Saturday, December 25, 2010

Stimulus, Without More Debt

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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Thursday, December 23, 2010

An Invitation

For any who have enjoyed following Shiller Feeds, I want to invite you to follow my new personal blog at Perhaps you will find my posts on random topics including economics, politics, religion and technology to be of interest. I also plan to use my new blog to highlight some of the other projects I am working on that may be of interest to you.

Best wishes for a very Merry Christmas and a Happy New Year!


Thursday, November 18, 2010

Shorting Fiscal Consolidation

NEW HAVEN – Real long-term interest rates – that is, interest rates on inflation-protected bonds – have fallen to historic lows in much of the world. This is an economic fact of fundamental significance, for the real long-term interest rate is a direct measure of the cost of borrowing to conduct business, launch new enterprises, or expand existing ones – and its levels now fly in the face of all the talk about the need to slash government deficits.

Nominal interest rates – quoted in terms of dollars, euros, renminbi, etc. – are difficult to interpret, since the real cost of borrowing at these rates depends on the future course of inflation, which is always unknown. If I borrow euros at 4% for ten years, I know that I will have to pay back 4% of the principal owed as interest in euros every year, but I don’t know what this amounts to.

If inflation is also 4% per year, I can borrow for free – and for less than nothing if annual inflation turns out to be higher. But, if there is no inflation over the next ten years, I will pay a hefty real price for borrowing. One just doesn’t know.

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Sunday, November 14, 2010

Bailouts, Reframed as ‘Orderly Resolutions’

DISTASTEFUL as it may seem, we need to prepare for the next financial crisis, which, of course, will arrive eventually. Right now, though, people are so angry about the recent bailouts of Wall Street that the government may not be able to use the same playbook again.

The criticism has emphasized the trillions of taxpayer dollars that the bailouts put at risk. But, in fact, the realized losses were minuscule when compared with the widespread suffering they averted. The net losses of the $700 billion Troubled Asset Relief Program, for example, which ran from October 2008 to October 2010, amounted to only $30 billion by the latest estimate. Yet TARP may have prevented many trillions of dollars of losses in gross domestic product.

Our principal hope for dealing with the next big crisis is the Dodd-Frank Act, signed by President Obama in July. It calls for bailouts of a sort, but has reframed them so they may look better to taxpayers. Now they will be called “orderly resolutions.”

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Sunday, October 3, 2010

The Survival of the Safest

CORPORATE managers struggling to preserve their companies and protect their core employees have inadvertently contributed to a vicious cycle of rising unemployment and plummeting national morale. If we are to break out of this downward spiral, we first need to understand the problem, then deal with it on a huge scale.

It’s no surprise that business confidence has been shaken over the last few years. Executives are unwilling to take on new risks, and people in all walks of life are nervous about trusting in one another. In a broad sense, damage to morale — which John Maynard Keynes called “animal spirits” — surely ranks as one of the most important reasons for the American economy’s persistent weakness.

Yet professional managers throughout the business world see it as their job to keep work-force morale high. But, paradoxically, the actions they take for their own workplaces often make the overall crisis more severe.

A remarkable book by Truman Bewley, titled “Why Wages Don’t Fall During a Recession” (Harvard, 1999), provides insights into the current situation, even though it focuses on the recession of 1990-91 and the long “jobless recovery” that followed it.

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Friday, September 24, 2010

Seven More Years of Hard Times?

NEW HAVEN – Much of the talk emerging from the August 2010 Jackson Hole Economic Symposium, attended by many of the world’s central bankers and economists, has been about a paper presented there that gave a dire long-run assessment of the future of the world’s economies.

The paper, “After the Fall,” was written by economists Carmen Reinhart and Vincent Reinhart. Their work draws upon a recent book that Carmen Reinhart co-authored with Kenneth Rogoff, entitled This Time Is Different: Eight Centuries of Financial Folly.

According to the Reinharts’ paper, when compared to the decade that precedes financial crises like the one that started three years ago, “GDP growth and housing prices are significantly lower and unemployment higher” in the subsequent “ten-year window.” Thus, one might infer that we face another seven years or so of bad times.

Economic theory is not sufficiently developed to predict major turning points based on first principles or mathematical models. So we have to be historically oriented in our method. History may be a “soft” social science, but we have to look at it, even distant history, if we are to grasp other examples of major crises.

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Monday, August 30, 2010

The Case for Reviving Revenue Sharing

PROTRACTED unemployment is eating away at millions of people. And the economy’s failure to create enough jobs for them is part of a vicious circle that could keep turning for years to come.

In my last column, I called for big, temporary government programs aimed directly at putting people back to work. But how might we best accomplish this? The clock is ticking, and we don’t have time to create new national organizations to employ people. Instead, the most efficient approach is to use existing organizations for specific ideas and projects.

State and local governments as well as nonprofit and other organizations need to be mainstays in this effort. We need to enlist their help — without telling them exactly what to do. As for a framework, think of the general revenue sharing program adopted by Congress in 1972.

In his 1971 State of the Union message, President Richard M. Nixon advocated general revenue sharing to offset the tendency for power to be concentrated in Washington. Give local governments the money and “put the power to spend it where the people are,” he said.

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Monday, August 9, 2010

What Would Roosevelt Do?

ACROSS the United States, thousands of federally financed stimulus projects are under way, aimed at bolstering the economy and putting people to work. The results so far have not been spectacular.

Why not? There’s nothing wrong with the idea of fiscal stimulus itself. We need more stimulus, not less — but we need to focus much more on actually putting people to work.

Two friends of mine, both economists, came upon a stimulus project recently that illustrated the problem. On a Wyoming highway they saw a sign that read “Putting America to Work: Project Funded by the American Recovery and Reinvestment Act” and prominently featured a picture of a worker digging with a shovel. Out on the road, there was plenty of equipment, including a gigantic asphalt paver, dump trucks, rollers and service vehicles. But there wasn’t a single laborer with a shovel. That project employed capital, certainly, but not many human beings.

Like many such stimulus projects, it could be justified if you accept the idea that gross domestic product, not jobs, is central — a misconception rooted in economic theory, or at least in the way that Keynesian economic theory has evolved.

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Tuesday, July 27, 2010

Who Should Safeguard Financial Stability?

NEW HAVEN – Central bankers around the world failed to see the current financial crisis coming before its beginnings in 2007. Martin Čihák of the International Monetary Fund reported in July 2007 that, of 47 central banks found to publish financial stability reports (FSRs), “virtually all” gave a “positive overall assessment of their domestic financial system” in their most recent reports.

And yet, although these central banks failed us before the crisis, they should still play the lead role in preventing the next crisis. That is the conclusion, perhaps counterintuitive, that the Squam Lake Group [], a think tank of 15 academic financial economists to which I belong, reached in our recently published report, Fixing the Financial System.

Macro-prudential regulators (government officials who focus not on the soundness of individual financial institutions, but rather on the stability of the whole financial system) are sorely needed, and central bankers are the logical people to fill this role. Other regulators did no better in predicting this crisis, and are even less suited to prevent the next.

Sunday, June 20, 2010

Help Prevent a Sequel. Delay Some Pay.

by Robert J. Shiller in The NY Times

CONGRESS’S approach to financial reform has been a bit like my own household’s response to a moth infestation in our kitchen a couple of years ago. After we got over the initial shock, my wife and I responded rapidly, disposing of food in which moths were breeding. Then we broadened our focus, throwing away items that had passed their expiration date or were no longer needed. Then we made a list of things to buy and went shopping.

But, in retrospect, we neglected something important. We didn’t take control of the crisis by finding where the moths came from, or figuring out how to prevent their return. (Just two weeks ago, we found another infestation.)

How does that compare to the federal response to the financial crisis?

Well, now that we’re past the initial phases of crisis management, Congress has a chance to address the underlying issues in a fundamental way. Unfortunately, though, the reform bills approved separately by the House and the Senate — and now in conference committee — deal with the crisis by offering a host of little cleanups and shopping lists. The cumulative effect would certainly be positive, but the current versions wouldn’t really prevent a repeat of the mess.

Read full commentary

Wednesday, May 26, 2010

How Nutritious Are Your Investments?

By Robert J. Shiller for Project Syndicate

NEW HAVEN – Those labels that you see on packaged foods listing their ingredients and nutritional values had their beginnings in an international scandal and in the efforts by governments to deal constructively with the public outrage that followed.

The scandal erupted with the publication in 1906 of Upton Sinclair’s novel The Jungle, a bestseller that detailed the experiences of a Lithuanian immigrant family working in America’s meatpacking industry. The public response to the book’s description of unsanitary conditions in the industry was so strong that the United States Congress enacted the Pure Food and Drug Act – the first law to require labeling of contents on food packages – the very same year.

By 1910, according to The Manchester Guardian, “The Jungle Scare” had spread to the United Kingdom, where it had been taken up by “less scrupulous [sic] newspapers of this country,” with “slanderous” and “sensational” claims about the food industry. That may have been true, but the eventual effect was better food labeling laws in the UK, too.

Indeed, the scandal set in motion a sequence of laws in countries around the world that today require food labeling to go beyond mere lists of ingredients to include information about the vitamins, minerals, and calories that products contain. These labels are undoubtedly useful to consumers, but it is unlikely that many manufacturers, if given the choice, would have introduced them on their own.

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Saturday, May 15, 2010

Fear of a Double Dip Could Cause One

By Robert J. Shiller in The NY Times

THE risk of a double-dip recession hasn’t abated, even after news of the huge European bailout in response to the Greek debt crisis.

World markets soared initially on the announcement of the nearly $1 trillion rescue plan, and then declined. But as the economist John Maynard Keynes cautioned long ago, such market reactions are basically a “beauty contest” — with investors trying to predict the short-term reaction that other investors think still other investors will have.

In other words, don’t view these beauty contests as a heartfelt response to a fundamental change in the economy.

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Saturday, April 24, 2010

The Housing Recovery Could Be on Shaky Ground


To understand the state of the housing market now I spoke with the co-creator of the S&P/Case-Shiller Home Price Index, Robert Shiller...

Jennifer Schonberger: The latest Fed minutes showed the central bank is concerned the activity in the housing sector could be leveling off. What is your take on the state of the housing market now? Do you share the same concern as the Fed?

Robert Shiller: Yes. Home prices have been going up for nearly a year now, according to our data, the S&P/Case-Shiller indices ... Normally we could extrapolate that kind of upward trend because historically home prices have shown a lot of momentum. But I think we're in a very unusual circumstance because of the massive bailouts, the homebuyer tax credits, the Fed's purchase of mortgage-backed securities -- and these things are coming to an end. So it's an unusual period. So I don't trust the trend that we have. I'm worried that it might get reversed.

Schonberger: Speaking of momentum, I remember in our last discussion that momentum and confidence levels are keys in your view to examining the health of the housing market. Is momentum waning now?

Shiller: In terms of the S&P/Case-Shiller numbers, the rate of growth of home prices has fallen. If you look at them in nonseasonally adjusted terms -- just the raw data -- they're falling. But if you seasonally adjust them they're going up. But they're not going up so briskly as they were in the middle of 2009. That's one leading indicator. There are others as well. One that I particularly like is the National Association of Home Builders Housing Market Index, which is based on a survey of their members. That has turned down starting last fall. So we've had months of decline in homebuilders' impressions as to the strength of the market.

Read full interview

Monday, April 12, 2010

Don’t Bet the Farm on the Housing Recovery

By Robert J. Shiller in The NY Times

MUCH hope has been pinned on the recovery in home prices that began about a year ago. A long-lasting housing recovery might provide a balm to households, mortgage lenders and the entire United States economy. But will the recovery be sustained?

Alas, the evidence is equivocal at best.

The most obvious reason for hope is that, unlike stock prices, home prices tend to show a great deal of momentum. Correcting for seasonal effects, home prices as measured by the S.&P./Case-Shiller 10-City Home Price Index increased each month from June 1995 to April 2006, then decreased almost every month to May 2009. Since then, they have risen through January, the latest month for which data is available.

So, because home prices have been climbing of late, isn’t it plausible that they’ll keep doing so?

If only it were that simple.

Read full commentary

Saturday, April 3, 2010

Encouraging Saving: Lessons for Developed and Developing Countries

By Robert J. Shiller in the Yale Journal of International Affairs

Adam Smith’s 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations had an explanation for the great diversity of economic outcomes across countries. Some countries save more than others, and thereby accumulate more capital, that is, more productive resources. This, Smith argued, was a big part of the picture in explaining why some nations are rich and some are poor. His conclusion has intrigued economic theorists ever since. There has been much interest and dispute about his conclusions.

As developed and developing nations recover from the financial crisis and begin to set new directions for the development of their countries, it will serve them well to heed the words of Adam Smith on the importance of saving and capital accumulation. Indeed, promoting the savings rate is no longer simply an ambition of developing nations, but has also become a major goal of developed nations, especially those in Europe that face aging populations.

Read full article [pdf]

Sunday, March 14, 2010

A Crisis of Understanding

By Robert J. Shiller at Project Syndicate:

NEW HAVEN – Few economists predicted the current economic crisis, and there is little agreement among them about its ultimate causes. So, not surprisingly, economists are not in a good position to forecast how quickly it will end, either.

Of course, we all know the proximate causes of an economic crisis: people are not spending, because their incomes have fallen, their jobs are insecure, or both. But we can take it a step further back: people’s income is lower and their jobs are insecure because they were not spending a short time ago – and so on, backwards in time, in a repeating feedback loop.

It is a vicious circle, but where and why did it start? Why did it worsen? What will reverse it? It is to these questions that economists have been unable to offer clear answers.

Read the full commentary

Saturday, March 6, 2010

Economic View: Mom, Apple Pie and Mortgages

By Robert J. Shiller in the NY Times:

FOR decades, the federal government has subsidized housing — particularly owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration propping up the housing market by issuing guarantees for investors on most new mortgages.

But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? Is this nothing more than a sacred cow in American society — a political necessity because so many voters own homes and are mindful of their resale value?

In fact, there is much more to the history of subsidizing housing. While the crisis in the housing market shows that our current approach is far from perfect, there is a certain wisdom behind it, related not only to economic stimulus but also to the preservation of a sense of national identity. It’s important to remember this as we consider re-engineering our institutions as the crisis ebbs.

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Wednesday, February 17, 2010

Can leaders revive animal spirits?

By Robert J. Shiller at

We expect our political leaders to manage the level of economic activity by employing fiscal and monetary tools such as interest rates, tax incentives and stimulus packages to avoid recessions. However, in the aftermath of the bursting of the largest bubble in history, in the property market as well as other markets, we see that a social-psychological phenomenon, over-confidence, was not managed by leaders, and its subsequent collapse represents the deepest cause of the financial crisis.

We can imagine that words of warning might have been effective in stopping the bubble before it got so big. Alan Greenspan’s “irrational exuberance” speech in 1996 had a briefly chilling impact on stock markets around the world. However, in the years just before the crisis, leaders failed either to issue firm notes of caution or to restrain over-enthusiastic investment by changing economic incentives.

Now the danger is that we will languish in a period of under-confidence. The over-confidence of a few years past, which encouraged many people to leverage themselves in questionable investments in property, has now left us with a legacy of damaged portfolios. In this uncertain economic climate, businesses are hesitant to invest and consumers reluctant to spend. For a particular business or family, such hesitation may seem wise. However, the cumulative impact of individual decisions based on low confidence is an economy that stalls, either failing to recover or slipping once again into a recession.

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Saturday, January 30, 2010

Stuck in Neutral? Reset the Mood

by Robert J. Shiller in the NY Times:

THE United States and other advanced economies may be facing a long, slow period of disappointing growth.

That is a widespread concern, as recent polls demonstrate. A USA Today/Gallup poll, for example, found this month that about two-thirds of Americans say they think that economic recovery won’t start for two more years, while 28 percent say it won’t begin for at least five years.

Among students of history, there are fears that we will suffer the type of chronic economic malaise that afflicted the world after the 1929 stock market crash, or that weakened Japan after the puncturing of twin stock and housing market bubbles around 1990. The post-1929 depression did not end for about a decade, and Japan has still not emerged from its post-1990 slowdown.

The fears themselves are an integral part of the problem. Economists have a tendency to assume that everyone’s behavior is rational. But post-boom pessimism is a factor driving the economy, and it is likely to be associated with attitudes that may be enduring.

Read full commentary

Friday, January 22, 2010

Fixing the plumbing in banking system

By Robert J. Shiller at

THE severity of the global financial crisis has to do with a fundamental source of instability in the banking system, one that we can and must design out of existence.

In a serious financial crisis, banks find that the declining market value of many of their assets leaves them short of capital. They cannot raise much more capital during the crisis, so, in order to restore capital adequacy, they stop making new loans and call in their outstanding loans, thereby throwing the entire economy - if not the entire global economy - into a tailspin.

This problem is rather technical in nature, as are its solutions. It is a sort of plumbing problem for the banking system, but we need to fix the plumbing by changing the structure of the banking system itself.

Many finance experts - including Alon Raviv, Mark Flannery, Anil Kashyap, Raghuram Rajan, Jeremy Stein, Ricardo Caballero, Pablo Kurlat, Dennis Snower, and the Squam Lake Working Group - have been making proposals along the lines of "contingent capital."

The proposal by the Squam Lake Working Group - named for the scenic site in New Hampshire where a group of finance professors first met to devise ideas for responding to the current economic crisis - seems particularly appealing.

Monday, January 4, 2010

Continued housing volatility a sure bet

By Robert J. Shiller at

BEIJING, Jan. 4 -- Volatility in the housing market has long been known, but until now it has never been visible in so many places around the world at the same time. Indeed, the year 2009 might even be a milestone marking a new era of volatility.

Since 2000, we have seen the most dramatic evidence ever of speculative bubbles in markets for owner-occupied homes. Home prices exploded after 2000 in North America, Europe and Asia, and in many isolated places elsewhere in the world. Markets peaked in 2007, and then fell sharply in many of these places with the onset of the global financial crisis. Surprisingly, prices rebounded in some places in 2009. It seems the story never ends.

In the United States, the S&P/Case-Shiller 10-City Home Price Index recorded the biggest turnaround since the index began in 1987, rising 5 percent (a 15 percent annual rate) from April to August 2009, after having fallen 7 percent (a 21 percent annual rate) in the four months from December 2008 to March 2009. Recent increases in home prices have also been seen in Australia, the UK, South Korea, Singapore, Sweden and the Hong Kong Special Administrative Region, and optimistic talk is heard in still more places.

Read the full commentary