Wed Feb 2 10:27:28 EST 2005
Krugman's calculations hold that dividend yields will remain at about 3
percent over the projection period. This generates an exploding PE
ratio. Instead, the inconsistency he is pointing out might be
rephrased as:
"Because of the low rate of economic growth, those holding to a 6.5
percent return are assuming an unrealistically high dividend yield."
On my blog, http://voxbaby.blogspot.com, I consider the possibility
that dividend yields will rise as the elderly, with their high marginal
propensities to consume, comprise more of the population. In a
nutshell, the elderly demand higher dividend payouts so they can
consume their wealth, and this allows the PE ratio to remain stable,
even with solid returns to capital and low economic growth.
Andrew
*****
Professor Andrew A. Samwick
Director, The Nelson A. Rockefeller
Center at Dartmouth College