Things tagged scott sumner:
Scott Sumner with a bit of wisdom in a review of Tyler Cowen’s Stubborn Attachments:
Unfortunately, when discussing redistribution, our society tends to focus on income, which is the wrong variable. Yes, the rich might invest an extra dollar in income, thereby helping future generations. But that’s not relevant to the real issue, which is consumption redistribution. One commenter suggested that it might be better if I invested $10,000 rather than donate the money to a family in Ethiopia. But that’s dodging the real question—don’t I have an ethical obligation to donate $10,000 of my current consumption? The rich should never feel any guilt about investing money rather than giving it to charity. Where they perhaps should feel a bit of guilt is in spending $500 million on consumption, rather than donating a significant share of those funds to the poor.
The EMH doesn’t do a good job of explaining the 1987 stock market crash, or the 2000-02 tech stock crash. It’s hard to find fundamentals that would justify such a dramatic shift in prices over a short period of time. (Actually much harder for the 1987 crash than the tech stock declines, which took considerably longer.) So how do I defend the EMH? Two points:
The EMH is very useful to me in all sorts of ways. It’s also consistent with a lot of research on the wisdom of crowds, and basic economic ideas such as competitive rates of return in competitive markets with free entry. It’s got a lot going for it. Because of the EMH, I’ve invested in index funds, and also engaged in buy and hold of stocks (not day trading). I ignored Shiller’s 2011 comments on overvalued stocks. My 401k has done very well as a result. It also helped me during my research on the Great Depression, when I found that market responses to policy shocks were much more perceptive that expert opinion, even the expert opinion of Friedman and Schwartz.
The EMH cannot explain certain puzzling facts. (Matthews right about that). And on these points we should just keep our mouths shut.