Sunday, November 23, 2014

The Global Economy’s Tale Risks

TOKYO – Fluctuations in the world’s economies are largely due to the stories we hear and tell about them. 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.

Visiting Japan on a speaking tour, I am struck by the positive impact of the economy-related stories on people’s thinking and behavior, and also by how fragile that change is. Since Prime Minister Shinzo Abe assumed office in December 2012 and launched his program of monetary and fiscal stimulus and structural reform, the impact on Japanese confidence has been profound. According to the International Monetary Fund, the output gap – the difference between actual and potential GDP – narrowed from -3.6% in 2011 to -0.9% in 2013.

Most of the rest of the world lacks a comprehensive, easily understood narrative of positive change similar to Japan’s “Abenomics.” The output gap for the world’s major advanced economies, as calculated by the IMF, remains disappointing, at -3.2% in 2013, which is less than half-way back to normal from 2009, the worst year of the global financial crisis, when the gap was -5.3%.

We seem to be at the mercy of our narratives. 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.

Think of the story of the real-estate boom in the United States and other countries in the first half of the 2000’s. This was a story not of a “bubble”; rather, the boom was a triumph of capitalist enterprise in a new millennium.

These stories were so powerful because a huge number of people were psychologically – and financially – invested in them. Most families owned a house, so they were automatically participating in the boom. And many homeowners, eager to participate even more in the boom and feel like savvy capitalists, bought more expensive houses than they normally would.

With the abrupt end of the boom in 2006, that ego-boosting story also ended. We were not all investing geniuses after all. It was just a bubble, we learned. Our confidence in ourselves, and hence in our futures, took a hit, discouraging economic risk-taking.

Then the financial crisis erupted, scaring the entire world. A story of opportunity and riches turned into one of corrupt mortgage lenders, overleveraged financial institutions, dimwitted experts, and captured regulators. The economy was careening like a rudderless ship, and the sharp operators who had duped us into getting on board – call them the 1% – were slipping away in the only lifeboats.

By early 2009, the plunge in stock markets around the world reached its nadir, and fear of a deep depression, according to the University of Michigan Consumer Sentiment Survey, was at its highest level since the second oil crisis in the early 1980’s. Stories of the Great Depression of the 1930’s were recalled from our dimmest memories – or from our parents’ and grandparents’ memories – and retold.

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. One example is the rapid advance in smartphones and tablet computers. Apple’s iPhone was launched in 2007, and Google’s Android phones in 2008, just as the crisis was beginning, but most of their growth has been since then. Apple’s iPad was launched in 2010. Since then, these products have entered almost everyone’s consciousness; we see people using them everywhere – on the street and in hotel lobbies, restaurants, and airports.

This ought to be a confidence-boosting story: amazing technologies are emerging, sales are booming, and entrepreneurship is alive and very well. But the confidence-boosting effect of the earlier real-estate boom was far more powerful, because it resonated directly with many more people. This time, in fact, the smartphone/tablet story is associated with a sense of foreboding, for the wealth that these devices generate seems to be concentrated among a tiny number of tech entrepreneurs who probably live in a faraway country.

These stories awaken our fears of being overtaken by others on the economic ladder. And now that our phones talk to us (Apple launched Siri, the artificial voice that answers your spoken questions, on its iPhones in 2010), they fuel dread that they can replace us, just as earlier waves of automation rendered much human capital obsolete.

I had the pleasure of meeting with Abe on this trip. He sticks to the script, telling a story of taking aggressive and definitive action against an economic malaise that has plagued Japan for decades. He inspires confidence; I felt it immediately.

Abe is also described as reviving national patriotism, even nationalism. Though I heard none of this from him in my meeting, I think it may be a central part of his story, too. Nationalism, after all, is intrinsically bound up with individual identity. It creates a story for each member of the nation, a story about what he or she can do as part of a successful country. Some of Abe’s most controversial steps, such as visiting the Yasukuni Shrine despite Chinese and Korean objections, only increase the story’s impact.

Still, 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. No leader can consistently shape the narratives that affect the economy. But that does not rule out the need to try.

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    1. CommentedJose araujo

      Professor, the problem is that sometimes reality gets in the way of perfect narratives, and this is one of such cases.

      The real estate bubble, and how we all bought over priced homes would be a very nice explanation if true, but the facts are that defaults and delinquencies rates don't validate such theories, nor the default rates on individual loans, validate the narrative that we were all maximizing our credit cards and going to the Bahamas on vacation.

      The alternative narrative is that real estate bubble was a land developer/bank scam, much like the sub-prime scam, and the involvement of the general public was not generalized. The delinquency rates are perfectly explained not by the real estate bubble but by unemployment.

      It’s time to change narratives.

    2. CommentedEdward C D Ingram

      This is all very well but please Professor Shiller tell us about the history of private debt in Japan and compare that to the USA and the UK etc.

      Japan has been paying theirs down for many years.

      And maybe thre is some capacity to borrow again?

      Less so elsewhere.

      An d then Japan still may face a problem.

      When interest rates rise that borrowing may not be so easy to manage.

      So what to do?

      I am the co author (one of many) who will be writing from the perspective of the financial services sector a mail to the Bank of England.

      We will explain why Wealth Bonds may help to fix the problem.

      Well Bonds are like your trills (linked to GDP) but they will be far more powerful.

      Would you like a copy?

    3. CommentedAurelian Dochia

      I grew up in a communist regime which tried to shape reality by using narratives; after a while, people realize there is a divorce between the narrative and the reality and propaganda's charm ends. "Animal spirits" are important, but not sufficient.

    4. CommentedDallas Weaver, Ph.D.

      Narrative does have an impact, but when we view actions around the world that have lifted billions of people out of poverty it wasn't narrative changes that brought out (released) the "animal spirit" in individuals.

      In China of the 70's, the political class of bureaucrats controlled all of agriculture from determining what to grow on which plots to how to distribute the crops. The result was low food security (for real) and poverty for the masses and a ego trip and good life for the bureaucrats, planners, etc. They changed the rules about who made decisions on the agricultural details to the farmers who actually worked the land (had real "skin in the game") in a system that make tenant share farming look like a liberal invention (the government got its share of the production first and the farmer could sell only the surplus: farmers had 100% of all risk). The bureaucrats lost status, and power and the economic growth rate increased with the "animal spirits" pushing in all directions.

      The same happened in India where the phenomenal increase in economic growth rate was from decreasing the governments "license Raj's" power over every decision. Freeing the "animal spirits" from the government bureaucrats was the key to success.

      Our bureaucrats are now preventing "animal spirits" from solving any real problems in every area they have control (the entire real economy of real things). When it takes over 10 year to get a permit for a desalinization facility in water short So. California, while employing dozens of planners, lawyers, commissioners, experts, etc. (the top 1%: the highly educated elite) for a decade with no jobs for the construction, operators, and maintenance people (the median workers), the problem is clear.

      The solution will require decreasing the decision making power of the 1% educated elite who control the government bureaucracies.

    5. CommentedRaghuraman MV

      Very True and well written.It is the narrative which has shaped things.Whether it be shaping and encouraging the bubble and now the effort to show a turnaround story, global economy increasing thrives on perceptions,positive projections and good narratives.Reality Checks are passe or rather I should say that it has never been there

        CommentedRaghuraman MV

        Very True and well written.It is the narrative which has shaped things.Whether it be shaping and encouraging the bubble and now the effort to show a turnaround story.Global economy increasingly thrives on perceptions,positive projections and good narratives.Reality Checks are passe or rather I should say that it has never been there

    6. CommentedMike Maloy

      Spoken like a true Renaissance man, Bob. I returned from a dinner party, during which the narrative poetry of Richard Blanco was discussed, to find the power of narrative the focus of an economist's musings. Most refreshing!

    7. CommentedProcyon Mukherjee

      To raise the sentiments from the stupor set by deflation Abe must be credited and Shiller is so right.

      While business confidence is upbeat, if one goes by Nikkei, we are now entering into that phase where things are getting murky, like the performance against the inflation target of 2%, where it just touched 1.3% last month. Jiji Press survey in March showed that 70 percent of respondents did not feel the economic recovery, which should be the area of concern as wage hikes have not seen much progress (the “shunto” spring wage negotiations would translate into only a 0.3 percent rise in basic salaries).
      But still Japan continues to do better on per capita growth than the other developed nations, it still has a better Gini and the most important of all, the bulk of the debt is held by the people of Japan. So kudos.

    8. CommentedZsolt Hermann

      I think it is a very crucial article showing our present attitude, hopes.
      I think our recent history is all about stories, we live a Hollywood movie with all its ups and downs, and still with our belief in a guaranteed happy ending.
      Just look at the stories we are facing day after day on the front pages, or on TV, personalities, emotional adventures picked by very sensitive and refined tweezers to keep us entertained, keep us glued to the papers and the screen. These stories cover all our human activities from films, celebrities, personal tragedies to the depth of economics and scientific research.
      The problem is stories by themselves only inflate bubbles, create expectations, emotional states, and they can undoubtedly give an initial motivation, driving fuel but these bubbles deflate or burst unless some reality, some real material is injected into them.
      But we no such reality today.
      Our whole human system is simply a story, a dream, and illusion.
      We have lost all contact with our natural foundations, we want to live above the clouds.
      We live in a closed and finite natural system and even within this natural system humanity has evolved into a global and integral compact in full interconnections and interdependency.
      These two characteristics of our present living conditions are in total opposition with the polarized, isolationist, exploitative, constant growth paradigm, pursuing ruthless competition against each other.
      The whole crisis, the problems, impending catastrophes all over the globe we cannot hide, or beautify any longer, should be like alarm bells ringing.
      We are already late with waking up from our dreams, we cannot drag more and more fairy tales into our lives we have to stand with both our feet on the ground again, and start building a human system that is real.
      The happy ending is not guaranteed at all, in this movie we are the actors and we are the director too. Unless we start consciously and wisely changing the course of the movie based on the real-life conditions we live in, the ending can be very far from what we hoped for.

    9. CommentedConfuciusmaster lee

      American Dream is also a story.Wall Street is all about financial stories.Where there is a story, there is a will,there is confidence,there is a good economy.

    10. CommentedMoctar Aboubacar

      I agree that discourses of economic performance and the mood or trend mentioned are important in determining actual results. But does even a 'good story', with good effects for the economy, always matter to the people? Economic recovery is no use to office workers if it means that their jobs are now more 'flexible', and that they are likely to be fired. There have been few mainstream economic discourses of developmentalism or of inequality reduction (Brazil being an important exception).

      What matters is not a story about how well the country is/can/will recover, but the focus of that story: Abenomics is about inflation and exchange rates and GDP, and not about people's lives in that mix. Perhaps a more 'social' economic story of recovery would keep the focus on where it needs to be, and be less exposed to momentum-stopping 'counter-stories'?

    11. CommentedVal Samonis

      RE: reviving national patriotism, even nationalism.

      We are definitely due for a longer period of that globally, however double-edged it might seem. Certainly, the collapse of the EU "too fast for comfort" part of the centrally and bureaucratically planned (and failed) integration calls for some other "animal spirits" mechanisms and platforms. However, we have to develop some safeguards in order not to repeat the bad history. It is probable that national and sub-national animal spirits stories aimed at developing global rather than just already partially compromised regional/continental stories (e.g. of integration and success) have a better chance of moving the nations, etc., forward from the middle income trap, for example. That would be a new stage of globalization and probably a more successful one, if we could paint such animal spirits stories into the global knowledge economy of the 21st C.

      Val Samonis
      Vilnius U, RRU, INET