Tags: Shiller | narratives | economy | gap

Shiller: Narratives Surrounding Economies Greatly Influence Their Performance

By    |   Thursday, 20 Mar 2014 11:21 AM

Popular impressions of a country's economy go a long way in determining the economy's performance, says Nobel laureate economist Robert Shiller of Yale University.

"Fluctuations in the world’s economies are largely due to the stories we hear and tell about them," he writes in an article for Project Syndicate.

"These popular, emotionally relevant narratives sometimes inspire us to go out and spend, start businesses, build new factories and office buildings and hire employees. At other times, they put fear in our hearts and impel us to sit tight, save our resources, curtail spending and reduce risk. They either stimulate our 'animal spirits' or muffle them."

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For example, the narrative surrounding Japan Prime Minister Shinzo Abe's economic policy has greatly boosted Japan's confidence, Shiller argues.

And its GDP output gap shrank to -0.9 percent in 2013 from -3.6 percent in 2011, according to the International Monetary Fund. Meanwhile, the overall output gap for the world’s major advanced economies stood at -3.2 percent last year.

"We seem to be at the mercy of our narratives," he contends. "Ever since 2009, most of us have just been waiting for some story to turn our hearts aglow with hope and confidence — and to reinvigorate our economies."

The U.S. economic vibe was positive during the real estate boom in the first half of the 2000s, largely because so many people were homeowners and thus felt like they were participating in the boom, he maintains.

Everything went south with the real estate bust and 2008 financial crisis, Shiller adds. By early 2009, fear of a deep depression was raging.

"To understand why economic recovery (if not that of the stock market) has remained so weak since 2009, we need to identify which stories have been affecting popular psychology," he writes. "One example is the rapid advance in smartphones and tablet computers."

The growth of these products since Apple introduced the iPhone in 2007 has been tremendous, Shiller notes.

"This ought to be a confidence-boosting story: amazing technologies are emerging, sales are booming and entrepreneurship is alive and very well," he says. "But the confidence-boosting effect of the earlier real estate boom was far more powerful, because it resonated directly with many more people."

The smartphone/tablet boom has engendered fear, because "the wealth that these devices generate seems to be concentrated among a tiny number of tech entrepreneurs who probably live in a faraway country," he adds.

"It is not easy for national leaders, even those with Abe's talents, to manage such stories, just as it is hard for film producers to make a blockbuster every time," he explains. "No leader can consistently shape the narratives that affect the economy. But that does not rule out the need to try."

Meanwhile, Gallup's U.S. Economic Confidence Index improved to -18 for the week ended March 16 from -20 a week earlier.

"Americans continue to be more negative than positive about the economy," writes Gallup's Rebecca Riffkin in a statement.

"But they are currently somewhat less negative than they have been at other points since 2008, including during the fiscal crisis, periods of high unemployment and government battles over the debt ceiling and trimming the federal budget."

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Popular impressions of a country's economy go a long way in determining the economy's performance, says Nobel laureate economist Robert Shiller of Yale University.
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2014-21-20
Thursday, 20 Mar 2014 11:21 AM
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