Nobel Memorial Award in Economics? Check. Best-selling author? Check. In the New York Times Robert Shiller remarks on the role of what fellow award recipient and best-selliung economist has referred to as “the uncertainty fairy”:
Anyone can tell you that there is no certainty about the effect that new technologies will have on job security in coming decades: There is a risk, but it is hard to quantify for general categories of jobs, and nearly impossible to calculate for individuals. Yet these concerns have effects on investor decision-making through the emotional component of our actions — what John Maynard Keynes, the great British economist, called our animal spirits.
Uncertainties about individual economic fortunes can affect asset prices through an important indirect channel, government policy, which is swayed by popular concerns. Raghuram Rajan, governor of the Reserve Bank of India, in his book “Fault Lines: How Hidden Fractures Still Threaten the World Economy†(Princeton 2010) argued that governments were more tolerant of excessive credit expansion when their citizens were upset about rising inequality. Governments, he said, use expanded credit in a desperate effort to placate a dissatisfied electorate. Credit expansion can create housing bubbles and an illusion of wealth for many people, for a while, at least. The idea is: “Let them eat credit.â€
But with rising anxiety about our economic lives and about the state of the markets, we need something more substantial than credit expansion to help us. We all need to think hard about the underlying mechanisms producing individual uncertainty and inequality, and we need to devise financial and insurance plans to help us to deal with whatever looms ahead.
I found a becoming modesty in Dr. Shiller’s op-ed viz.:
There is a great deal that we don’t know about market movements. Interest rates and prices generally reach extreme levels when there is an unusual confluence of many precipitating factors, like anxiety, and others as well. We are usually puzzled by this multiplicity.
And, because markets are really not very efficient, the effect of these varied factors tends to be amplified through emotional feedback.
How do you foster confidence? There are all sorts of ways. A less confrontational Congress. A less activist executive with a greater relish for doing whatever’s necessary to work with the Congress. Modesty would be a good start. Or maybe instituting rules-based regimes rather than the goggles and white scarf approach to economic planning we’ve engaged in for the last couple of decades would be a start.
