On September 25, 2019, Professor Robert Shiller and I spoke about what some of the stories that are currently in circulation say about where the economy is headed. Is a recession, or a continued rally, on the horizon?
NP: I just saw an ad for Super Store where one of the employees screams that robots are coming to take our jobs. Does a fear of losing our jobs – to robots or to having them shipped overseas – cause us to reduce our spending, which in turn slows down the economy – contributing to the very thing we fear?
RJS: That’s how it happened in the past. In the Great Depression, there was a lot of talk of robots replacing jobs. It’s not part of our conventional history of the Great Depression. They didn’t have robots that walked around and talked, but they had plenty of machines. [This phenomenon] could happen again because artificial intelligence is such a stunning development, with things like driverless cars and pilotless ships. Artificial intelligence looks like it’s going to have an impact on our jobs.
NP: Are you saying that the stories we tell ourselves, just our mindset, could actually cause a recession, or perhaps make it deeper than it needs to be?
RJS: That’s the idea that I’m
[proposing]
in my book Narrative Economics, that stories are causal elements. Narratives are like diseases, like influenza. Influenza lies relatively tame until suddenly there is a big epidemic. The same thing is true with narratives. The artificial intelligence narrative doesn’t seem to be scaring people, but it’s there. It could come back into a big scare.
NP: How much of the recovery that we’ve seen since 2009 was just access to money, versus the stories that we are telling each other? In the wake of the Great Recession, did credit return more quickly to the consumer than it did in the Great Depression?
RJS: Our credit markets have developed a lot since the Great Depression, and they are regulated better. In the early years of the Great Depression, there was no Securities and Exchange Commission. There was no Financial Stability Board. There was no Consumer Financial Protection Bureau. We learned, and things are better. We still are vulnerable to a consumption pullback. People can afford to consume more because the cost of borrowing to do that is lower. Right now, consumption demand is holding up in the U.S. That could change though.
NP: Corporate buybacks have really driven this bull market. Main Street has been rather skeptical, up until 2016. What are your thoughts on the economic narratives being told today about the stock market?
RJS: The lowest ebb for safety in the market was right at 2009. Although the market had gone down 50% in real terms, people thought it would go down even further. They were talking about 1929 in exorbitant levels. Now that narrative is fading. However, we still call that recession the Great Recession, which is a play on the words Great Depression. So, it’s still on our minds. The recovery that we’ve seen since then is partly due to just forgetting about the stories that we heard about people losing their houses and suffering under unemployment. They are not fresh in our memory anymore. It may be that more than any new narrative.
It’s also the Donald Trump narrative, which provides a script for a new way of living – more ostentatious. You may feel more embarrassed about being poor.Trump talks about losers. He’s very harsh in his judgment of some people. That affects our thinking. We have to keep up with the Joneses. They used to say that in the Depression, but they said it pejoratively.
NP: The shift toward nationalism that began with the new Administration is not just in the U.S. There are a lot of countries grappling with this. You noted that this mindset was viral before World War II.
RJS: I’m worried about the polarization in our societies and the rise of primitive nationalism. Part of my theory is about stories going viral. But it is also about stories that are forgotten. One of the powerful narratives that is being forgotten is World War II. That was such a nightmare. For a long time afterwards, people were much kinder to one another and supportive. That’s fading. We’re slipping back into our tribal past, and it’s worrisome.
NP: You point out that stories can evolve, just like viruses. In the Dot Com Recession, the artificial intelligence narrative was not a scare, but something that everyone wanted to profit from.
RJS: That’s right. And then the Dot Com thing came to an end right around the time that Barron’s published an article called “Burning Up,” which documented how many of those Dot Com companies were close to insolvency. It became a sudden narrative that: “This is it.” [The Dot Com Recession] also came after the New Millennium. We heard all of these expansive stories about the future, and here we are in 2000, and it’s looking kind of iffy. Maybe we were suffering a hangover after our New Millennium party.
NP: What do you think about the Sharing Economy and Micro Mobility, which are hallmarks of Millennials and Gen Z. Is this a new modesty craze that might spark frugality?
RJS: The bike craze happened before. During the Great Depression, a lot of stores set up bike racks because there was a big switch to riding a bike. Right now, this isn’t associated with poverty, but it could become associated with that. Bikes are relatively cheap.
NP: Interesting. Affordable transportation, such as bikes and e-scooters, which are getting popular out of necessity and also due to a stronger emphasis on sustainability, can also play into the Donald Trump “I’m winning” narrative, without being seen as frugality…
RJS: The problem with narratives is that they are so subtle. You can’t just focus on a word. Ultimately it reflects humanity, and the deep complexity of our minds and our emotions. So, the idea is that some kind of new narrative just gets started. It goes like wildfire. It can stimulate demand, and it can contract demand. It’s not something that we can view at this point from a purely mathematical viewpoint. We have to look at the content of the story, and what is it that makes it so contagious.
NP: Let’s talk about the rescue last week of the overnight repo market, which popped from 2 to 10% interest.
RJS: Monetary experts view that as a glitch that will be handled by the Federal Reserve. The 10% interest rate was momentary. It disappeared quickly. However, it could get magnified. The question is, “How is the story received by the public?” For example, in October 19, 1987, we had the biggest stock market one-day drop ever. It was over 22% in the Dow in one day. There was talk of the Great Depression then, but it just didn’t register. There was no recession after that. People thought it was just some technical glitch. At another time, the story could take another dimension. It’s really hard to predict.
NP: Ronald Reagan was very good at slogans. Do you think there was some slogan that he pulled out that people just bought into?
RJS: I’m thinking it was a Reagan joke. He was great at jokes. The Reagan jokes were generally about the Soviet Union, and they were very effective.
NP: OK. Let’s hear one.
RJS: A man just bought a new car in the Soviet Union. The salesman is drawing up the final papers and he says, “Funny thing. I see that your car will be delivered on today’s date exactly ten years from now.” The buyer says, “Morning or afternoon?” The salesman responds, “It’s ten years from now. How can you care whether it is morning or afternoon?” The buyer says, “Well, the plumber is coming by in the morning.”
NP: Apparently those jokes were so effective they could tear down walls.
RJS: Those big changes in the Soviet Union were narrative induced. When I visited Moscow in 1989, I was struck at how people would talk against the government. I thought this was not allowed. Of course, you didn’t see this in the newspapers. I had a tour guide, an official tour guide, who showed me around the Kremlin. She said, “I think civil war is coming to Russia.” That was 1989, before the Internet and with no newspapers reporting on this.
NP: But there might have been some sort of economic recession that preceded that mind shift?
RJS: Yes. We went into a department store and they had nothing there. There were long lines. I asked someone what he was standing in line for and he said, “Soap.” Things weren’t working right. They sensed hypocrisy. They wanted a change.
NP: There’s an ancient Chinese saying that the Emperor stays in power as long as the economy is good. When an economy tanks, there is a divine authority and a change in leadership.
RJS: I hadn’t heard that.
NP: I remember it from a Chinese culture
survey course at USC.
RJS: See, we remember the jokes and the narratives easily…
NP: Do you have any last thoughts on the economy today?
RJS: The economics profession is changing with the times, and particularly with the availability of data. We have digitized texts with all sorts of human exchange, talk and conversation. It will take decades for the economics profession to sort this out. With modern computers, which will be an essential element of the research, we should be able to classify and organize our thinking about narratives. Narratives repeat themselves in history, but you have to have them up to date. There are so many narratives that it is hard to summarize the effect of all of them. I think we’ll get there.
NP: But there are some pervasive, over-riding themes to our stories, right?
RJS: That’s right and they can come back. There are enough people who remember [the old stories] that they provide a background from which to take off again. And the stories may have a human-interest component that is very strong. Any narrative around some people making a lot of money fast tends to be contagious. That’s why we have bubbles.
There are also narratives that have a different emotion attached to them, not so much glory and making a lot of money, but it can also be anger at other people and the willingness to boycott something – some nation or some product.
NP: All of that played into the cryptocurrency bubble of 2017.
RJS: That’s right. It was an anarchist sentiment. The anarchist narrative goes back to the early 19th century. Hatred of government, in the sense that if government didn’t exist, we’d be fine. One of the reasons that cryptocurrencies have been so popular is that they seem to suggest a route toward a cutting off of government influence, that we cosmopolitans can run our business quite well, thank you. We don’t need the government regulating us.
On top of that, we had this nice mystery story about Satoshi Nakamoto who is the supposed inventor of Bitcoin. Nobody can find him. Nobody knows who he was. Maybe it was some committee that wrote the code. That actually adds to the narrative. People like mystery stories. Whenever someone comes forth claiming to be Satoshi Nakamoto, it’s like Anastasia or Delphine. When someone can’t be found and imposters keep coming up, that’s a great story.
Click to listen to my full interview with Professor Robert Shiller on BlogTalkRadio.com/NataliePace.
About Robert Shiller
Professor Robert J. Shiller is one of the leading economists of today. His work on inefficient markets earned him a Nobel Prize in economics in 2013. He is the author of many bestselling books, and is a frequent guest on television and at major economic conferences worldwide. Professor Shiller is the Sterling Professor of Economics at Yale University.