Lunchtime Must-Read: Dean Baker: Stock Returns: Between Shiller and DeLong

Dean Baker: Stock Returns: Between Shiller and DeLong: “Stocks still look like a pretty good deal…

…since even if there is some decline in the profit share of income and also some reversion toward long-term trends in price to earnings ratios (my bet is that the ratio stays above 20), then the real returns are still likely to be well above 3.0 percent. In short, I can’t see the basis for Shiller’s big fears. On the other hand, the high price to earnings ratios in the stock market means returns will almost certainly be lower in the next decade or so than their long-term average. (There actually is a very good paper on this topic, see Baker, Delong, and Krugman, 2005.)