death Stamps“) is no exception.

Oregon led the way with an attempt at explicit rationing–treating only the diseases that were most likely to benefit from treatment and increasing the coverage as money allowed. Most everyone else in the world rations implicitly through a process known as “queuing” in England by progressively increasing the length of time needed to obtain services until the least hardy either get better, get discouraged, or die. It is debatable which is the better procedure; it is not debatable that resources are limited, that some form of rationing is inevitable, and that virtually every scheme for financing medical care has run aground on the shoals of excess demand in an ocean of insufficient resources.

People actually do get treatment for many of the “noncovered services” in Oregon, and specifically, they get treated for anal fissures. It’s just that the doctor usually doesn’t get paid for treating them. Many “below the line” procedures actually are covered on a case-by-case basis, but it depends on the insurance company’s policy (there are many private companies administering the Oregon Health Plan).

To my knowledge, there has been little or no movement of “the line” since the scheme was first written down. The federal government has been very reluctant to grant the necessary waivers to allow the Oregon experiment to operate that way, so in reality, the number of diseases covered has not changed very much. But the eligibility requirements change with changing resource levels so that more or fewer people are covered by the plan depending on how much money is available. People pretty much expect to be taken care of no matter what is wrong with them, and once they get their “insurance” card the hemorrhoid sufferers generally will not defer to congestive heart failure, for example, so the Oregon plan has a fatal flaw; the most basic flaw of all–human nature.

Most people are uncomfortable with the idea of a tax-supported planned suicide–but it is, among other things, an unintended consequence of the Americans with Disabilities Act. How can a publicly funded program discriminate against persons with disabilities? If it is legal, then the law requires that it be funded. For what it is worth, there has been no rush to exterminate a lot of unwanted Oregon Health Plan recipients. For one thing, there is something called Tort Law (malpractice) that discourages even the most dyed-in-the-wool supporters of “death with dignity” from actually prescribing any suicide cocktail.

Thomas S. Duncan, M.D.

Astoria, Ore.

Cyrus Sanai replies: Dr. Duncan is correct that the HMOs administering the Oregon Health Plan may elect to cover conditions below the funding line, and no doubt many physicians do treat such conditions at no charge or by combining treatment with a condition falling above the line. But they don’t have to provide such treatment under the Oregon system; that’s the whole point of having the prioritization list.

Dr. Duncan’s information on the status Medicaid demonstration waiver is outdated; the Oregon Health Plan received its Section 1115a Medicaid demonstration waiver from the federal government in 1994 after being required to reorder the prioritization list.

The Americans with Disabilities Act has a lot of strange things to answer for, but publicly supported assisted suicide is not one of them. After the Death with Dignity Act survived a repeal attempt and court challenges, the Oregon governor’s office concluded (correctly, I think) that physician-assisted suicide was a medical procedure eligible for inclusion in the prioritization list. However, it was the commission that decided that the “Rx of No Return” merited position 263. That there has not been a rush to fill these prescriptions, let alone publicize the availability of this option, does not lessen the significance of Oregon’s move as the logical intersection of health-care rationing and assisted suicide.

Chihuly Hoop

In general I agree with Eric Scigliano’s “Letter From Washington” (“Heart of Glass“) on Dale Chihuly; however, I think he’s being unfair in a few places.

First, I think he makes far too big a deal over the fact that Chihuly doesn’t blow his own glass. Many sculptors run workshop studios where assistants do the actual casting and assembling of the large works. I’m not sure how many of the Burghers of Calais were actually cast by Rodin, and I don’t think it particularly affects how I should regard the statues. If Scigliano thinks that Chihuly’s real crime is to imply that he still blows glass, then he should say so directly.

I’m also not sure it’s fair to lay all of the Northwest’s sins at the feet of Microsoft,, and Starbucks. While making his case that the nouveau riche are responsible for Chihuly-mania, Scigliano also cites Tacoma as ground-zero for the phenomenon. Last time I checked, there weren’t too many stock-option millionaires living in Tacoma.

Tom Williams