Robert Shiller: Stimulus "not enough"; "unemployment rate... going much higher"

Embarrassingly few economists predicted the Great Recession, so I pay special attention to those who did. Robert Shiller is on this honor roll.

So I’m thrilled that I’ll attend next week’s CT Hedge Fund Association spring symposium at which Prof. Shiller is a panelist. I’m also thrilled to have been able to watch his “Financial Markets” class lectures online, thanks to Yale’s Open Yale Courses program.

Professor Shiller, along with Nobel Prize-winning economist George Akerlof, has written a new book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism and shares some of his insights (for free) in a Maclean’s interview yesterday.

Shiller is concerned about insufficient economic stimulus:

There’s a tendency all over the world to under-stimulate. In Canada, the Harper government has created a stimulus package but it’s small change, and that is not big enough. Similarly in the U.S. we had a stimulus package earlier this year of $787 billion. Again, it’s not enough.

He also says we waited too long to act:

One thing that we learn from the study of psychology is that ideally a stimulus package should come on strong before anything serious really happens, we want to apply the stimulus before massive numbers of people are laid off, because once they’re laid off it creates a different psychology that’s hard to correct. We’ve already missed that opportunity substantially, but of course I think the unemployment rate is at risk of going much higher.

More general thoughts about psychology and markets:

A. One thing that really drives the economy is the sense of opportunity that people get at certain times, the sense that this is a good time to start a business, the sense that I can take a long shot now, and I have to move fast because otherwise I’ll be overtaken by other people who are more on the spot, and that drives the economy to a fervent degree, and it’s exactly that sense that has disappeared now. It changes slowly, through a diffusion of ideas, like a social epidemic. Ideas spread the way jokes do. You know, someone invents a joke and it just spreads through millions of people by word of mouth. In the same way we have changes in ideas about what the economy means to us and how we fit in to it.

Q: What role did animal spirits play in leading us into this mess we’re in now?

A: Certain ideas, the idea that stock market investing is a road to riches, and then later the idea that investing in housing is a road to riches. These things infect our thinking on not only decisions about which investment to make but decisions about our lives. The last decade or so has been a time when we’re re-evaluating who we are and what is our purpose. The idea that we are smart investors in a capitalist world has been taking hold. The idea that, say, labour solidarity is important and that we want to be a good, dedicated teacher or nurse or something like that is somewhat diminished. We imagine ourselves to be capitalists on some level, even though recently it’s challenged by a sense of anger at capitalists who are making big profits when the economy is going down the tubes, but we did have kind of a gold rush mindset… One thing that has happened in recent years is a wave of gambling, not just in the U.S. but all over the world. Casinos have been opening up everywhere. Fifty years ago, lotteries were considered immoral or inappropriate. And now poker has become a legitimate spectator sport—that represents a real change. I may be over-interpreting this, but Texas Hold’em and other forms of poker are games that simulate aggressive, selfish personal profit pursuit. Poker is about bluffing, it’s about being dishonest, in a sense, and it’s not a family game.

Q: You argue as well that financial bubbles tend to be accompanied by corrupt and antisocial behaviour in the economy, hence the many financial scandals in recent years. I’d have thought that bad actors are just as prevalent in good times or in bad, but that they simply have more room to play in good times.

A: In good times people are more willing not to do due diligence. They think they have to get in fast to stay ahead of the game and they have a sense that other people aren’t doing due diligence, so they go along with it. It’s a time of trust and that becomes a time of opportunity for hucksters to do things, or if they aren’t hucksters at least people who are not really acting in good faith. Afterwards, when the confidence slips, people fall into a different mode: “You can’t trust anybody, and I’m not going to do anything because I’d have to do all this research to figure it out and I’m never going to do it.”

Posted by James on Friday, April 17, 2009