Shiller Feeds

Does Austerity Promote Economic Growth?

2012-01-18T21:49:00.000-08:00

In his classic Fable of the Bees: or, Private Vices, Publick Benefits (1724), Bernard Mandeville, the Dutch-born British philosopher and satirist, described – in verse – a prosperous society (of bees) that suddenly chose to make a virtue of austerity, dropping all excess expenditure and extravagant consumption. What then happened?

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Spend, Spend, Spend. It’s the American Way.

2012-01-15T07:07:00.000-08:00

GRIDLOCK in Congress implies that there won’t be any collective decision to spend more as a nation to get out of our slump. Increases in deficit spending seem unlikely, and so does the balanced-budget stimulus I’ve been advocating in this column. For now, we must pin our hopes for a robust recovery on the willingness of millions of consumers to spend substantially more.

But what really drives consumer spending? Economists are reasonably good at divining how consumers tend to react to changes in government policy, but in the absence of such policy, and when the economy is in the doldrums, they aren’t very good at predicting spending shifts.

A new book, “Beyond Our Means: Why America Spends While the World Saves” (Princeton University Press), offers some insights. It was written by Sheldon Garon, a Princeton professor who is not an economist but rather a historian with a sociological bent.

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A Tax Credit to Fix A Housing Mess

2012-01-01T14:48:00.000-08:00

WE used to talk a lot about helping homeowners in trouble.

Instead, the bankers were bailed out — and now we hardly talk at all about aiding ordinary Americans.

Yet the problems facing homeowners today are even bigger than they were in the dark days of the financial crisis. According to the S.& P./Case-Shiller 20-city Home Price Index, home prices have fallen 13.2 percent since Lehman Brothers collapsed in September 2008. Over the same period, of course, unemployment has climbed.

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The Fire Bell of Unemployment

2011-11-27T06:57:00.000-08:00

THE failure of the Congressional supercommittee to come up with any agreement on the budget deficit makes it even less likely that Congress will rise above its partisan divisions and act on behalf of the millions of out-of-work Americans.

Yet without government intervention, we may well have high unemployment and social discord for years to come. How did this disaster happen?

Probably the most important reasons for the failure to rescue the unemployed are intellectual, rather than purely political. First, there is a lack of scientific proof that government spending — fiscal stimulus — will do much to remedy unemployment. Second, there is a lack of appreciation of the human impact and social consequences of high, long-term joblessness.

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The Neuroeconomics Revolution

2011-11-21T09:33:00.000-08:00

Economics is at the start of a revolution that is traceable to an unexpected source: medical schools and their research facilities. Neuroscience – the science of how the brain, that physical organ inside one’s head, really works – is beginning to change the way we think about how people make decisions. These findings will inevitably change the way we think about how economies function. In short, we are at the dawn of “neuroeconomics.”

Efforts to link neuroscience to economics have occurred mostly in just the last few years, and the growth of neuroeconomics is still in its early stages. But its nascence follows a pattern: revolutions in science tend to come from completely unexpected places. A field of science can turn barren if no fundamentally new approaches to research are on the horizon. Scholars can become so trapped in their methods – in the language and assumptions of the accepted approach to their discipline – that their research becomes repetitive or trivial.

Then something exciting comes along from someone who was never involved with these methods – some new idea that attracts young scholars and a few iconoclastic old scholars, who are willing to learn a different science and its different research methods. At a certain moment in this process, a scientific revolution is born.

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Video: Robert Shiller at Neuroscience 2011

2011-11-19T08:02:00.000-08:00

Robert J. Shiller, PhD, presents "Animal Spirits: How Human Behavior Drives the Economy," with SfN President Susan Amara and neuroscientists Antonio Rangel and Wolfram Schultz on November 12 at Neuroscience 2011 in Washington, DC.

Note: Dr. Shiller's remarks begin at 19 minutes.

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2011-11-07T06:01:00.000-08:00

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Making the Most of Our Financial Winter

2011-10-15T22:55:00.000-07:00

ON a traditional farm, when winter comes and there’s no need for planting, fertilizing or harvesting, it’s time for infrastructure projects. Farmers fix their barns, build fences or dig wells — important tasks that could be done in any season if there weren’t more pressing jobs to do.

If the winter is unusually long and cold, planting time is delayed and additional projects are undertaken. It’s all very simple and sensible: the idea is not to let people sit around idle, and to use down time to get important things done.

The farm needn’t go into debt to do this. All able-bodied people on the farm are expected to contribute their labor, an imposition we can view as an informal tax. Later, everyone on the farm enjoys the benefits of all that work, by participating in the various benefits — the economic growth — it helps to create.

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The Great Debt Scare

2011-09-23T09:11:00.000-07:00

It might not seem that Europe’s sovereign-debt crisis and growing concern about the United States’ debt position should shake basic economic confidence. But they apparently have. And loss of confidence, by discouraging consumption and investment, can be a self-fulfilling prophecy, causing the economic weakness that is feared. Significant drops in consumer-confidence indices in Europe and North America already reflect this perverse dynamic.

We now have a daily index for the US, the Gallup Economic Confidence Index, so we can pinpoint changes in confidence over time. The Gallup Index dropped sharply between the first week of July and the first week of August – the period when US political leaders worried everyone that they would be unable to raise the federal government’s debt ceiling and prevent the US from defaulting on August 2. The story played out in the news media every day. August 2 came and went, with no default, but, three days later, a Friday, Standard & Poor’s lowered its rating on long-term US debt from AAA to AA+. The following Monday, the S&P 500 dropped almost 7%.

Apparently, the specter of government deadlock causing a humiliating default suddenly made the US resemble the European countries that really are teetering on the brink. Europe’s story became America’s story.

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The Beauty Contest That’s Shaking Wall St.

2011-09-03T14:15:00.000-07:00

THE extraordinary surge of stock market volatility during the last month can’t be explained by conventional means. Yes, hundreds of scholarly papers have tried to predict the size of such swings, and whole markets — like those for futures and options thrive on these movements. Yet we still don’t have a clear, mathematical understanding of volatility’s source.

Last month, market watchers might have thought they were witnessing a gamma ray burst from outer space, with waves of sudden, crazy noise: On Thursday, Aug. 4, the market, as measured by the Standard & Poor’s 500-stock index, fell by almost 5 percent. The next day was quiet, but the following Monday, the index dropped almost 7 percent. In successive days, it rose 4.7 percent, fell 4.4 percent and rose 4.3 percent. Bigger-than normal changes have persisted since, though they haven’t been quite as drastic.

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Raise Those Taxes, Spend That Money

2011-08-29T07:36:00.000-07:00

There are two facts about our current economic situation that can no longer be denied: Our economy is in desperate need of government stimulus, and our political system won't abide any increase in our national deficit.

Taken together, the two points seem to bode poorly for the United States. But we shouldn't be too quick to assume a contradiction. Just because stimulus has traditionally been understood as a function of deficit-spending doesn't mean that's how it has to work.

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Irving Fisher, Debt Deflation and Crises

2011-08-15T21:34:00.000-07:00

It is the 100th anniversary of Irving Fisher’s 1911 book The Purchasing Power of Money. But, more important than that, it is a good time, during the current financial turmoil, to reconsider some of his theories again, in light of current events. And I think that some of his theories about variations in the purchasing power of money are very important today, have been underappreciated, and are worthy of considering anew.

In that 1911 book he described a theory of financial crises that tied them to over-borrowing during the expansion phase that preceded the crisis, and to the changes in the purchasing power of money that this expansion causes, then to the collapse in credit and the drop in the price level.

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Taxing and Spending, in Balance

2011-07-23T10:22:00.000-07:00

THE fight over the debt ceiling has deflected attention from the serious problems of fixing the economy and finding jobs for the 14 million unemployed. Worse, it has created strong negative feelings about fiscal policy, just when other policy measures seem incapable of restoring economic health.

The very term “fiscal stimulus” has become tainted. John Boehner, the House speaker, refers to a “misguided ‘stimulus’ spending binge.” It’s a label that reflects how many people have come to think of government expenditures to stimulate the economy — as a binge, maybe like an overdose of amphetamines. For amphetamines, the aftereffects are mental fatigue and depression. For fiscal stimulus, it is the headache of national debt — or at least that is the all-too-common view.

Fiscal stimulus is actually very useful and appropriate in the current circumstances. But rather than despair, we should at least consider what more we should be doing to deal with the pressing issue of unemployment. Let’s never give up proposing sensible economic policies.

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Debt and Delusion

2011-07-21T08:58:00.000-07:00

NEW HAVEN – Economists like to talk about thresholds that, if crossed, spell trouble. Usually there is an element of truth in what they say. But the public often overreacts to such talk.

Consider, for example, the debt-to-GDP ratio, much in the news nowadays in Europe and the United States. It is sometimes said, almost in the same breath, that Greece’s debt equals 153% of its annual GDP, and that Greece is insolvent. Couple these statements with recent television footage of Greeks rioting in the street. Now, what does that look like?

Here in the US, it might seem like an image of our future, as public debt comes perilously close to 100% of annual GDP and continues to rise. But maybe this image is just a bit too vivid in our imaginations. Could it be that people think that a country becomes insolvent when its debt exceeds 100% of GDP?

That would clearly be nonsense. After all, debt (which is measured in currency units) and GDP (which is measured in currency units per unit of time) yields a ratio in units of pure time. There is nothing special about using a year as that unit. A year is the time that it takes for the earth to orbit the sun, which, except for seasonal industries like agriculture, has no particular economic significance.

We should remember this from high school science: always pay attention to units of measurement. Get the units wrong and you are totally befuddled.

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The Sickness Beneath the Slump

2011-06-11T11:21:00.000-07:00

THE origins of the current economic crisis can be traced to a particular kind of social epidemic: a speculative bubble that generated pervasive optimism and complacency. That epidemic has run its course. But we are now living with the malaise it caused.

News accounts of the economic crisis rarely put it in these terms. They tend to focus on distinct short-term developments or on the roles of prominent people like Federal Reserve governors, members of Congress or Wall Street financiers. These stories grab attention and may be supported by some of the economic statistics that the government and private institutions collect.

But the economic situation is primarily driven by hard-to-quantify sociological factors that play out over many years.

The uptick in the unemployment rate, to 9.1 percent from 8.8 percent two months earlier and the drop in stock prices over the last month have attracted notice, yet in a sense they are symptoms of a deeper economic sickness.

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Economy, Insure Thyself

2011-05-27T20:58:00.000-07:00

NEW HAVEN – The basic principle of financial risk management is sharing. The more broadly diversified our financial portfolios, the more people there are who share in the inevitable risks – and the less an individual is affected by any given risk. The theoretical ideal occurs when financial contracts spread the risks all over the world, so that billions of willing investors each own a tiny share, and no one is over-exposed.

The case of Japan shows that, despite some of our financial markets’ great sophistication, we are still a long way from the theoretical ideal. Considering the huge risks that are not managed well, finance, even in the twenty-first century, is actually still rather primitive.

A recent World Bank study estimated that the damage from the triple disaster (earthquake, tsunami, and nuclear crisis) in March might ultimately cost Japan $235 billion (excluding the value of lives tragically lost). That is about 4% of Japanese GDP in 2010.

Given wide publicity about international charitable relief efforts and voluntary contributions to Japan, one might think that the country’s economic loss was shared internationally. But newspaper accounts suggest that such contributions from foreign countries should be put in the hundreds of millions of US dollars – well below 1% of the total losses. Japan needed real financial risk sharing: charity rarely amounts to much.

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Continuous Workout Mortgages

2011-05-10T07:39:00.000-07:00

By Robert J. Shiller, Rafal M. Wojakowski, M. Shahid Ebrahim and Mark B. Shackleton

The ongoing crisis has exposed the vulnerability of the most sophisticated financial structures to systemic risk. This crisis—emanating from mortgage loans to borrowers with high credit risk—has devastated the capital base of financial intermediaries on both sides of the Atlantic. Its impact on the real sector of the economy has given rise to a fear and uncertainty not seen since the Great Depression of the 1930s.

The fragility of the financial intermediaries stems from the rigidity of the traditional mortgage contracts such as the Fixed Rate Mortgages (FRMs), Adjustable Rate Mortgages (ARMs) and their hybrids.

Read full paper [pdf]

Needed: A Clearer Crystal Ball

2011-04-30T14:46:00.000-07:00

THERE were relatively few persuasive warnings during the 1920s that the Great Depression was on its way, and few argued convincingly during the last decade that the most recent economic crisis was near. So it’s easy to conclude that because we didn’t see these events coming, nothing could have been done to prevent them.

In fact, some people view the recent crisis as just another “black swan event,” one of those outliers, as popularized by Nassim Taleb, that come out of the blue. And it’s clear that a lot of smart people simply didn’t see the housing bubble, the instability of our financial sector or the shock that came in 2007 and 2008.

But the theory of outlier events doesn’t actually say that they cannot eventually be predicted. Many of them can be, if the right questions are asked and we use new and better data. Hurricanes, for example, were once black-swan events. Now we can forecast their likely formation and path pretty well, enough to significantly reduce the loss of life.

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Economists as Worldly Philosophers

2011-04-02T11:34:00.000-07:00

By Robert J. Shiller and Virginia M. Shiller

In his influential 1953 book The Worldly Philosophers: The Lives, Times And Ideas Of The Great Economic Thinkers, Robert Heilbroner gave an inspirational account of what economists do, an account that was assigned as supplemental reading to countless beginning economics students over decades. Heilbroner wrote that he chose the term “worldly philosophers” because of the breadth and moral depth of economists’ inquiry. The appellation stuck, and for many years it was common to refer to economists as worldly philosophers. The inspiration of that book has contributed to the desire for many to go on to become economists, and to productive lives as researchers.

But, while the volume of research turned out by economists is most impressive, there are questions whether “worldly” and “philosophical” are represented as much as they should be in economic research. Has economics as a profession substantially lost sight of the idealism that existed in earlier decades? Has the strong impulse to pursue narrow specialization in order to propel research to the frontier led to some loss of moral perspective?

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Bubble Spotting

2011-03-22T07:34:00.000-07:00

NEW HAVEN – People frequently ask me, as someone who has written on market speculation, where the next big speculative bubble is likely to be. Will it be in housing again? Will it be in the stock market?

I don’t know, though I have some hunches. It is impossible for anyone to predict bubbles accurately. In my view, bubbles are social epidemics, fostered by a sort of interpersonal contagion. A bubble forms when the contagion rate goes up for ideas that support a bubble. But contagion rates depend on patterns of thinking, which are difficult to judge.

Big speculative bubbles are rare events. (Little bubbles, in the price of, say, individual stocks, happen all the time, and don’t qualify as an answer to the question.) And, because big bubbles last for many years, predicting them means predicting many years in the future, which is a bit like predicting who will be running the government two elections from now.

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Economic View: Share the Risk and Share the Harvest

2011-03-19T12:25:00.000-07:00

NOT so very long ago, most Americans lived on farms, with three generations under one roof: grandparents, parents and children.

Farming was — and still is — a risky undertaking. Sometimes, you have good weather and abundant crops, sometimes bad weather and meager crops. How did our forebears manage their risks, which were as significant for them as the booms and busts of our 21st-century economy are to us?

In good times, all three generations consumed a lot. In bad times, all three consumed less. The risks were spread among the extended family. This is risk management at its most basic level. It is called sharing.

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Housing Bubbles Are Few and Far Between

2011-02-05T13:44:00.000-08:00

WHAT’S the outlook for home prices over the next decade? It’s not easy to tell. We need to confront the basic fact that near the beginning of the 21st century, the market for homes in much of the world suddenly became more speculative than ever.

This enormous housing bubble and burst isn’t comparable to any national or international housing cycle in history. Previous bubbles have been smaller and more regional.

We have to look further afield for parallels. The most useful may be the long trail of booms and crashes in the price of land, particularly of farms, forests and village lots. Those upheavals may give some insights into the present situation, and some guidance for the next decade.

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A People’s Economics

2011-01-20T09:04:00.000-08:00

NEW HAVEN – We are in the midst of a boom in popular economics: books, articles, blogs, public lectures, all followed closely by the general public.

I recently participated in a panel discussion of this phenomenon at the American Economic Association annual meeting in Denver. An apparent paradox emerged from the discussion: the boom in popular economics comes at a time when the general public seems to have lost faith in professional economists, because almost all of us failed to predict, or even warn of, the current economic crisis, the biggest since the Great Depression.

So, why is the public buying more books by professional economists?

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Coming Soon: New Book by Robert Shiller and Randall Kroszner

2011-01-09T19:35:00.000-08:00

Reforming U.S. Financial Markets: Reflections Before and Beyond Dodd-Frank

From the publisher:

Over the last few years, the financial sector has experienced its worst crisis since the 1930s. The collapse of major firms, the decline in asset values, the interruption of credit flows, the loss of confidence in firms and credit market instruments, the intervention by governments and central banks: all were extraordinary in scale and scope. In this book, leading economists Randall Kroszner and Robert Shiller discuss what the United States should do to prevent another such financial meltdown. Their discussion goes beyond the nuts and bolts of legislative and regulatory fixes to consider fundamental changes in our financial arrangements.

Kroszner and Shiller offer two distinctive approaches to financial reform, with Kroszner providing a systematic analysis of regulatory gaps and Shiller addressing the broader concerns of democratizing and humanizing finance. Kroszner focuses on key areas for reform, including credit rating agencies and the mortgage securitization market. Shiller argues that reform must serve to make the full power of financial theory work for everyone—bringing the technology of finance to bear on managing risk, for example—and should acknowledge the reality of human nature. After brief discussions by four commentators, Kroszner and Shiller each offer a response to the other’s proposals, creating a fruitful dialogue between two major figures in the field.

Pre-order on Amazon.com

Stimulus, Without More Debt

2010-12-25T21:46:00.000-08:00

THE $858 billion tax package signed into law this month provides some stimulus for our ailing economy. With the unemployment rate at 9.8 percent, more will certainly be needed, yet further deficit spending may not be a politically viable option.

Instead, we are likely to see a big fight over raising the national debt ceiling, and a push to reverse the stimulus we already have.

In that context, here’s some good news extracted from economic theory: We don’t need to go deeper into debt to stimulate the economy more.

For economists, of course, this isn’t really news. It has long been known that Keynesian economic stimulus does not require deficit spending. Under certain idealized assumptions, a concept known as the “balanced-budget multiplier theorem” states that national income is raised, dollar for dollar, with any increase in government expenditure on goods and services that is matched by a tax increase.

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