SeekerBlog

A transcript of the Conor Clarke interview is at Atlantic Business. I wish the interview were 10x longer…

Here is my interview with Yale’s Robert Shiller about his new book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism.

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Is manipulating confidence something akin to a placebo effect? You know, fiscal stimulus will work as long as we convince people that fiscal stimulus will work, because that restores some consumer and investor confidence independent of the effects the stimulus has on the real economy?

Yes that’s right, but the thing is that people are really savvy about someone trying to instill confidence in them. And the classic example of that is Herbert Hoover, who was President when the Depression started. He thought that the best thing for him to do was to keep talking up the economy, saying that there’s nothing wrong. In fact he went so far as to give predictions, that the recovery will start in two months. And then two months passed and things were even worse, so he just extended his deadline for the recovery. And eventually he became the laughingstock. See that’s the problem, it’s more subtle than that. My wife is a psychologist and sometimes I will say something like ‘You’ve got to get control of yourself,’ or ‘Pull yourself together’ and she will say ‘That’s not an enlightened way to talk. We don’t say that as psychologists.’ You can’t tell people to pull themselves together, it doesn’t work. So, I guess the best thing we have is a stimulus passage.

One thought I had reading the book and the Wall Street Journal op-ed is, there is some amount of polling evidence indicating that people are not terribly optimistic about the effects the stimulus will have on the economy. Might that undermine the case that a stimulus is necessary to induce a resurgence in confidence, if in fact it is true that Americans are not confident that the stimulus will work?

Well, I think the stimulus has to actually happen. I don’t think the stimulus package is a panacea at all, because what is going to happen is that it is going to take a long time for the stimulus to take effect, it won’t be big enough, we will see unemployment continuing to rise, and it will be seen as confirming the general public view that stimulus isn’t going to work.

Are you confident about the stimulus?

I think it will create some jobs, as they say. If the government hires people, they’ll get jobs. But the problem is that the private sector outside may be worsening faster than they are fixing things.

Your piece speculates to some extent that any stimulus will need to be larger, I think you say something to the effect of, ‘It has got be bigger than it is to instill confidence and restore trust.’ Knowing what you know now, what would an optimally designed stimulus package look like in broad, rough strokes?

Well what I emphasized in Subprime Solution was that it is not just the stimulus package. We should be setting a course toward a better economy. That’s why I have these things like, subsidizing financial advice. Nobody else picks that up but…

But I think you wrote a New York Times article about it.

I did write about that. We have to give people the impression, the valid impression that things are being fixed and are getting better. And I have these ideas for new mortgage institutions and new kinds of financial markets and home equity insurance. These are the kinds of things that might give an additional boost by giving us the sense that we have a government that is creative and is responsive to the people’s needs. We have a serious problem. It’s not easy for the government to fix, and I am giving the best ideas that I think that we have. But it’s not easy.