The equity premium
The Economists’ Voice is one of the more interesting (at least to me) ventures in academic publishing on the Internet. The aim is to provide analysis of economic issues from leading economists, something that has been sorely lacking in recent years. It’s intended to contain deeper analysis than is found on the Op-Ed page of the Wall Street Journal or New York Times, but to be of comparable general interest. Unfortunately, it’s not free but you can get guest access to read particular articles.
Simon Grant and I have an article on the implications of the equity premium, an issue that’s been discussed in various ways on this and other blogs.
Here’s the abstract:
Simon Grant and John Quiggin argue that taking the equity premium seriouslyâ€”-the well-known fact that the average annual historical return of stocks is seven times that of government bonds and other debt-â€”has many implications, the most robust of which is that recessions are extremely costly even if they donâ€™t lower average consumption and that macroeconomic stabilization policies are more important than has been thought.
We also show that, to the extent that the equity premium is due to various kinds of capital market failure, it provides a rationale for public ownership of some business enterprises and for a rate of return on public investment close to the real bond rate.
fn1. Paul Krugman is an exception, but an isolated one. Thirty years ago, leaders of the profession like Samuelson and Friedman routinely wrote for newspapers and for periodicals like Time and Newsweek.