Gross Distortions
A Slate writer is way wrong on dividends, Bush, and Kudlow.


Donald L. Luskin

It makes me mad when liberal pundits play fast and loose with the facts to push their political agendas. But I guess all’s fair in love and politics. However, when the pundits fall back on sleazy techniques when they write or speak about the stock market — that’s when I really see red. If you fall for those lies, it can cost you money. They’re no longer trying to shove political bias down your throat — they’re taking part in what I call “the conspiracy to keep you poor and stupid.”

Take a look at a recent piece titled “Dividend Dead End,” by Slate’s financial columnist Daniel Gross. Gross wants you to think that this year’s tax cuts on dividends and capital gains were a failure, and that the Bush administration lied about their likely positive effects on the stock market. Indeed, in an interview with me last week, Gross said he thought the administration’s claims about the stock market were just like its claims about weapons of mass destruction in Iraq.

The difference in the dividend case, though, is that we’ve already found the WMD. The stock market is at or near its year-to-date high, and it logged most of its recovery since April — when the Bush administration and Republicans in Congress got serious about enacting the tax cuts. The burden of proof is squarely on anyone who’d try to say that the tax cuts didn’t boost the market like the administration said they would. But Gross has no proof — instead he had to resort to distortions to support the insupportable point he set out to make. Gross distortions, as it were.

Since Gross could not deny that stocks overall have recovered, he instead claimed that “stocks that pay dividends have fared worse” than those that don’t. Gross cited statistics from Standard and Poor’s, which show that dividend payers returned 2.5 percent for the June-to-mid-August period, while non-payers returned 3.9 percent during that time. Since the beginning of the year, S&P says the payers have returned 13.6 percent while the non-payers have returned 31.7 percent (only the latter statistics appear in the S&P press release that is linked to by Gross). Fared worse?? Maybe to a Democratic partisan. But to an unbiased observer the dividend-payers have fared spectacularly, while the non-payers have fared ultra-spectacularly.

But for Gross it’s more than just a prejudicial choice of adverbs. He cited Standard and Poor’s statistics showing that dividend-payers have done 2.7 percent better annually than non-payers from 1980 to 2002. Citing one highly debatable argument for why companies that raise dividends might perform poorly, Gross concluded, “the Bushies have managed to turn the same trick they first performed on the whole economy on a subset of the economy. They’ve turned a perennial outperformer into a chronic underperformer.”

Pretty damning — until you look at the facts. I talked to Howard Silverblatt, the S&P analyst who came up with the statistics cited by Gross. Silverblatt told me that his statistics on the relative performance of dividend-payers and non-payers actually have very little to do with dividends. He said, “It’s like looking at who drives what kind of car. Rich people drive fancy cars. Does the fancy car make them rich?”

Silverblatt said, “When you plot this, you are plotting technology.” The whole reason why non-payers appear to have done so well this year is that this group is dominated by technology stocks — which have done very well this year, as have other smaller, riskier companies. I ran the numbers myself, and as the chart below shows, Silverblatt is right.

Silverblatt went on to say that the reason why dividend-payers appear to have done so much better than non-payers between the years 1980 and 2002, is largely a function of the end-point chosen for that calculation. The year 2002 marked the bottom of a terrible bear market in non-paying technology stocks. If the end-point had been 1999 instead — near the top of the bull market in technology stocks — the relative performance would be quite different.

In other words, whether a stock pays or does not pay a dividend is nearly irrelevant to the performance of that stock, according to Silverblatt.

Gross told me that he didn’t even talk to Silverblatt before writing his column. I not only talked to Silverblatt — I took it to the next level. I went to BARRA, the investment analysis firm. The world’s largest and most sophisticated institutional investors use BARRA to help them understand the true risk-dynamics of their portfolios. BARRA’s techniques allow us to do more than just sort stocks into two bins, dividend-paying and non-paying — as though that were the only important distinction. Instead, BARRA allows us to look separately at the effect on returns arising from a company’s dividend yield — filtering out any side-effects from its industry group, its beta, and dozens of other factors.

Seen through this more powerful lens, it turns out — amazingly! — that dividend-payers have actually outperformed non-payers this year, holding all other factors constant. Guy Miller at BARRA told me that this year’s outperformance cuts against two decades of underperformance — exactly the opposite of Gross’s claim that the Bush administration has “turned a perennial outperformer into a chronic underperformer.” Miller also noted that the return to the pure dividend-yield factor during the days in May that led up to President Bush’s signing of the tax cuts was more statistically significant than at any other time in history.

Of course, it wouldn’t be a modern-day, left-liberal column if the “Bush lied” element were not included. So Gross quoted President Bush saying, “by ending double-taxation of dividends, we will increase the return on investing.” Isn’t that precisely what happened? Have returns this year not been better than returns last year, or the year before last? They have indeed been better.

And did Bush or any administration official ever say that dividend-paying stocks would do better than non-payers? Maybe some pundits or Wall Street economists did — but the Bush administration never did (neither did I, for what it’s worth).

Gross quoted several tax-cut advocates, in and out of the administration, and yet he caught none of them saying that the tax cut would especially favor dividend-paying stocks.Yet Gross treated their predictions that the overall stock market would be lifted by the tax cuts — precisely what happened — as though that were a lie, simply because non-dividend-paying technology stocks have done better this year.

Gross singled out one tax-cut advocate — Larry Kudlow, my colleague at National Review Online — for particularly gratuitous verbal violence. He said Kudlow’s “assurance is matched only by his capacity for issuing loonily high forecasts.” Well, right now, Larry Kudlow’s forecasts (and mine) are looking damn good. And by the way, Gross apparently doesn’t know that Kudlow’s “loonily high forecasts” made him the number-one ranked economist for forecast accuracy in a 2002 study by the Federal Reserve Bank of Atlanta.

Would you be better off if, earlier this year, you had listened to President Bush and Larry Kudlow and me when we said that these tax cuts would lift the stock market? Yes. What if you had listened to Gross a year ago, when he wrote in his Slate column that cutting the tax on dividends was “bear-market desperation” and a “harebrained proposal” to “establish yet another source of tax-free income for the undeserving rich.” I don’t know about the rich, but I know that you and I are deserving of better financial forecasting than that.

And one more thing. Nowhere in Gross’s column does he bother to mention the fact that Bush’s tax cuts were not just on dividend income, but also on capital gains and labor income. So whatever effect he observes in the market overall, or between dividend-paying and non-paying stocks, he can hardly pin it all on just one element of Bush’s overall tax cuts. Even if the administration had asserted (which it did not) that dividend tax relief would especially benefit dividend-payers (which BARRA’s analysis suggests was the case) — it could still be the case, at the same time, that other elements of the tax cuts benefited non-payers even more.

Or, hey — maybe this stock market action had nothing at all to do with tax cuts. Maybe it was all about the Bush administration’s decisive action in Iraq. (No, can’t be that — it was a quagmire, right?) Or maybe it had to do with the administration’s handling of the federal budget. (No, can’t be that — we’re looking at deficits as far as the eye can see, right?). Wait … I know what it was! It was the stock market “looking across the valley,” already anticipating the presidency of Howard Dean. Well, that one will have to wait for Daniel Gross’s next column.

But my advice is this: Don’t hold your breath waiting. And whatever you do, don’t make any investment decisions based on the writings of reckless, left-leaning financial pundits.